    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                          SUSTAINABLE HOUSING FINANCE:.
                          AN UPDATE FROM THE DIRECTOR.
                             OF THE FEDERAL HOUSING.
                                 FINANCE AGENCY

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                JANUARY 27, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 114-1

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    DAVID SCHWEIKERT, Arizona
    ROBERT DOLD, Illinois
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        January 27, 2015.............................................     1
    Appendix:
        January 27, 2015.............................................    65

                                   WITNESSES
                           Tuesday, January 27, 2015

    Watt, Hon. Melvin L., Director, Federal Housing Finance Agency
      (FHFA).........................................................     6

                                    APPENDIX

    Prepared statements:
        Watt, Hon. Melvin L..........................................    66

                  Additional Material Submitted for the Record

    Hensarling, Hon. Jeb:
        Letter from the Credit Union National Association (CUNA),
          dated January 26, 2015.....................................    85
        Default Rate chart submitted by the National Association of
          Federal Credit Unions (NAFCU)..............................    92
        Letter from NAFCU, dated January 26, 2015....................    93
    Beatty, Hon. Joyce:
        Letter dated January 2, 2015, from the Ohio Capital Finance
          Corporation (OCFC) to the Federal Housing Finance Agency
          (FHFA).....................................................    96
    Kildee, Hon. Daniel:
        Written statement of the Homeownership Preservation
          Foundation (HPF)...........................................    98
    Moore, Hon. Gwen:
        ``Changes in Buyer Composition and the Expansion of Credit
          During the Boom,'' by Manuel Adelino, Duke; Antoinette
          Schoar, MIT and NBER; and Felipe Severino, Dartmouth, dated
          January 2015...............................................   102
    Waters, Hon. Maxine:
        Article from the Washington Post entitled, ``A shattered
          foundation,'' dated January 24, 2015.......................   144
    Watt, Hon. Melvin L.:
        Written responses to questions submitted by Representative
          Barr.......................................................   158
        Written responses to questions submitted by Representative
          Fincher....................................................   160
        Written responses to questions submitted by Representative
          Moore......................................................   162
        Written responses to questions submitted by Representative
          Pearce.....................................................   164
        Written responses to questions submitted by Representative
          Royce......................................................   165
        Written responses to questions submitted by Representative
          Sherman....................................................   167
        Written responses to questions submitted by Representative
          Sinema.....................................................   168
        Written responses to questions submitted by Representative
          Williams...................................................   171
        Written responses to questions submitted by Representative
          Hultgren...................................................   173

                          SUSTAINABLE HOUSING FINANCE:.
                          AN UPDATE FROM THE DIRECTOR.
                             OF THE FEDERAL HOUSING
                                 FINANCE AGENCY

                                  ----------

                           Tuesday, January 27, 2015

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:07 a.m., in
    room 2175, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Members present: Representatives Hensarling, King, Royce,
    Lucas, Garrett, Neugebauer, McHenry, Pearce, Posey,
    Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Stivers, Fincher,
    Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus,
    Messer, Schweikert, Dold, Guinta, Tipton, Williams, Poliquin,
    Love, Hill; Waters, Maloney, Velazquez, Sherman, Hinojosa,
    Clay, Lynch, Scott, Green, Cleaver, Moore, Ellison, Himes,
    Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema,
    Beatty, Heck, and Vargas.
        Chairman Hensarling. The Financial Services Committee will
    come to order. Without objection, the Chair is authorized to
    declare a recess of the committee at any time.
        Today, we meet to hear from the Director of the Federal
    Housing Finance Agency (FHFA). No stranger to this committee,
    he is our former colleague and truly our friend, Mel Watt, whom
    the Senate confirmed to his current position in December of
    2013. A special welcome to the Director. Most of us know him
    well. He was the Representative of North Carolina's 12th
    District for 21 years. And I can say from both sides of the
    aisle, he is one who served on this committee with both honor
    and distinction.
        It was a pleasure to serve with Mel. And I always listened
    very carefully when he spoke. I rarely agreed with anything
    that he said, but he always commanded my respect. And I
    listened carefully because, again, he was a thoughtful member
    of this committee. I certainly admire the fact that the
    Director has chosen to continue his career in public service.
        I might remind my friend and colleague that when he was on
    this side of the witness table, he always demanded of the
    witnesses short, concise, and substantive answers. So I have no
    doubt that now that he is on the other side of the witness
    table, he will continue to demand the exact same from that side
    of the witness table.
        And once this hearing is over, I can't wait to ask my last
    question, which is: Mr. Director, which did you enjoy being
    more, the inquisitor or the inquisitee? Although I suspect I
    already know the answer to that question.
        Now, before we get started with opening statements, I wish
    to yield a brief moment to the ranking member for a special
    welcome, as well.
        Ms. Waters. Thank you very much, Mr. Chairman. I, too,
    would like to welcome Director Mel Watt to this hearing today.
    I must admit, I was somewhat torn when Mr. Watt received this
    appointment. While I know and always knew that he would do a
    great job at FHFA, I knew I was going to miss him on this
    committee, and not only because he was such a thoughtful, well-
    prepared member of the committee.
        I could count on him as the one person who had read every
    line of a bill. Mel Watt not only had read every line of a
    bill, he was the one who could come up with the question that
    no one else could come up with, because he had spent so much
    time reading the bill.
        I also appreciate the fact that he served an important
    role, even when Barney Frank was the Chair of this committee.
    When there was a need for tough negotiations, Barney Frank
    turned to Mel Watt and would ask him to work with the opposite
    side of the aisle to work out the differences. And he did that
    on any number of occasions. Barney Frank could never trust me
    with that. And I understand why and everybody else understands
    why. But Mel Watt certainly did serve in that role for all of
    us.
        So we are so pleased, again, that you are over at FHFA. And
    despite the fact that I mourn your not being here with us on
    this committee, we know that you are the right person for that
    position.
        And we are very pleased that you were able to hit the
    ground running because you knew and you know the issues so
    well. So welcome, Mel Watt. We look forward to hearing from you
    today. And don't worry. If anybody on the opposite side of the
    aisle tries anything with you, I will take them on. Okay?
        Thank you.
        Chairman Hensarling. The purpose, again, of today's hearing
    is to take testimony from the Director of the FHFA to learn
    about the conservatorship of the GSEs. I now recognize myself
    for 3 minutes for an opening statement.
        As Yogi Bera once famously said, it is deja vu all over
    again. Memories are clearly short among Washington's ruling
    class, because they are repeating the same mistakes that caused
    the 2008 financial crisis in the first place. Contrary to the
    fable told by the left, the root cause of the financial crisis
    was not deregulation, but dumb regulation: regulations and
    statutes that either incented or mandated financial
    institutions to loan money to people to buy homes they
    ultimately could not afford to keep.
        Exhibit one, Fannie Mae and Freddie Mac's Affordable
    Housing Goals. Seventy percent of all troubled mortgages were
    backstopped by Fannie, Freddie, and other Federal agencies.
    Contrary to the fable of the left, it ultimately wasn't Wall
    Street greed that brought down the system.
        Of course there is greed on Wall Street. When hasn't there
    been? But there is also something known as Washington greed:
    greed for power to command and control huge swaths of our
    economy; greed to have Washington allocate credit within our
    society, as opposed to We, the People, in a free and
    competitive, transparent, and innovative market.
        The mentality of this Washington greed is best summed up by
    Obama architect, Jonathan Gruber, who famously stated, ``The
    American people are too stupid to know the difference.'' I
    doubt the American people collectively would have been foolish
    enough to roll the dice on taxpayer-backed subprime lending.
    Clearly, Washington was. The dice were rolled, millions lost
    their homes, the economy was brought to its knees, and
    hardworking taxpayers had to pay for the mother of all
    bailouts.
        Regrettably, Washington appears to be rolling the dice yet
    again. Within the last 12 months, FHFA has announced three
    different policies that are harmful to transitioning us to a
    sustainable housing finance system that protects both
    homeowners and taxpayers. First, by suspending a previously
    scheduled increase to fees Fannie and Freddie charge for their
    loan guarantees, FHFA is leveraging the taxpayer balance
    sheet--one that is clearly awash in red ink--to lock in a near
    government monopoly.
        Next, in a race to the bottom with FHA to become the
    Nation's largest subprime lender, FHFA has announced that it
    will begin to allow the GSEs to buy mortgages with as little as
    3 percent down. As history repeats itself, historically-prudent
    underwriting standards are yet again being thrown out the
    window. The data is overwhelming that there is a direct
    correlation between delinquencies and foreclosures on the one
    hand and low downpayments on the other.
        Finally, and most recently, FHFA has announced it will
    begin siphoning off taxpayer funds from Fannie and Freddie in
    order to begin filling government housing slush funds. All the
    while, Fannie and Freddie remain ridiculously leveraged and
    continue to threaten hardworking American taxpayers.
        The best affordable housing program is a healthy economy,
    not a doubling down on failed Obama economics and certainly not
    more risky housing schemes from Washington. It is time to grow
    our economy from Main Street up, not from Washington down. It
    is time to get off the boom-bust-bailout cycle. It is time
    hardworking middle-income families have greater economic
    opportunity to achieve financial independence and the
    opportunity to buy a home they can actually afford to keep.
        I now recognize the ranking member for 3 minutes.
        Ms. Waters. Thank you, Mr. Chairman.
        Again, let me welcome my friend and our former colleague,
    Mel Watt, back. Director Watt, in the years since you became
    head of the Federal Housing Finance Agency, you have taken
    important steps to ensure that our housing market remains
    affordable and works for everyone. With Fannie Mae and Freddie
    Mac now having paid the government $225 billion--which is $38
    billion more than the Treasury invested during the crisis--I
    think it is fair to say that our actions to prevent a total
    collapse of our housing market have been a resounding success.
        If we close the GSEs without putting in place a viable
    alternative, as my Republican colleagues would do, we would
    likely reenter a recession. In fact, I think it is in our
    economy's best interest that the PATH Act lost what little
    momentum it may have ever had. And, Director Watt, your actions
    demonstrate that you are fulfilling your statutory mandate to
    preserve a liquid, competitive, and national housing market.
        Similarly, the FHFA has finally abided by another statutory
    mandate to fund the Affordable Housing Trust Fund. This one
    action will help improve, especially in districts like mine,
    the availability and affordability of rental housing. There are
    7.1 million American households for whom safe and decent
    housing is neither affordable nor available, a situation made
    worse due to Republican attacks on public housing and voucher
    programs.
        But by complying with your statutory obligation to allocate
    a tiny percentage of Fannie Mae and Freddie Mac's profits to
    these funds, we have the chance to improve the lives of
    millions of American children, families, people with
    disabilities, and the elderly.
        I also applaud your efforts to expand the availability of
    homeownership for all Americans, including Americans who are
    qualified borrowers but are not fortunate enough to come from
    wealthy families. When FHFA lowered the downpayment
    requirements, it appropriately balanced safeguards to protect
    the taxpayer with expanded credits for eligible borrowers.
