Two top Obama administration officials said Tuesday that the government-sponsored enterprises would not be exempted from a pending proposal to help standardize mortgages sold into the secondary market.
Banking regulators have yet to release their risk-retention proposal, but early reports suggested that the GSEs would be exempted temporarily while they remained in conservatorship.
On Tuesday Department of Housing and Urban Development Secretary Shaun Donovan and Treasury Secretary Tim Geithner signaled that the GSEs would have to comply with a plan that forces lenders to retain 5% of the credit risk of loans they sell unless they qualify for a safe harbor that establishes strict underwriting standards. "Everything we've said in this discussion today about reform of the GSEs would suggest that we are very much in favor of ensuring that the GSEs are holding adequate capital against their commitments," Donovan told the Senate Banking Committee. "I actually do not think there are discussions about exemptions."
During the hearing, Geithner also voiced support for the creation of a covered bond market in the U.S. and continued to dodge questions on a specific proposal for the future of Fannie Mae and Freddie Mac.
"Our overall objective, and this has to be our shared objective, is to have the private markets — the banks and the investors — bear more of the risk in housing finance, not less of the risk," Geithner said. "So absolutely we want to make sure as we design these draft regulations that we're meeting that basic objective. We don't want to be working against that basic objective."
Republicans had raised concerns that the GSEs could be exempt from the plan, potentially adding to government losses from its bailouts of Fannie Mae and Freddie Mac. In response to a question from Sen. David Vitter, R-La., Donovan sought to address those fears.
"If we are setting standards for risk retention that should cover the market broadly, and the question is, how do we ensure whether it is the GSEs or any other kind of financial institution that they are holding adequate capital?" Donovan said.
Donovan stressed that the definition of a "qualifying residential mortgage" — which is exempt from the risk-retention requirements — would be key.
"One of the clear problems that led us into the crisis in the first place was a sort of patchwork of various standards or lack of standards that applied across different types of mortgages," Donovan said. "One of the important elements of the QRM is that it would hopefully level that playing field rather than continuing the patchwork that we saw before."
