Speaking before the House Financial Services Committee at a hearing Tuesday morning, Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco presented his take on “sustainable housing finance” and what the future of housing finance might look like.

DeMarco began his testimony at Tuesday’s hearing,Sustainable Housing Finance: An Update from the Federal Housing Finance Agency on GSE Conservatorships, by reiterating his goals for the GSEs this year.

He then went on to describe three possible scenarios for the future of the housing finance system and the government’s role in that system.

The first, which he termed “Standard-Setting,” would leave the market with no government guarantee. Instead, the government would establish a “regulatory regime or a market utility” to set standards for the industry. The responsibility of pricing credit risk would lie solely with investors.

The second market format DeMarco highlighted, the “Federal Backstop,” would call on the government in times of market stress or illiquidity.

This “backstop” could come from one or more of several sources, according to DeMarco. He suggested the Federal Housing Administration, Ginnie Mae, Treasury, the Federal Reserve, or the Federal Home Loan Bank could fill this role.

DeMarco’s third scenario, the “Government Guarantee,” is most similar to today’s structure. A government guarantee offers “a high degree of liquidity” and favorable pricing but “would not provide the benefit of market pricing for credit risk of the underlying mortgages,” according to DeMarco.

“This type of structure requires a significant amount of regulatory safety and soundness oversight to protect against the moral hazard associated with providing a government guarantee,” DeMarco added.

As for the current state of housing finance, DeMarco placed the responsibility on Congress to set the course for the GSEs—either ending or revising their charters, reiterating as he has in the past, that as Congress placed the GSEs under government conservatorship, only it has the authority to remove or revise that status.

“While FHFA is doing what it can to encourage private capital back into the marketplace, so long as there are two government-supported firms occupying this space, full private sector competition will be difficult, if not impossible, to achieve,” DeMarco said.

The government currently guarantees 90 percent of mortgages when measured by securities issuance, according to DeMarco’s testimony.

by Krista Brooks