        Moving forward, I encourage FHFA to think outside the box
    when it comes to credit scores to ensure that all creditworthy
    borrowers have a chance at the American dream.
        So I thank you, Director Watt. And again, we welcome your
    testimony today. I yield back the balance of my time.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from New Jersey, the chairman of our Capital Markets and
    Government Sponsored Enterprises (GSEs) Subcommittee, Mr.
    Garrett, for 2 minutes.
        Mr. Garrett. Thank you, Mr. Chairman, for convening this
    very important hearing today. And thank you, Director Watt,
    also, for being here and for your testimony, as well.
        I would like to begin today's hearing by commending
    Chairman Hensarling for your work and your steadfast commitment
    to reforming our Nation's broken housing finance system. Our
    housing finance system and, more specifically the GSEs, were at
    the heart and center of the recent financial crisis. I realize
    the odds are long and the political issues to overcome are
    immense. I do believe that reforming this broken marketplace
    must remain a priority of this committee in the 114th Congress.
        So I am heartened at the level of substantive engagement by
    Members on both sides of the aisle with a number of specific
    legislative proposals introduced by the chairman, the ranking
    member, and Mr. Delaney, as well. These proposals and the
    bipartisan bills provide a foundation for which to continue
    negotiations with Congress and hopefully reach bipartisan
    consensus on a reform package.
        Now, Director Watt, you have been quoted as saying that you
    believe that GSE reform should be left up to Congress, and the
    FHFA should not interfere. While I appreciate the appropriate
    deference you pay to the body where you once served, it is
    important to understand that no matter your intent, any
    decisions that you make as Director will impact upon reform
    efforts, either positively or negatively. There is no way for
    you to avoid them.
        So given that, I would hope that your decisions, then,
    would err on the side of helping to facilitate reform, and not
    acting as an impediment to it. So lowering downpayments,
    preventing risk-based guaranteed pricing, and the funding of
    the Housing Trust Fund, those things will make it harder to
    reform these entities and quite possibly lead us down the path
    of another multibillion dollar taxpayer bailout.
        These decisions bring to mind the old saying, ``Those who
    don't learn from history are doomed to repeat it.'' So subpar
    underwriting standards, taxpayer-subsidized pricing,
    encouraging people to buy homes that they simply can't afford,
    well, they were the main causes of the last crisis.
        So I would ask the Director, please, don't let these
    decisions lead to the next one.
        With that, I yield back.
        Chairman Hensarling. The Chair now recognizes the
    gentlelady from New York, the ranking member of our Capital
    Markets and GSEs Subcommittee, Mrs. Maloney, for 2 minutes.
        Mrs. Maloney. I thank the chairman and ranking member for
    calling this important hearing. And it is a pleasure to welcome
    our former colleague and good friend, Mel Watt. You are missed
    on this committee.
        Director Watt has been on the job for 386 days. And he has
    proven to be a thoughtful, deliberative, and conscientious
    leader of this tremendously important agency. He has focused on
    maintaining the liquidity of the mortgage markets and on
    increasing access to credit for creditworthy borrowers. For
    example, his first act as Director of FHFA was to delay a
    planned increase in Fannie and Freddie's guarantee fees, which
    would have raised g-fees even more in States with stronger
    consumer protections, such as the one I represent.
        There was never a sound basis for penalizing States that
    have strong consumer protections in foreclosure. And I applaud
    Director Watt for this decision. States that have strong
    consumer protections should be rewarded, not penalized. In
    addition, he halted the arbitrary 10 percent cuts to Fannie and
    Freddie's multifamily businesses, and created an exception for
    small and affordable multifamily housing. This is hugely
    important for my district, where multifamily housing is our
    single family business.
        He has also allowed Fannie and Freddie to buy certain
    mortgages with a 3 percent downpayment, which will allow
    borrowers with strong credit histories but not stockpiles of
    extra cash to get a mortgage. I think that decision is
    tremendously important. And he was guided by the data, which
    clearly demonstrates that the size of the downpayment is not
    the most important factor in predicting default rates.
        Finally, he recently made the decision to start funding the
    National Housing Trust Fund and the Capital Magnet Fund, which
    will provide hundreds of millions of dollars for affordable
    housing programs. This was a critically important decision,
    because this was one of the only dedicated sources of funding
    for affordable housing that we have.
        Thank you very much. We are delighted to have you back here
    before the committee.
        Chairman Hensarling. The gentlelady yields back. Director
    Watt, welcome once again to that side of the witness table. And
    you are now recognized for your opening statement.

     STATEMENT OF THE HONORABLE MELVIN L. WATT, DIRECTOR, FEDERAL
                     HOUSING FINANCE AGENCY (FHFA)

        Mr. Watt. Chairman Hensarling, Ranking Member Waters, and
    members of the committee, thank you for inviting me to discuss
    the work we are doing at the Federal Housing Finance Agency,
    and for providing my first opportunity to return to this
    committee since I left Congress. This actually might be the
    first time since I left that I have the sense that I might be
    better off on that side of the table.
        FHFA is mandated by statute to ensure the safety and
    soundness of the Federal Home Loan Banks, Fannie Mae, Freddie
    Mac, and to ensure that they provide liquidity in the national
    housing finance market. FHFA works to balance these obligations
    across all of our activities.
        Because Fannie Mae and Freddie Mac are also in
    conservatorship, we are also mandated by statute to preserve
    and conserve their assets. Earlier this month, FHFA issued a
    new scorecard that outlines our conservatorship expectations
    for the enterprises in 2015. FHFA's conservatorship strategic
    plan that we issued in 2014 and the scorecards we issued in
    2014 and 2015 are centered around three strategic goals that
    are fully aligned with FHFA's statutory mandates.
        The first goal is to maintain the credit availability and
    foreclosure prevention activities supported by the enterprises,
    and to do so in a safe and sound way. During 2014, in support
    of this goal, FHFA made considerable progress with the
    enterprises to clarify their representation and warranty
    framework, to encourage responsible lending to creditworthy
    borrowers, and to enhance the enterprises' outreach and
    provision of services to small and rural lenders.
        In 2015, the enterprises will continue their work on these
    and other priorities, such as analyzing the potential benefits
    and feasibility of using updated or alternative credit score
    models.
        The second goal is to reduce taxpayer risk. The primary way
    we do this is by increasing the role of private capital in the
    mortgage market. In 2014, FHFA tripled the enterprises' credit
    risk transfer requirement and the enterprises' executed
    transfers on single family mortgages with a combined unpaid
    principal balance of over $300 billion last year.
        In 2015, the enterprises will continue to use the models
    that have already proven successful to transfer credit risk,
    and they will explore other ways of transferring and reducing
    risk to taxpayers.
        Our third goal is to build a new securitization
    infrastructure for use by the enterprises and adaptable for use
    in the future mortgage market, whatever that might be. Last
    year, we defined the governance structure of the common
    securitization platform, and the enterprises announced a CEO
    for this joint venture. We also made significant progress
    toward our multiyear goal of developing common securitization
    platform technology and a single security. Our strategic plan
    and the 2015 scorecard also have affordable rental housing
    priorities for the enterprises.
        The focus here is not to compete where there is adequate
    private sector coverage of the multifamily market, but to
    ensure that affordable housing is available and that the
    housing needs of people in rural and other underserved areas
    are met, including areas that rely heavily on manufactured
    housing.
        FHFA is also focused on regulating the Federal Home Loan
    Banks. As part of our responsibility to ensure that the Banks
    fulfill their statutory mission and support housing finance in
    a safe and sound manner, we proposed a rule last year
    concerning the Banks' membership requirements. Our comment
    period ended earlier in January, and we received approximately
    1,300 comments.
        I want to emphasize that getting and evaluating input from
    stakeholders is a crucial part of our policymaking process. We
    will carefully consider comments made by members of this
    committee and the public in determining our final rule on the
    bank membership standards. We are also actively considering
    input we have received on guarantee fees, single security, and
    the enterprise housing goals.
        I have covered a lot more areas and provided a lot more
    details in my written statement. And I look forward to
    responding to your questions. Again, thank you for the
    opportunity to testify. I am happy to be back, especially since
    I know that I am free to leave after the hearing is over.
        [The prepared statement of Director Watt can be found on
    page 66 of the appendix.]
        Chairman Hensarling. The Chair now yields himself 5 minutes
    for questions. Again, thank you, Director Watt.
        I wish to echo the comments of the Chair of our Capital
    Markets and GSEs Subcommittee. I fear, Director Watt, that you
    have reversed the policies of your predecessor, which will make
    it more difficult to have a sustainable housing finance system.
        I want to first focus on what you have done in authorizing
    the GSEs to backstop 3-percent-down loans. You have previously
    testified before the Senate that, ``We know that the size of a
    downpayment by itself is not the most reliable indicator of
    whether a borrower will repay a loan.'' All things being
    equal--because I have looked, and I can't find your thoughts on
    this subject--is a 3-percent-down loan riskier to the taxpayer
    than a 10-percent-down loan?
        Mr. Watt. I would say, Mr. Chairman, that is generally
    true. But when you pair the downpayment with other compensating
    factors--which is part of the sentence that apparently people
    missed when I announced this--you can make a 3-percent
    downpayment loan as--
        Chairman Hensarling. --I understand there are other
    factors--okay. I understand there are other factors, Mr.
    Director. But also, ability to repay certainly is an indication
    of whether or not a homebuyer can save. If they can only afford
    3 percent down, do you believe that 3 percent down is riskier
    to the home purchaser than 10 percent down?
        Mr. Watt. Again, the same considerations would apply to the
    borrower as would apply to the lender. If you carefully look at
    other considerations and take them into account in deciding
    whether to extend that credit--or in Fannie and Freddie's case,
    whether to back that credit--then you can ensure that a 3
    percent loan is just as safe as a 10 percent downpayment loan.
        Chairman Hensarling. Let's explore some information that
    has come out of your agency previously. Can I have the chart
    from the Federal Register, please?
        Your agency, frankly, along with Treasury, the Fed, the
    FDIC, the SEC, and HUD--I know, like most charts, it is
    somewhat difficult to read. But on the horizontal axis, this is
    loan-to-value ratio. On the vertical axis is default rate. And
    to the far right-hand corner, you see a precipitous rise in
    default rates when you go from 90 percent loan-to-value. And
    particularly, an incredible slope from 95 percent as we reach
    no downpayment whatsoever.
        Again, this is information that is coming from your agency,
    along with just about every other prudential banking and
    housing regulator. So doesn't that seem to indicate that,
    again, a 3 percent downpayment, not only is it not too good for
    the taxpayer--you are once again putting people in homes that
    they can't afford to keep. And you had previously testified
    when you were on this side of the table during the Dodd-Frank
    Act proceedings, ``I have always believed that you cannot make
    a loan to somebody who cannot afford to repay it. That is
    unstainable.'' This is data from your agency and others. So why
    is it sustainable?
