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Today, the House Financial Services Committee is holding a Housing and Insurance Subcommittee hearing, led by Subcommittee Chair Mike Flood (NE-01), to examine the structure, function, and evolution of the secondary mortgage market and the role the government-sponsored enterprises (GSEs) have on housing affordability.

Read Subcommittee Chair Flood’s opening remarks as prepared for delivery:

"I’d like to thank our witnesses for being with us today, and I very much look forward to an interesting discussion of our secondary mortgage market and the Enterprises—Fannie Mae and Freddie Mac.

"When witnesses refer to the secondary mortgage market during this hearing, please note that they are not referring to direct mortgage lending.

"In the case of the conforming market, or the market that runs through Fannie Mae and Freddie Mac, they are referring to a chain of interactions between separate actors:

"1. The lender who sells a loan they originated to Fannie Mae or Freddie Mac,

"2. The securitization of that loan into a mortgage-backed security,

"3. The investors who purchase those mortgage-backed securities.

"The private label securitization market works in a similar manner, but with fully private entities working to securitize the mortgage products instead of Fannie Mae and Freddie Mac.

"The secondary mortgage market works to provide greater liquidity for lenders and results in greater access to mortgage lending for borrowers.

"In today’s banking regulatory climate, holding a mortgage on a bank’s balance sheet can result in significant capital costs. If instead the lender sells the mortgage they originate on the secondary market, their balance sheet is comparatively free to originate new loans.

"This creates an incentive for originators to utilize the secondary mortgage market rather than hold those loans on their own books.

"Next, I’d like to touch on the origin of the Enterprises:

"Fannie Mae was established as a federal agency in 1938 under the National Housing Act to provide liquidity in the mortgage market.

"In 1954, Congress passed the Federal National Mortgage Association Charter Act, which converted Fannie Mae into a public-private, mixed ownership corporation. Then, in 1968, Fannie Mae became entirely privately owned.

"Freddie Mac was chartered by Congress in 1970 as a private company to create competition with Fannie Mae.

"Around the same time, Ginnie Mae issued the first modern mortgage-backed security or 'MBS.'

"Mortgage-backed securities grew in popularity in the 1980s and became a major tool for both Fannie Mae and Freddie Mac to provide liquidity in the conforming mortgage market.

"Before the Financial Crisis in 2008, Fannie Mae and Freddie Mac were private entities. However, when mortgage delinquencies rose sharply in late 2007, the GSEs large, retained mortgage portfolios exposed them to significant losses in the collapsing housing market.

"Congress enacted the Housing and Economic Recovery Act of 2008 (HERA), which created today’s FHFA and provided the government with the authority to provide further support to the Enterprises.

"Later that same year, as the Enterprises eroded further, Treasury committed up to $100 billion per GSE in exchange for senior preferred stock, warrants for 79.9% of the companies’ common equity and a dividend.

"This intervention effectively ended both Fannie Mae and Freddie Mac’s status as fully private companies. They now were both entered into what’s called a conservatorship.

"Their Board and CEOs were removed and the government had the ability to closely manage the Enterprises and “conserve” their important secondary market function.

"Fannie Mae and Freddie Mac have remained in conservatorship ever since.

"My hope is that this hearing will provide members of this subcommittee with an opportunity to closely examine two very important topics:

"1. The mechanics of the secondary mortgage market. How does it work? What are the incentives of the relevant actors in the space, and what does all this mean for a prospective homebuyer?

"2. The role of Fannie Mae and Freddie Mac in the secondary market, and the policy implications of their ongoing status in conservatorship.

"Keen observers of this committee may note something unusual about the structure of this hearing: There is no legislation noticed to our discussion today.

"The lack of legislation noticed to this hearing was an intentional choice. While there are absolutely important policy issues to be discussed regarding the secondary mortgage market and GSEs, I felt it was imperative that we begin our subcommittee’s work by focusing on the underlying subject matter.

"My hope is that all members of this subcommittee will be better served by an in-depth discussion of how the secondary mortgage market works, and why it’s so important borrowers, lenders and investors alike.

" I believe that our expert panel of witnesses today is very well-positioned to discuss this complicated issues in detail, and I look forward to their testimony."