        Mr. Watt. Mr. Chairman, I haven't changed my position on
    that. And I want to assure this committee that I have not
    changed my position. You should never make a loan to somebody
    that you cannot anticipate would pay it. But if you couple--
        Chairman Hensarling. Again, this is data. This is data from
    your agency--
        Mr. Watt. --other factors and make a loan as safe, which is
    exactly what we have done with this 97 percent product;
    compensating factors including housing counseling, including--
        Chairman Hensarling. Okay. Well, Director Watt, let's not
    just look--
        Mr. Watt. --private mortage insurance--
        Chairman Hensarling. --let's not just look--
        Mr. Watt. --all of those things--
        Chairman Hensarling. --you do recall I get to control--
        Mr. Watt. --taken into account in determining--
        Chairman Hensarling. Let me quote from the same document,
    ``Default rates increase noticeably among loans used to
    purchase homes at LTV ratios above 80 percent. There is
    substantial data indicating that loans with LTV ratios of 80
    percent or less perform noticeably better than those with LTV
    ratios above 80 percent.''
        So notwithstanding, Mr. Director, with all due respect, I
    understand what you are saying. But I fear what you are doing
    is again repeating the exact same mistakes that brought us here
    in the first place. And now, you are in a contest with FHA to
    see who can be the Nation's largest subprime lender. I fear we
    are going in the complete wrong direction with your policy.
        I now recognize the ranking member for 5 minutes.
        Ms. Waters. Thank you very much. Mel Watt, I really wanted
    to spend my time on the Affordable Housing Trust Fund. But I
    must step in here to basically ask, when we take a look at
    those that we would lend to with the 3 percent down, are we not
    talking about people who have shown that they pay their bills
    every month, they have basically good credit, they have not
    defaulted, they don't have any bankruptcies? They just are not
    able to save up a 10 to 20 percent, as some more wealthier
    people are able to do.
        But these are good, hardworking taxpayers. Are these the
    kind of people you are talking about?
        Mr. Watt. That is exactly the kind of people that we would
    be looking for. And we would pair that with strong credit
    scores, lower debt-to-income ratios, housing counseling, and
    private mortgage insurance. All of which put together,
    compensate for the fact that you are making a loan to somebody
    with a lower downpayment.
        We have no interest in going back to irresponsible lending.
    And it is part of our statutory mandate to make sure that
    doesn't happen.
        Ms. Waters. Thank you. I think that even though I don't
    have the data or the information, that a large part of our
    society fits into that category. And they deserve to be
    homeowners if, in fact, they are hardworking citizens who pay
    their bills, who have not had any problems. A 3 percent
    downpayment should not cause us any problems at all.
        Let me get to the Affordable Housing Trust Fund. I would
    like to commend you on your recent decision to follow the
    requirements set forth in the Housing and Economic Recovery Act
    of 2008 and lift the suspension on Fannie Mae and Freddie Mac's
    obligation to fund the National Housing Trust Fund and the
    Capital Magnet Fund.
        As you are well-aware, we are in the worst rental housing
    crisis this Nation has ever seen. In the richest country in the
    world, it is unconscionable that there are 7.1 million American
    households for whom safe and decent housing is neither
    affordable nor available. In my own district alone, there is a
    shortage of nearly 43,000 affordable and available rental units
    for extremely and very-low-income households.
        These critical new funds will not only add to the supply of
    affordable rental housing, but will also help to address
    homelessness and poverty across the country. Please talk to us
    about what factors you considered in coming to your decision to
    end the suspension of contributions to the funds.
        Mr. Watt. Ranking Member Waters, I simply followed the
    statute. The statute tells us the exact circumstances for the
    criteria to be applied on the suspension of the contributions
    to the Housing Trust Fund. And it tells us the criteria to be
    applied under normal circumstances for funding. And that is
    whether the contributions to these funds would contribute or
    are contributing to the financial instability of the
    enterprises, whether they are causing or would cause the
    enterprises to be classified as undercapitalized, or whether
    they are preventing or would prevent the enterprises from
    successfully completing a capital restoration plan. Those are
    the statutory provisions.
        They are the same provisions that Mr. DeMarco applied
    appropriately, in my opinion, at the time that they were
    applied to suspend contributions to the trust fund. They are
    the same criteria that I applied, appropriately in my opinion,
    to reinstate them. Because circumstances have changed in that
    interim. So I simply followed the statute. That is all I did.
        Ms. Waters. Thank you very much. That is very important to
    know, because there are those--and some are my friends on the
    opposite side of the aisle--who would have us believe that you
    have done something outside of the statutory requirements or
    mandates. And so I am very pleased that you were able to
    clarify that. And I think it is going to be--if we can get this
    implemented, it is going to be very good for this country.
        I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back. The Chair
    now recognizes the gentleman from New Jersey, Mr. Garrett,
    chairman of our Capital Markets and GSEs Subcommittee. He is
    recognized for 5 minutes.
        Mr. Garrett. Thanks, Mr. Chairman. I will follow up, Mr.
    Chairman, on your questions with regard to the downpayment.
        So obviously, we are seeing a return to loose underwriting
    standards at the agencies. I am sure, Director, you have read
    that one of the largest banks in the country has publically
    stated that 3 percent downpayment loans are simply too risky
    for them to originate. And yet here, on the other hand, you are
    having the agencies--you are instructing them to basically take
    on more risk than the largest too-big-to-fail banks.
        Now, every day we read in the paper how Wall Street banks
    are greedy and risk-taking. But it would appear that in this
    situation, you are doing just the exact opposite of what they
    are doing; they are being more prudential in this matter, and
    you are saying, as someone else once said, let's roll the dice.
    But the difference here is we are rolling the dice once again
    with taxpayer money, as opposed to private investors. Is that
    wise to do, to be riskier than--
        Mr. Watt. --let me clarify that I haven't instructed any
    bank to make any loans that they think--
        Mr. Garrett. Well, not the banks. You are instructing your
    agencies.
        Mr. Watt. I have instructed that Fannie and Freddie can
    guarantee loans that are made responsibly that fit our
    criteria. The bank you are talking about, I think, is the same
    one that made the decision to acquire Countrywide. In following
    their experience, I can understand why they might be a little
    bit reticent to go back into that business, but that shouldn't
    control the entire mortgage market--
        Mr. Garrett. I am reclaiming my time.
        They are doing that on behalf of their investors. And I
    guess I am speaking on behalf of the American taxpayer, that we
    are concerned that where the taxpayer dollars could potentially
    be as we return to these very loose underwriting standards.
        Another point that we read in the paper is how after the
    last crisis, a lot of people felt they did everything right and
    still they got burned at the end of the day from this crisis.
    And it seems to me that with the handling you are doing with
    the g-fees, that is exactly the same thing you are doing now.
        With regard to loan-level price adjustments there is, as
    you know, a fair amount of cross-subsidization that occurs on
    the pricing here. What does that mean? That means that you have
    good borrowers with high downpayments and better credit scores,
    they are being told that they have to pay the exact same fees
    as borrowers who have lower downpayments and have worse credit
    scores.
        Would you explain to me why you consider it is fair to tell
    people who have done everything right, saved their money, acted
    in a prudential way, that they have to pay the exact same fees
    and have the cross-subsidization there to those people who have
    done everything wrong, haven't saved, have bad credit, worse
    credit scores, and what have you? Why is that fair?
        Mr. Watt. I think your question illustrates the complexity
    of this issue, Representative Garrett. And all I did was
    suspend it, suspend the increase in guarantee fees, until we
    had a chance to evaluate all of the implications of it. And
    when we announce the guarantee fees--which we will do hopefully
    by the end of this quarter--we might take into account some of
    the things that you are talking about.
        But doing that without a thorough evaluation and
    consideration of all of the aspects of it--as you suggest we
    should do--I think would have been irresponsible.
        Mr. Garrett. But it is pretty--and you only suspended the
    decreases, I understand. And it seems to be pretty plain on its
    face that those that did good are being penalized for those
    that did poorly. And yet, here we are three hundred--a year
    later, and we are still in the situation of rewarding bad
    behavior and unfairly treating those who showed good behavior.
        Moving over to some other items. We don't have a clock on
    here. The securitization platform--I mentioned earlier that
    there is bipartisan support as far as moving forward. One of
    those areas is the securitization platform. All parties, I
    think, seem to agree that we should be having this.
        And yet, we see that the industry seems to be cut out of
    some of the development of the securitization platform. They
    are not really allowed in at the ground floor, the creation of
    it and the governance of this. Why are we, when we have a
    bipartisan initiative here, when we have both sides of the
    aisle and both chambers looking at it in the same manner, why
    are you cutting out industry? Is this another attempt by the
    GSEs to try to continue what they did before, to control the
    marketplace, to manipulate the going reforms, as opposed to
    allowing those players in the future to be able to have a say
    in it?
        Mr. Watt. My response would be twofold. Number one, we are
    not cutting out private industry in our consultations. We are
    in regular consultation with private idustry on the common
    securitization platform. But--
        Mr. Garrett. Do they have a role in the governance? Do they
    have a role in the governance of--
        Mr. Watt. --the Chair when I discussed it with him, what I
    did was exactly what I thought Republicans really support, is
    de-risk this whole process by not trying to form a common
    securitization platform for a future that you all had not yet
    defined.
        Chairman Hensarling. The time of the gentleman has expired.
    Members probably don't need to be reminded that we are not in
    our usual hearing room. Obviously, we are lacking the
    individual clocks. So to gauge your time, you need to look at
    the little color wheel, if you will, at the witness table. And
    I think you otherwise know the drill.
        The Chair now recognizes the gentlelady from New York, Mrs.
    Maloney, ranking member of our Capital Markets and GSEs
    Subcommittee.
        Mrs. Maloney. Thank you.
        Director Watt, I was pleased last year when you delayed
    your predecessor's decision to raise g-fees. As you know, your
    predecessor wanted to raise g-fees even more in four States,
    one of which was New York. And New York and the other four have
    particularly strong consumer protections for foreclosures. This
    would have needlessly harmed New York's economy and would have
    discouraged States from enacting stronger consumer protections.
    I think this was an important decision. We should be rewarding
    States that put strong consumer protections in, not penalizing
    them.
        Now, of course, what I am hearing the markets are telling
    me--or some of them--that they anticipate a possible decrease
    in the g-fees, rather than an increase. So can you just give an
    update on your review of the g-fees in general? And do you
    anticipate that they will be going down and not going up? That
    is what I was told, so--
        Mr. Watt. I don't know where that information would come
    from. We are still in the process of evaluating the input that
    we have gotten in response to a request for input from the
    public on this issue. And we anticipate making a decision
    hopefully by the end of this quarter. It may slip into next
    quarter. But we are going to make a decision, and then we will
    talk; we will justify and outline the reasons for that
    decision.
        I don't think I have any information about whether they are
    going down or going up. Risk-based might have some adverse
    impact on some of the States that you were talking about. But
    at this point, I think it would be premature to talk about what
    that result will be. Because I don't even know what it will be.
    We are in the process of evaluating it.
        Mrs. Maloney. In your deliberations, I hope that strong
    consumer protections for foreclosures are considered a plus,
    something for which States should be rewarded.
        I have another question. Director Watt, we have heard a lot
    about the Housing Trust Fund and the Capital Magnet Fund, some
    of which has been critical. But, of course, we know the facts
    are that the Capital Magnet Fund has already had one successful
    round of funding in 2010, and it was a huge success through a
    public-private partnership model: $80 million in funding from
    the Capital Magnet Fund was turned into $1 billion for
    affordable housing. And I congratulate this effort.
        Now, with your decision to start funding for both the
    Housing Trust Fund and the Capital Magnet Fund, there will be
    hundreds of millions of dollars for affordable housing every
    year. Can you talk a little bit about the impact that you
    expect this funding to have on the affordable housing crisis
    that our country is facing? And can you talk a little bit about
    the public-private partnership that emerged to help magnify the
    money? And are you looking at more public-private partnerships?
    Just in general, where this program is going for affordable
    housing.
        Mr. Watt. Representative Maloney, to be quite honest, I
    didn't take any of that into account. Those are policy
    decisions that I think are legislative decisions, congressional
    decisions. And we don't have any control over at FHFA over the
    use of these funds. Those decisions are actually made at
    Treasury and HUD. Our decision related only to whether or not
    to fund it, and applying the statutory criteria to determine
    whether it should be funded or should not be funded.
        And so, we didn't look at the use of these funds. We didn't
    look at the history of--I didn't--I am not even sure I knew
    that there had been projects--
        Mrs. Maloney. Thank you for clarifying.
        I would like to ask you about the risk retention rule. As
    you know, the final rule inadvertently failed to exempt Freddie
    Mac's multifamily securities, even though it did exempt
    Fannie's multifamily securities. And I understand that the FHFA
    is working on a possible solution for this already. Can you
    give us an update on these efforts?
        Mr. Watt. The risk retention rule was not done by FHFA.
    That was a combined--that was a joint rulemaking process. So I
    am not sure that we are looking at anything that is--
        Mrs. Maloney. But the fact that it inadvertently failed to
    exempt Freddie Mac's multifamily securities, even though it did
    exempt Fannie's multifamily securities--they should be treated
    the same. That is a--
        Mr. Watt. I would hope that whatever rule comes out would
    treat both Fannie's and Freddie's securities the same. That is
    what we are trying to work our way towards--
        Mrs. Maloney. Okay.
        Mr. Watt. --in the single security. So--
        Mrs. Maloney. Thank you.
        Mr. Watt. --certainly--
        Mrs. Maloney. My time has expired. Thank you.
        Chairman Hensarling. The time of the gentlelady has
    expired. The Chair now recognizes the gentleman from North
    Carolina, Mr. McHenry, vice chairman of the committee.
        Mr. McHenry. Director Watt, thank you. It is good to see
    you again. And it is always good to see you on the plane coming
    back and forth from your former district in Charlotte.
        Mr. Watt. Congratulations on that beautiful baby.
        Mr. McHenry. Thank you. Thank you, Mel. I appreciate it.
    And I appreciate your kindness and friendship over the years.
    We have been able to have conversations even when we disagree
    about issues. And so, I just wanted to ask you a few questions.
    But you know me fairly well, so I figured at some point, you
    will cut me off here.
        So it seems that we have some conflicting actions that you
    have taken. One is you suspend the g-fees, right, and you move
    away from risk-based pricing. At the same time, you start
    holding up reserves to the Housing Trust Fund and allocating
    capital to the Housing Trust Fund. In one respect, you are
    conserving capital for an assessment. In the other, you are
    actually moving capital away from the enterprise. How do you
    reconcile that?
        Mr. Watt. Representative McHenry, all I am doing is
    following the statutes that were written by Congress and passed
    by Congress. And we are trying to do it as judiciously and
    prudently as we can. I am not even trying to connect those two
    things. The Housing Trust Fund funding was an independent
    decision that was based on the statute. The g-fee decision was
    a prudence decision just to give us an opportunity to study the
    issue thoroughly. And we are doing that. And we don't know
    where we are going to get to on that. So I think judging where
    that might go at this point would be premature.
        Mr. McHenry. So under the statute, you have no choice? You
    have to allocate capital for the Housing Trust Fund?
        Mr. Watt. If the statutory standards are met, the
    contributions to the trust fund can be suspended. They were
    suspended in 2008 by the acting Director at that time. And we
    applied the same principles under changed circumstances to
    reinstate them. That is all we did.
        But the Housing Trust Fund was not created by FHFA. The
    Housing Trust Fund was created by Congress. And the decision to
    fund it or not fund it is based on statutory criteria.
        Mr. McHenry. Yes. But most of us look at Freddie being
    leveraged at 156 to 1, and Fannie being leveraged at 134 to 1,
    and think that the conditions are not right. Because the
    requirement to suspend the allocation of capital to the Housing
    Trust Fund shouldn't be justified under these circumstances
    with this type of leverage rate of these institutions.
        Mr. Watt. That is not what is one of the statutory criteria
    that Congress set for evaluating whether to fund the Housing
    Trust Fund or not fund the Housing Trust Fund.
        Mr. McHenry. So is this an odd circumstance? Because you
    were outspoken about the subprime lending in the private sector
    leading up to the crisis. I heard you in debates here, I heard
    you on TV at home; you said that these really high-LTV loans
    were problematic, that this was deeply concerning, especially
    for those who didn't have savings, that a small fluctuation in
    the marketplace could cause problems.
        Do you have that similar concern? Because in many respects,
    you are making substantial decisions--no, no--you are making
    huge decisions. And the consequences of these actions are real.
    I know you know that. But is there that conflict looking back
    at what you said about the private sector versus the actions
    you are taking right now?
        Mr. Watt. I don't think there is any conflict between what
    I said then and what I am doing now. You need to make
    responsible loans. And this decision was surrounded by a bunch
    of compensating factors for every borrower who would make their
    loan as reliable a loan as a 10 percent downpayment loan, a 20
    percent downpayment loan. And that is our responsibility.
        And I would hope that you all would rely on the same things
    that I said in advocating for reform in this area, to know that
    we are going to apply those principles and not sanction loans
    backed by Fannie and Freddie and the taxpayers that are not
    reliably expected to be paid.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms.
    Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman. And welcome,
    esteemed colleague Director Watt.
        I just would like to revisit again the question that was
    asked by Congresswoman Carolyn Maloney regarding the National
    Housing Trust Fund. I heard you when you said that it will be
    hard on Treasury, the one making the decision as to which
    projects to fund. My question to you is, when will that money
    make it out there? Have you had any discussion with those two
    agencies?
        Mr. Watt. I have not had any discussions with them about
    the application of the funding. That is their decision to make.
    Treasury makes the decisions about the Capital fund, and HUD
    makes the decisions about Housing Trust Fund side of it. So
    those are their decisions to make.
        Ms. Velazquez. But do you have any idea as to when this
    money will start?
        Mr. Watt. Yes. I can tell you that because the process that
    we followed directs Fannie and Freddie to start setting aside
    the funds in January of 2015; and at the end of 2015, if
    circumstances don't reverse, then the moneys would actually be
    allocated into the Trust Fund and the Capital Magnet Fund and
    could be used. So there won't be any use of those funds during
    2015. It would be 2016 at the earliest before the funds would
    be available.
        Ms. Velazquez. Thank you. Director Watt, as part of the
    public mission, Fannie Mae and Freddie Mac maintain a duty to
    serve the entire housing market and support affordable housing
    preservation. In 2008, Congress asked FHFA to issue a rule to
    implement this duty-to-serve requirement. But while a proposed
    rule was issued in 2010, a final rule has not been promulgated
    to date. When do you plan to issue a final rule?
        Mr. Watt. We are in the process of looking at that. And you
    are right, a proposed rule was issued in 2008 or 2009. It never
    was finalized because of whatever reasons. I don't know. We
    haven't tried to evaluate that. But we are going to have a
    duty-to-serve rule finalized hopefully in the year 2015.
        Ms. Velazquez. Thank you. In August, FHFA proposed a new
    housing rule category for small multifamily properties that
    have units affordable to low-income families. This effort, of
    course, is very important for places like New York City, where
    these properties are an important part of the housing stock.
        While your agency has set initial benchmarks in an effort
    to take a gradual approach, please explain how this goal will
    be evaluated so that more ambitious targets can be set in the
    future.
        Mr. Watt. We will evaluate it on the same terms that we
    evaluate everything. First of all, make sure that the loans are
    safe and sound. And second of all, that they achieve the
    purpose of serving a group or a category of people who have
    been underserved. Which is why we encouraged--directed Fannie
    and Freddie to look at how to incentivize small developments.
    Because generally, smaller developments have more orientation
    toward middle- and lower-income people.
        So that is included in the 2015 scorecard for Fannie and
    Freddie to continue to work to encourage those kinds of loans.
    And we will have in place an evaluation mechanism that makes
    sure that is effective. Or we will revise the expectations in
    the future based on experience, which is something that we do
    quite regularly.
        Ms. Velazquez. Thank you. Thank you, Mr. Chairman.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from Oklahoma, Mr. Lucas.
        Mr. Lucas. Thank you, Mr. Chairman, and my old colleague,
    Director Watt.
        I would like to address the Federal Home Loan Housing
    Finances proposed rulemaking regarding membership requirements
    for Federal Home Loan Banks. And I am concerned that the
    proposed rule would unnecessarily harm a significant number of
    community financial institutions in Oklahoma and across the
    country by limiting membership in the Federal Home Loan Bank
    System.
        In recent years, it is been increasingly difficult for
    these institutions to provide mortgage financing needed in
    their communities. And the Federal Home Loan Banks have served
    a very critical role as a source of liquidity during these
    challenges times.
        I guess my question, Mel, is why propose such a regulation
    at a time when community banks and credit unions are in need of
    every credit resource available to them to serve their
    communities? Or as Congressman Watt would have said, what is
    the problem you are trying to fix with this rule?
        Mr. Watt. There are some potential problems that we are
    trying to fix to make sure that the Federal Home Loan Banks
    meet the statutory purposes that have been set.
        First of all, you don't want anybody to be a member of the
    Federal Home Loan Bank System and get the benefits of it unless
    they meet the criteria that Congress has set. And we were
    concerned that some of the members of Federal Home Loan Banks
    were not meeting these criteria.
        I can go into more detail. I can give you a complete
    outline of the rationale. But we are trying also to do this in
    a way that does not have the adverse impact that you are
    talking about.
        Mr. Lucas. But as I understand it, Director, under the
    present system, once an institution meets the requirement to
    participate, they still have all the obligations and all the
    standards that have to be met by any Home Loan Bank board
    institution.
        There is just some concern out there in the countryside,
    and perhaps in the hallways of Congress, that there is more to
    this than just an ongoing set of standards, that perhaps since
    the Administration has not really been able to legislate much
    in the last 4-plus years, that this is another effort to change
    how the system works by rule and not by law, since I don't
    think this institution would pass a bill to do this.
        So I guess my question is, is this an effort by the
    Administration to be able to channel and steer how these
    institutions use this resource?
        Mr. Watt. First of all, let me be clear with you, as I have
    been with the Administration. I am not part of the
    Administration. The Federal Housing Finance Agency is an
    independent regulatory agency. We don't play out the
    Administration's policy. We follow the statute. And that is
    what we are doing in this case.
        Mr. Lucas. But once again, to paraphrase Congressman Watt:
    The folks what brung ya are the folks what keep you there;
    i.e., the question still goes back to, is this an effort to try
    through the rule process to determine how these resources are
    used and, in effect, to put the institutions that are a part of
    the Home Loan Bank board system on a rather short leash?
        Mr. Watt. We have no agenda, other than making sure that
    they--that members of Federal Home Loan Banks meet the criteria
    that Congress has established for membership.
        The one that--and I know this is a controversial issue
    because we put out the rule, we got 1,300 comments. That is
    almost unprecedented. We are going to go through every one of
    those comments and evaluate every single one of them. And most
    of them, to be quite--I would say probably 90 percent of them
    appear to be against the proposed rule. So obviously, we have
    touched a nerve.
        Mr. Lucas. It is good--
        Mr. Watt. But we are going to apply the statute and try not
    to have the adverse impact that people are contemplating might
    be a result of this rule.
        Mr. Lucas. You have always been a man of your word. I take
    you as a man of your word. But we are in an environment where a
    lot of things are going on in very interesting ways. And I
    would just note that I would hope the committee would be very
    sensitive about doing anything to a model that has worked
    really well and is working well in a particularly tough set of
    times for those institutions.
        Mr. Watt. I agree with you.
        Mr. Lucas. I appreciate our friendship. And many of the
    underclassmen weren't here when you and I worked to help
    whomever the ranking member and chairman were at any given
    time, over 2 decades almost. So as we helped leadership, I am
    going to try and help you, sir.
        Mr. Watt. Thank you so much. It is great to see you again.
        Mr. Lucas. I yield back, Mr. Chairman
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentleman from Massachusetts, Mr. Lynch, for
    5 minutes
        Mr. Lynch. Thank you, Mr. Chairman. And I want to welcome
    back Director Watt. It is good to see you again. And as you can
    see, some things have not changed here in terms of how we might
    view affordable housing and the way FHFA works
        There was a great article yesterday in the New York Times
    by Searcey and Bob Gebeloff. It talked about how the middle
    class is continuing to shrink. And this phenomenon is resulting
    in more people being squeezed into the very bottom of income
    earners. That is obviously putting a lot of pressure on
    affordable housing, which is where you come in.
        According to the National Low Income Housing Coalition, we
    need about 7 million more homes nationwide that are affordable
    and available to extremely-low-income households and those with
    incomes at 30 percent or less of the area median income. And I
    know that in my home State of Massachusetts, there is a
    shortfall of about 175,000 affordable units, and in my district
    it is about--let's see--16,000 units.
        There are a couple of tools that you have. And I am happy
    to see that they are beginning to be used. The Housing Trust
    Fund and the Capital Magnet Fund, I think can be part of the
    solution. And now, I know that you are following statutory
    directives in terms of the Magnet Fund. But can you talk a
    little bit more broadly about how your affordable housing goals
    are consistent with the reality that we are seeing out there?
        I know that the situation seems to be getting worse for
    that tier of people who would benefit from access to affordable
    rental housing, never mind the 3 percent downpayment on
    purchasing housing. But there are folks who are, I think, have
    resigned themselves that they are not home purchasers, that
    they are renters now. How does your affordable housing goal
    help those people?
        Mr. Watt. First of all, we haven't finalized the affordable
    housing goals yet. The rule is in process. And we are
    evaluating comments, so--
        Mr. Lynch. How do you anticipate your goals once you figure
    them out?
        Mr. Watt. Here is the way we think of this. First of all,
    we want to, on the ownership side for people who can afford to
    pay a mortgage, make it available to them. On the rental side,
    we want to make sure that affordable housing is available in
    the marketplace. There is, actually, a very robust multifamily
    market on the high end, but not so much on the affordable end.
    Which is why when we wrote the scorecard criteria, we exempted
    from the $30 billion--or whatever the figure was; I can't even
    remember what it was--cap, affordable housing developments to
    try to encourage Fannie and Freddie to be more involved and
    active in getting into that space, which is underserved by the
    private sector.
        So, that is what we have done. And the rule itself, we will
    try to build on that and incentivize that. You are right; there
    are a lot more people renting now than had been historically
    renting. The rental market is robust and there are not enough
    units to serve that market.
        Mr. Lynch. Okay. I see my time is just about expired. I
    yield back. And I thank you.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentleman from Texas, Mr. Neugebauer,
    chairman of our Financial Institutions Subcommittee.
        Mr. Neugebauer. Director Watt, it is good to see you again.
    You mentioned a couple of times--I want to talk about g-fees
    first. That goal--or you are currently studying the g-fee issue
    and will make a determination? It is my understanding that a
    study was done prior to the previous Director issuing a
    directive to increase the g-fee to 10 percent.
        So I guess my first question is, if we have already studied
    it, why are we studying it again?
        Mr. Watt. I don't think we should ever stop evaluating
    issues. I was not a party to the study that was done before. We
    obviously are taking that study and any conclusions that it
    reached into account in reaching our conclusion. But we have
    been very transparent in seeking input about how these g-fees
    should be set, what criteria should be applied in setting the
    g-fees, should it be just about protecting against the risk
    that Fannie and Freddie are assuming? Should it be about
    capital formation? Should it be about attracting private
    capital into the--the process has been very transparent. And--
        Mr. Neugebauer. So you decided to study it again, is what--
        Mr. Watt. Yes.
        Mr. Neugebauer. Okay. So the cross-subsidization issue that
    the gentleman from New Jersey brought up I think is an issue
    that I am interested in, as well. And, in fact, I had
    conversations with your predecessor in that there are some
    States that have very, very stringent foreclosure procedures
    that in many cases keep the people who loan the money in good
    faith, not months from getting their property back if the
    person's not paying, but in some cases years.
        And so I think that in those cases, I support those--that
    is a higher risk to those entities and those--where those
    foreclosure rules are very consumer-oriented. And so I am not
    opposed to those States deciding that. I think that is their
    right. But I think what they have to also understand is when
    you make it so consumer-oriented, you penalize the people who
    are loaning the money and causing losses--and what we have seen
    in many of those States where they had--where it is very
    difficult to get your property back, that those properties were
    stripped of windows and sinks.
        And so, I just want to say to you that I think pricing your
    g-fees on risk is important.
        Now, one of the things that you alluded to you in your
    report--I mean in your written testimony, and you brought it up
    as well, is you have been doing some risk transferring. And I
    guess the question is, if you are not taking a risk, you don't
    have to transfer it. But I wondered if you could give the
    committee some idea how many basis points it is costing to
    transfer that risk. What is the pricing on those transactions
    that you are doing that would--to give us some idea of what it
    is costing to reinsure those risks?
        Mr. Watt. I can't tell you in basis points. But I can tell
    you that one of the criteria that is always applied is that a
    risk transfer must be done in a commercially reasonable manner,
    and it can't be just giving away assets. Because that would be
    inconsistent with our conserve and preserve mandate under the
    conservatorship statute, so--
        Mr. Neugebauer. I think what I am trying to get to, though,
    is in the current situation, where Freddie and Fannie really
    don't--they need to make a profit but there are really no
    market forces in place there to determine whether--what is the
    value of these entities.
        And so the question is, is if you are transferring that
    risk, it would be helpful for us to know that. Because that
    may--should also influence what your g-fee pricing is going to
    be. In other words--
        Mr. Watt. We have that information. I don't mean to suggest
    that we don't have that information. We have the information on
    every risk transfer transaction that has been undertaken: the
    cost; what the models say the value was; what Fannie and
    Freddie made on the transactions. We have that information. But
    you asked me what are the number of basis points. That is
    information I wouldn't have off the top of my head. But we can
    provide more information to you, if that is what you need.
        Mr. Neugebauer. I would like that. And the final point I
    would make is that, on the downpayment, I think it is
    erroneous--kind of ironic--maybe erroneous, too. But it is
    ironic that we made FHA increase their downpayment to 3.5
    percent. And it looks like the two of you have a race here of
    seeing who can get the most market share here. And so you have
    kind of one-upped FHA by going to a 3 percent downpayment when
    they have a 3.5 percent downpayment.
        Mr. Watt. First of all, you should be clear that we are not
    in competition with FHA.
        Mr. Neugebauer. Sure you are.
        Mr. Watt. We are not. The market might--the market is going
    to go to whomever gives them the best deal. We know that. But
    we are not competing with FHA. We are trying to provide
    liquidity in the market, which is what our mandates says we are
    supposed to do.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. Scott.
        Mr. Scott. Thank you, Mr. Chairman. And welcome, Director.
    I feel good and I feel proud to see you sitting where you are
    sitting and doing what you are doing for the people of this
    Nation. Congratulations. I think you are doing a great job.
        I would like for us to revisit for a moment the Housing
    Trust Fund. And I would like to clear up some things so that
    folks will understand. First of all, both you and I were here
    sitting on this committee when none other than President George
    W. Bush authorized this Housing Trust Fund. And if you recall,
    when he authorized it he said that this is perhaps the best
    tool that we could use to help get housing for our most
    vulnerable population.
        So I want to set the record straight that this is both a
    Democratic and a Republican initiative. And secondly, you have
    moved to reinstate the payments largely following the orders of
    us in Congress. Because during the economic recovery, we put
    three criterion in for suspending it. Those criterion now no
    longer exist for the GSEs.
        And so you are operating on this trust fund within the
    authority, first of all, that President George Bush gave you.
    And secondly, what the Congress of the United States
    reinforced. I just want to make sure that is clear.
        Now I want to talk about one other thing, because I think
    it is very important, and that is principal reduction. That is
    really at the core of helping people. And all the evidence is
    that that is the case.
        Recently, you went to--and that is another thing I want to
    commend you for. Because you go out where the problems are. You
    have been out in the Nation. You have been to Atlanta, and we
    certainly appreciated you there with the HARP program. But you
    went to Detroit where this problem is very pronounced. And I
    think you articulated there your concern about being able to
    use the necessary tools for principal reduction.
        I think that this is the core of it. Would you mind
    addressing that within the light of what you said and how
    important principal reduction is?
        Mr. Watt. It allows me to go back to a point that I made
    with Representative Neugebauer. This is one of those issues
    that I have received a lot of second-guessing about. Because
    there was a study done about principal reduction before I got
    there at FHFA also. And I haven't done principal reduction
    either. We are still studying that issue, just like we are
    still studying the g-fee issue.
        And what we are trying to do on principal reduction is find
    a place where it is beneficial to borrowers and not negative
    net present value to Fannie and Freddie. Right?
        And there are some instances in which that is the case; it
    is beneficial to borrowers and not negative to Fannie and
    Freddie. And when we find that niche, that is when we are going
    to make a decision about this.
        Now, in Detroit, we are, under the Neighborhood
    Stabilization Initiative, testing some things there to see
    where that sweet spot is. Because if you have a whole
    neighborhood that is sitting there with vacant properties, half
    of the properties--
        Mr. Scott. Right.
        Mr. Watt. --vacant, it pulls down the value of the other
    properties in that neighborhood. So we are trying to craft
    something that will work for the enterprises and for the
    borrowers.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr.
    Luetkemeyer, chairman of our Housing and Insurance
    Subcommittee.
        Mr. Luetkemeyer. Thank you, Mr. Chairman. And
    congratulations to you, Mr. Watt, on your appointment. I don't
    know whether to congratulate you or empathize or sympathize
    with you. But we are glad you are here today.
        So, to follow up on a couple of comments that were made
    earlier with regards to the capital that you have in the GSEs
    and the ability to provide stability, one of the things that I
    am looking at here as I look through this is, your past dues on
    Fannie Mae and Freddie Mac right now are just a little less
    than 2 percent, both of them. So that is good. Is my microphone
    not on?
        Mr. Watt. I can hear you, but I am having a little trouble
    picking up all of your sentences. I'm sorry.
        Mr. Luetkemeyer. Okay. Then I will hold the microphone a
    little closer. I apologize. Your past dues for Fannie and
    Freddie both are a little under 2 percent right now, which is
    very good. But your capital is at .4 percent. We are supposed
    to be at 2. And so I guess my question is how--and in your
    testimony, you say enterprises do not have the ability to build
    capital internally while they remain in conservatorship. How do
    we solve the problem of additional bad debts popping up?
        And I guess another subsequent question to go with that is,
    do you have any lawsuits pending that can bring in cash to add
    to your capital count? Or whenever a lawsuit is filed and you
    win it, does that money go to the treasurer or does it go
    into--how do you solve the problem of having enough capital to
    absorb the losses, is my question.
        Mr. Watt. We can't build up capital because we are
    operating under a preferred stock purchase agreement with
    Treasury in conservatorship that sweeps all of the profits that
    Fannie and Freddie make to the taxpayers.
        Mr. Luetkemeyer. Right.
        Mr. Watt. That was the quid pro quo for--
        Mr. Luetkemeyer. If that is the case though--
        Mr. Watt. --keeping them from going--Fannie and Freddie
    from going into--
        Mr. Luetkemeyer. If that is the case, though, how do you--
    whenever further bad debts losses occur, where do you take
    those losses? Eventually just go to the treasurer and ask them
    to write a check to build more accounts?
        Mr. Watt. That is what would happen under the preferred
    stock purchase agreements. Basically, the taxpayers are backing
    Fannie and Freddie. And they will be until GSE reform is done.
    And we don't--we can't do that. We don't do GSE reform. That is
    why it is so important for Congress to act on GSEs.
        Mr. Luetkemeyer. So I saw that you had some nice income
    figures. And I assume part of that is also the settlement of
    lawsuits with different entities. Are there any--
        Mr. Watt. It has been substantial.
        Mr. Luetkemeyer. --lawsuits pending now?
        Mr. Watt. There are three more lawsuits--two more lawsuits
    pending.
        Mr. Luetkemeyer. Okay. When you win those lawsuits, do
    those dollars go to your capital account, or do they go to the
    Treasury?
        Mr. Watt. They will go into Freddie and Fannie's account.
    And if at the end of the year they are--
        Mr. Luetkemeyer. That gets swept--
        Mr. Watt. --they are profits, they will be swept--
        Mr. Luetkemeyer. All right.
        Mr. Watt. --to Treasury. Yes.
        Mr. Luetkemeyer. Very good.
        One of the concerns that I have--excuse me--also is with
    regards to the way that you are pricing things and the way that
    you are changing some of your rules and regulations. Having
    been in the money loaning business for 35 years, I can tell you
    that there are certain tenets of lending you can't get away
    from, no matter how much you want to do it. Certain things have
    to happen. If they don't, you lose. It is just that simple.
        Mr. Watt. It is a risk. You are right.
        Mr. Luetkemeyer. Just that simple. Everybody wants to say
    well, I can slice the bread thinner. I am a little smarter than
    the next guy. All I have to do is just tweak here, tweak there.
    I'm sorry. It doesn't work. After 35 years, I have stubbed my
    toes against certain things stumbling over this. There are
    certain tenets that have to be there, that is it.
        And so my concern is that when we change these things and
    we loosen rules up--as you have seen over the last 6 years,
    Fannie and Freddie have had a resurgence. They actually now are
    profitable; they are turning a profit. So why in the world do
    you go back now and want to change those sound tenets of
    lending to loosen it up and head down the same path that caused
    the problem before?
        Mr. Watt. First of all, you are absolutely right; we are in
    the risk business. And there is no way to get away from risk.
    You can make--any loan at some point can become risky. So what
    we do is on every loan that we back, we try to assess what are
    the risks associated with this loan. And we try to minimize
    those risks. Now, you can't eliminate risk--
        Mr. Luetkemeyer. With respect, I have one more question,
    and I see my time is about up here.
        Mr. Watt. Okay.
        Mr. Luetkemeyer. With regards to--in your testimony, you
    also want to try to move a lot of stuff to the private sector.
    And I think that is laudable. That is a thing that we need to
    be doing.
        My concern is, though, that if you continue to compete with
    the private sector by lowering guarantee fees, by loosening
    lending standards, it makes it more difficult for the private
    sector to step in and do that. Would you agree with that
    statement?
        Mr. Watt. Yes. I agree with it generally. But at the same
    time, our responsibility is to assure a liquid housing finance
    market in the interim until you all do GSE reform. So we are
    balancing risk and availability of housing finance, which is
    what I said in my opening statement--
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. Green,
    ranking member of our Oversight and Investigations
    Subcommittee.
        Mr. Green. Thank you, Mr. Chairman. I thank the ranking
    member, as well. And Director Watt, it was a preeminent
    privilege to serve with you for nearly a decade in Congress.
    You were always a voice of reason. And I see that you continue
    to be that voice of reason.
        I would like to talk to you about the FICO score that the
    GSEs are required to adhere to. Under this current FICO
    standard, we have a circumstance that allows bad credit for
    utilities and rental payments to be utilized when ascertaining
    a score, but the good credit that one has for these very same
    utilities and rental payments is not utilized.
        And I am mentioning this to you because I think we need a
    more inclusive model. I am not talking about doing anything
    that would in any way impair or prevent a good FICO score from
    being developed. I just think that it is fair--we have used
    this term ``fairness'' this morning, ``fair play.'' It seems
    fair to me that if you are going to use the adverse
    information, that we should use that information in a positive
    way when it is available for Fair Isaac to score.
        These FICO scores, as you know, are exceedingly important.
    In fact, they are everything when it comes to getting a loan.
        So can you please give me just a bit of intelligence on
    this in terms of how we might work with your office to try to
    expand and have a more inclusive credit scoring model?
        Mr. Watt. First of all, you are right--credit scoring is
    one of those areas where there have been--
        Chairman Hensarling. Director Watt, is your microphone on?
        Mr. Watt. Did it go off? I'm sorry.
        Chairman Hensarling. If you could pull it a little closer
    to you, please.
        Mr. Green. Would you add these 30 seconds to my time,
    please?
        Chairman Hensarling. I will consider it.
        Mr. Green. Thank you, Mr. Chairman.
        Mr. Watt. Some things don't change in this committee.
        So there are alternative credit scoring models that are
    beginning to be out there now. FICO is updating its credit
    scoring model. Vantage has a credit scoring model. There are
    several. And what we have done in this year's 2015 scorecard is
    we have instructed Fannie and Freddie to evaluate these credit
    score--these alternative credit scoring models to see if we can
    get to a better place in this area. Not a race to the bottom.
    We don't want credit scores--
        Mr. Green. Exactly.
        Mr. Watt. --that get more people the ability to get loans
    and are not reliable. So we asked them to evaluate the
    reliability of it. We asked them to evaluate the operational
    challenges that would go with implementing alternative credit
    scoring models.
        So this is an area that we are working aggressively on this
    year. We started it last year in response--well, not in
    response, but a number of people on this committee have written
    to me about the alternative credit scoring models, both on the
    Republican side and the Democratic side. It is not a partisan
    issue. So we are trying to figure out how we can do this, but
    do it in a reliable way and in a way that operationally doesn't
    create angst in the entire market. Because what we do in this
    space could have some significant implications.
        Mr. Green. Thank you for exploring the possibilities.
    Because I concur with you, there are alternative models that
    seem to indicate that we have some opportunities.
        Let me move quickly to the Housing Trust Fund, because I
    think it is important for us to explain that when we--and you
    were here--developed the formula, if you will, we put a trigger
    in. And that trigger was placed there to prevent a person who
    might be in your position, who might have opinions that would
    vary from what we thought the law should require. So the
    trigger required that we not fund because of circumstances, and
    then it requires that we do fund because of circumstances. It
    allows circumstances to dictate the actions of the Director, as
    opposed to the will of the Director.
        I think it was a pretty good idea then. It seems like it is
    a pretty good idea now to take the Director to the extent that
    you can out of play. And this is no disrespect to you. It is
    just like we were trying to protect the process that could help
    the people that I was sent here to represent, a good many of
    whom don't have as much in assets liquidity as others.
        Chairman Hensarling. Very brief answer, please.
        Mr. Watt. I am happy to follow the statute that was
    written. And that is exactly what we have done. And I stand by
    that decision--
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr.
    Royce, Chair of the House Foreign Affairs Committee.
        Mr. Royce. Director, congratulations. It is good to see you
    again.
        Mr. Watt. Thank you. It is good to see you again.
        Mr. Royce. Thank you. As you know, my concerns have always
    gone to these issues of moral hazard and over-leverage, whether
    it was a Republican Administration or a Democratic
    Administration. But I think until 2007, we probably could have
    considered some of my concerns hypothetical or philosophical.
    But after 2007, I think that over-leverage issue sort of proved
    a point.
        And looking at the headlines--the headlines read,
    ``Government keeps pushing mortgage guarantees as risk index
    rises.'' Here is another headline, ``FHFA orders GSEs to start
    supporting affordable housing trust funds.'' Now, surprisingly,
    the year here is not 2005, it is 2015.
        And so we find the FHA today engaged in this race with
    Fannie and Freddie to see who can more swiftly crowd out the
    private sector, who can assume more risk on behalf of the
    American taxpayer. And I would just point out that this is kind
    of a frightening race here. Because, in my view, we have seen
    it before. The FHFA has joined sort of a moral hazard problem
    here.
        In December, you announced that the GSEs should begin to
    put more money into the coffers of housing advocacy groups
    through the Housing Trust Fund, established under the Housing
    and Economic Recovery Act. And you made this move, despite the
    fact that Fannie and Freddie have yet to repay a lot of the
    money due to the American people. We can argue about whether it
    is $200 billion or--but there was a lot of money lost at the
    end of the day because of over-leverage.
        So it is difficult to see how you can argue that as it is
    required by law, the GSEs are financially stable enough to
    begin the transfer of money to housing groups. Let me show you
    the ratios here. And I think this was pointed out earlier.
    Fannie Mae leveraged at 341 to 1. Now, that is a capital ratio
    of .29 percent. Freddie Mac, 153 to 1, and an equally
    concerning leverage ratio of .65 percent. You remember a decade
    ago, I was arguing against 100 to 1 leverage ratios. These
    ratios are excessive of that.
        And you said earlier in this hearing that the leverage
    ratio is not something the statute requires you to look at when
    resuming allocations. I have a different reading of that
    statute that I will share with you. What the statute requires
    is that you ``shall'' suspend allocations, not ``may.'' The
    statute reads, ``shall suspend allocations if they would
    contribute to the financial instability of the enterprise or
    would cause the enterprise to be classified as
    undercapitalized. So in reality, the statistics cited earlier
    do come into play. So, Director, how can the enterprises be in
    this state with these leverage ratios--in one case 341 to 1--
    and not be deemed both financially instable and
    undercapitalized? That is my question.
        Mr. Watt. First of all, we put in place prudential stops if
    circumstances go back in the other direction. If we ever have a
    draw on the Treasury, that would automatically stop the funding
    of the Housing Trust Fund.
        Mr. Royce. But it is already undercapitalized, is the point
    I am making.
        Mr. Watt. We don't have--when Fannie and Freddie were put
    into conservatorship and the preferred stock purchase
    agreements were entered into with Treasury, that suspended the
    capital of Fannie and Freddie. Now, if we were building up
    capital, I understand exactly what you are saying. But those
    two criteria don't apply anymore, because they are in
    conservatorship. Every dime is going to the taxpayers if there
    is a profit.
        Mr. Royce. There is statutory language here that requires
    an end to the allocation. I think it is very straightforward.
    But I will close with this.
        Today I, along with many of my Republican colleagues, will
    reintroduce the Pay Back the Taxpayers Act. And this bill will
    ensure that money coming in from the GSEs will go to the
    taxpayers, in other words, will go to address this issue,
    instead of being diverted to the Housing Trust Fund. But thank
    you, Director. It is good to see you again.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr.
    Cleaver, ranking member of our Housing and Insurance
    Subcommittee.
        Mr. Cleaver. Thank you, Mr. Chairman, and Ranking Member
    Waters. And thank you for being here, Mr. Watt.
        There has been a lot of discussion about the 3 percent
    down. And I am not sure if the suggestion is that a 3 percent
    down is reckless. I was looking at a study, V.A. has a 0
    percent down and a lower foreclosure rate than the prime
    lenders.
        So is there any evidence that 3 percent is going to cause
    more foreclosures if 0 percent is not causing foreclosures? And
    what is it about 0 to 3 that creates this problem?
        Mr. Watt. I think, Representative Cleaver, the challenge is
    to look at lenders and make a determination; when the
    downpayment is lower, there is the potential that it could be a
    riskier loan. But when you pair that with other compensating
    factors--which this product does--you offset that additional
    risk.
        And that is exactly what we have done. Lending is about
    assessing the ability of people to pay. And what most people
    don't realize is that probably 90 percent of the people who are
    underwater, who have no equity in their mortgages at this
    point, are continuing to pay their mortgages.
        Right? So that is not a criteria whether somebody is going
    to pay, whether you have 3 percent, 10 percent. It is about
    whether you want to have a home that you own, right? And so you
    assess those criteria. And there are substantial studies that
    suggest that--confirm that housing counseling, homeownership
    counseling, makes people better borrowers, more reliable
    borrowers. This program is--that is one of the compensating
    factors. And if all else fails, you have to have private
    mortgage insurance to back the loan.
        So it is not as if we have created a risky situation. These
    are not the loans that had no documentation, no resets after 90
    days or 3 years. These are not risky loans. And we have made
    that assessment based on research, not based on politics. Based
    on research, we have made that assessment. And I stand behind
    this decision. That is why I was happy to come here and have
    the opportunity to talk about the prudential compensating
    factors that we have put around this thing to make sure that
    you all understand that my philosophy has not changed; if
    somebody cannot pay a loan, they shouldn't be given the loan.
        If you look down there and say this person can't pay this
    loan, it would be irresponsible for us to say that we should be
    making loans to those people, or that Fannie and Freddie should
    be backing those loans--
        Mr. Cleaver. Yes. I think I heard you clearly.
        Mr. Watt. --to understand.
        Mr. Cleaver. Maybe I have time for a quick question. Let's
    remove the sociological issues, if people want to connect that
    to the loans. The economy is not healing for some people. We
    still have stagnant wages. And, in fact, hourly wages are
    actually ticking down in terms of keeping up with inflation. So
    if we are having stagnant wages and we are trying to heal the
    economy and housing is a significant part of healing the
    economy, having a housing market that is healthy, does it make
    sense then for us to put interest rates and downpayments high
    when we are trying to get the housing industry healed?
        Can we heal the housing industry without getting more
    people to buy houses, people who qualify, creditworthy people?
    Is there any other way to do it, to get people to buy more
    houses without making it affordable?
        Mr. Watt. Congress has given us this mandate: Do lending,
    back loans that are safe and sound, and provide liquidity in
    the market. We are constantly balancing those two objectives.
    That is what we are in business to do, and that is what we are
    planning to continue to do.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, chairman of our Monetary Policy and Trade
    Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman. And welcome back
    to--well, I guess this isn't quite home turf, since we are
    visiting somebody else's committee hearing room while ours is
    under some much-needed repair. But almost 2 years ago, I had a
    chance to ask your predecessor, Mr. DeMarco, about FHFA's
    intentions as it related to new regulations in the lender-
    placed insurance market, the LPI market. And I urged Director
    DeMarco to make sure that any such regulations met a test of
    producing a fair and open marketplace for providers of LPI and
    for, more importantly, even the consumers, which in turn would
    produce potentially lower prices for these consumers.
        Can you please provide the committee with any kind of
    update in this particular area that has gone on? I know at that
    time he was looking at some rules, so--
        Mr. Watt. First of all, Acting Director DeMarco is to be
    commended and FHFA is to be commended for getting into this
    space. Because there was a lot of abuse going on. There were
    virtually no controls. And FHFA addressed some of those
    inappropriate practices by directing the enterprises to
    prohibit servicers or servicer affiliates from receiving
    compensation in the form of commissions for placing insurance,
    because there was a perverse financial incentive for placing
    insurance in these circumstances with affiliates or people who
    were paying commissions.
        We have formed a working group, because this is an issue
    that is not only an FHFA issue, it impacts everybody who has a
    mortgage in this country. And we have set up a regulatory
    working group consisting of 14 State insurance regulators, the
    National Association of Insurance Commissioners, and 8 Federal
    regulatory agency representatives to try to figure out how best
    to attack this problem.
        Mr. Huizenga. And when was that formed?
        Mr. Watt. Beg your pardon?
        Mr. Huizenga. When was that formed?
        Mr. Watt. That was formed in 2013.
        Mr. Huizenga. Okay. And is there a status update?
        Mr. Watt. They have had seven meetings up to this point.
    And in the meantime, things have improved because of these
    interim requirements we imposed on Fannie and Freddie. But we
    are continuing to work on a set of guidelines that would apply
    across the whole housing industry.
        Mr. Huizenga. Do you have a timeframe/timeline of when that
    will be completed? I think anything that is in limbo like that
    is, probably needs to get wrapped up.
        Mr. Watt. It is hard to set a timeframe on a lot of these
    things, as you have noted. But we are going to do it as soon as
    soon as they come out with a set of recommendations. We are
    evaluating those. And we are--
        Mr. Huizenga. So they have not come up with those
    recommendations as of yet?
        Mr. Watt. They have not come up with those recommendations
    as of yet.
        Mr. Huizenga. Okay.
        Mr. Watt. And so we expect that to happen sometime during
    this year.
        Mr. Huizenga. Okay. All right. We will follow up on that.
        Now I am going to ask you a question as I was going back
    over some of the testimony from back then. I am going to ask
    you a question that I asked Mr. DeMarco, as well.
        Is the 30-year mortgage necessary, and why?
        Mr. Watt. Now you have gotten me into congressional
    territory. I think that is a decision that really is more
    appropriately made--I can tell you that demographics are
    changing. People are a lot more mobile than they used to be.
    And a 30-year mortgage was bottomed on people staying in the
    same place for 30 years, or that assumption. And on the fact
    that it would get you a lower payment if it--so there--there
    are a lot of factors that go into that. But that isn't a--
        Mr. Huizenga. But isn't that really--
        Mr. Watt. --decision that FHFA is going to make. That is a
    decision that I think is more appropriately made in the
    legislative context.
        Mr. Huizenga. Personally, I think it might be the private
    market space that is probably where most of that is--
        Mr. Watt. That is true also.
        Mr. Huizenga. I don't know if you are aware of this. And I
    am going to quote this: ``The Methuselah of mortgages has
    arrived; the 50-year home loan.'' That gets me very, very
    nervous when we are having these types of timeframes out there.
    But I appreciate it. Thank you, Mr. Chairman.
        Mr. Watt. Mr. Chairman, just for his information, we don't
    allow Fannie and Freddie to back 50-year mortgages. Thirty
    years is our limit. So, be clear on that.
        Chairman Hensarling. In listening to your comments, it was
    one of the few times I agreed with you. I was about to yield
    you more time. But instead, we will turn to the gentleman from
    Texas. Mr. Hinojosa is recognized for 5 minutes.
        Mr. Hinojosa. Thank you, Mr. Chairman. I apologize for not
    being here earlier, but I was at another committee where we
    were reorganizing. I want to say good morning and thank you to
    my former colleague, Director Watt, for being here today to
    give the Financial Services Committee an update on the changes
    to the housing finance system and FHFA's role going forward.
        I believe that Fannie Mae and Freddie Mac share very
    important goals such as ensuring liquidity in the mortgage
    market and promoting homeownership. However, due to their
    financial trouble in recent years, we have seen attempts to not
    just reform them, but wind them down completely, and I don't
    agree with that.
        I would like to go right into the questions. Director Watt,
    last year President Obama said that he would like to see Fannie
    Mae and Freddie Mac wound down and replaced by a government-
    backed mortgage bond insurer. Can you tell us where you stand
    on that proposal? And do you think this could negatively or
    positively affect the homebuying market?
        Mr. Watt. Representative Hinojosa, that is a subject that I
    am not going to express an opinion about. That is a legislative
    congressional decision. And just to kind of put it in
    perspective, when I got to FHFA, there were multiple visions or
    views about GSE reform. And I kind of took FHFA out of that
    discussion, because we were sending mixed messages. It wasn't
    part of the statutory mission that FHFA has, which is to, in
    the present, guarantee liquidity and safety and soundness in
    the market. That is a congressional decision, not an FHFA one.
        Mr. Hinojosa. I respect your answer. But I want to commend
    you, because since FHFA's conservatorship of Fannie Mae and
    Freddie Mac, we have seen a stark change in the finances of
    GSEs for the better. And we thank you for your leadership and
    your being able to make those improvements. I especially like
    the $38 billion in extra funds that you gave our Nation's
    Treasury.
        I have another question. Late last year, Fannie Mae and
    Freddie Mac announced new lending guidelines designed to help
    more low-income and first-time buyers afford homes, including a
    reduction of the minimum downpayment for a home from 5 percent
    to 3 percent. What are other proposals is FHFA looking at to
    encourage first-time homebuyers? And how is the agency making
    people aware of these initiatives that I have mentioned?
        Mr. Watt. We have a number of things already on the books.
    I don't know that we are looking at any new proposals that I
    would indicate to you. But we have homeowner modification
    programs. We have the HARP program, which is a refinance
    program for people who are underwater but have been regularly
    paying their mortgage. And the 97 percent loan product.
        I think what we have tasked Fannie and Freddie to do is to
    in this space evaluate how we can make credit available to
    creditworthy people. And that is part of the 2015 scorecard. It
    was part of the 2014 scorecard. They operate in this area
    regularly. We evaluate what they propose. It is all research-
    based. And we try to make good, prudent decisions in the
    interest of safety and soundness and the interest of liquidity
    in the market.
        Mr. Hinojosa. I want to ask my last question. What steps,
    if any, is FHFA taking to ensure that private capital is
    reentering the market? Because I can see some months where it--
    the numbers being--that people are buying new homes or used
    homes has been going up, and then suddenly they went down. So
    this is important to be on the private capital reentering the
    market.
        Mr. Watt. The major way is that we are doing aggressive
    risk transferring to the private sector. We are not holding
    onto these loans. We are transferring that risk back into the
    private sector. And we have tripled--quadrupled, really, the
    risk transfers since I have been there.
        Mr. Hinojosa. Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr.
    Duffy, chairman of our Oversight and Investigations
    Subcommittee.
        Mr. Duffy. Thank you, Mr. Chairman. And welcome again, Mr.
    Watt. Over the course of your testimony, you have indicated
    that you are following the law and following the statute, which
    we appreciate, because we don't always think that laws and
    statutes are followed.
        I want to follow up on Mr. Royce's line of questioning in
    regard to the funding of the Housing Trust Fund. Now, you are
    obviously aware of Section 1337. And basically, we have a
    discussion about whether the GSEs are well-capitalized. And if
    they are undercapitalized, you really can't fund the Housing
    Trust Fund. Would you agree with that?
        Mr. Watt. Yes. Well, no.
        Mr. Duffy. Kind of?
        Mr. Watt. Not undercapitalized. But if they are not making
    a profit, I absolutely agree with you.
        Mr. Duffy. They have to be well-capitalized.
        Mr. Watt. Capital is a whole different issue that basically
    when Fannie and Freddie were put into conservatorship, the
    capital considerations went away. Because basically, we don't
    have any capital at this point.
        Mr. Duffy. One of the drawbacks of statutes is you don't
    get to split hairs. The language is usually pretty clear. And
    you would agree that the language in the statute requires that
    the GSEs are well-capitalized, not undercapitalized; correct?
        Mr. Watt. They--
        Mr. Duffy. Before you can fund the Housing Trust Fund, you
    have to find that the GSEs are not undercapitalized; correct?
        Mr. Watt. No, I don't think that is the case.
        Mr. Duffy. You think the GSEs--
        Mr. Watt. It says I can't make a decision that causes or
    would cause the enterprises to be classified as
    undercapitalized. But the decision about capital was not on my
    plate. That was in the letter that I wrote that reinstated the
    contributions. I specifically said that neither that provision
    nor the third provision was applicable anymore, because they
    were in conservatorship. It was the only the first provision
    that was applicable to my decision.
        Mr. Duffy. Can you direct me to the section of the statute
    that says unless the GSEs are in conservatorship?
        Mr. Watt. There is nothing in there that says unless they
    are in conservatorship. But we--
        Mr. Duffy. Where did you come up with that?
        Mr. Watt. Beg your--
        Mr. Duffy. Where did you come up with that?
        Mr. Watt. The conservatorship statute tells us what
    authorities we have in conservatorship. It wouldn't be in the
    Housing Trust Fund statute.
        Mr. Duffy. So it is your testimony that that trumps Section
    1337(b)?
        Mr. Watt. I think the preferred stock purchase agreements
    trump (b)(2), yes.
        Mr. Duffy. So you are saying, just to be clear, that
    Section 1337(b) doesn't really apply, and that you have the
    authority to fund the Housing Trust Fund. Is that--
        Mr. Watt. That is correct, yes. If I hadn't concluded that,
    I wouldn't have done it.
        Mr. Duffy. Would you mind sending me the legal analysis on
    that? Because the statute seems pretty clear. And I want to
    follow the statute for your testimony. So if you would help me
    out on how you have reasoned--
        Mr. Watt. I would be happy do that.
        Mr. Duffy. --that would be wonderful. Just quickly, in
    regard to the Housing Trust Fund, how is that going to be
    funded? How is it going to be funded?
        Mr. Watt. How is it going to be funded?
        Mr. Duffy. Yes.
        Mr. Watt. Out of the profits of Fannie and Freddie.
        Mr. Duffy. Where do those profits come from? Is there any
    kind of a surcharge or tax or assessment?
        Mr. Watt. No, no, no. In fact, the statute specifically
    says there cannot be a surcharge to fund the Housing Trust
    Fund. And we have put out a rule that ensures that does not
    happen.
        Mr. Duffy. Will it increase the cost, do you think, to the
    end home purchaser?
        Mr. Watt. No.
        Mr. Duffy. In the form of--
        Mr. Watt. Because the statute says we are not allowed to
    increase the cost to the borrower.
        Mr. Duffy. I know statutes say a lot of things. But
    sometimes it is applicable and sometimes not.
        Mr. Watt. Sometimes--all the time we try to follow the
    statute, though.
        Mr. Duffy. I appreciate that. I want to just--Mr. Garrett
    and I had sent you a letter in regard to the GSEs lobbying.
    This was sent on December 11th, and we haven't received a
    response from you yet. Did you receive that letter?
        Mr. Watt. Yes. Yes, sir, I did.
        Mr. Duffy. Can we expect a response--
        Mr. Watt. Yes.
        Mr. Duffy. --in regard to--
        Mr. Watt. Yes, sir, you can.
        Mr. Duffy. Can you give me--
        Mr. Watt. You might have gotten it yesterday. But I thought
    you all would be saying that we were doing it just in response
    to the hearing.
        Mr. Duffy. We probably would.
        Mr. Watt. We take every inquiry we get seriously. And we
    try to go and get to the bottom of whatever--
        Mr. Duffy. Are you going to continue to--
        Mr. Watt. --but we will respond--
        Mr. Duffy. Are you going to continue the ban on GSE
    lobbying?
        Mr. Watt. I beg your pardon?
        Mr. Duffy. Are you going to continue the ban on GSE--
        Mr. Watt. Yes.
        Mr. Duffy. --lobbying?
        Mr. Watt. Absolutely, we are continuing the ban on GSE
    lobbying.
        Mr. Duffy. Thank you. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. Clay,
    the ranking member of our Financial Institutions Subcommittee.
        Mr. Clay. Thank you, Mr. Chairman. And welcome back,
    Director Watt. How is the family?
        Mr. Watt. The family is good--
        Mr. Clay. Good. Good. Thank you.
        Mr. Watt. --growing--
        Mr. Clay. Okay. Thank you for being here. Although there
    are operational costs involved in requiring the GSEs to update
    the credit scoring model that they use in their seller service
    guidelines, the GSEs are still using the FICO classic model in
    their seller servicer guidelines, despite the fact that newer
    versions of FICO, including FICO 2008 and 2009 are currently
    available in the marketplace. Given this, how concerned are you
    that the failure to compel the GSEs to use their most updated
    credit scoring models in their seller service guidelines may
    not be giving the GSEs the best available assessment of whether
    a borrower is a good credit risk, and may be unnecessarily
    restricting credit to eligible borrowers?
        Mr. Watt. Your question illustrates the difficulty of this.
    Because to move from FICO classic to FICO 8 or 9 is the same
    challenge that we have to move from FICO classic to Vantage or
    some other credit scoring model. So what we have done is in the
    2015 scorecards, we have instructed Fannie and Freddie to
    evaluate both the feasibility and the operational complexity
    challenges related to using updated or alternative scoring
    models.
        Now, feasibly, are these credit scoring models better than
    the ones that--than FICO classic? We think they are, but we
    have to document that. And then operational feasibility relates
    to what would it take to change not only Fannie and Freddie,
    but the industry, to using alternative credit scoring models.
    Because turning that ship is a major task; right?
        Mr. Clay. So have the credit scoring agencies--have they
    been receptive, or have they pushed these new versions?
        Mr. Watt. Yes, they have. FICO has updated its credit
    scoring model. And Vantage and others are--we are regularly
    talking to them about this conversation--
        Mr. Clay. Okay.
        Mr. Watt. --yes.
        Mr. Clay. All right. Let's move over to HARP. Director
    Watt, FHFA recently launched an interactive map showing that
    there are more than 722,000 eligible households nationwide that
    could still benefit from HARP, a program that allows certain
    homeowners with GSE-backed loans to refinance into mortgages
    with lower interest rates, thereby reducing their payments by
    as much as $200 per month while also reducing risk to the
    taxpayer by reducing their likelihood to default on their
    mortgages.
        What are you--what is your agency doing to ensure that
    households are aware of this refinancing program?
        Mr. Watt. First of all, we are very proud of that map.
    Because it gets you to the people who are eligible for HARP
    refinancing; 3.2, 3.3 million people have already taken
    advantage of HARP. There are over 700,000 who would still be
    eligible for it, who would get an advantage of taking advantage
    of it. And we are trying to get to those people.
        Now, let me just emphasize that these are people--every
    single one of them, all 3.3 million of them, who have no equity
    in their home. Their homes are underwater. And they have been
    continuing to pay their mortgage, despite the fact that they
    are underwater. That takes us back--this notion that you have
    to have a downpayment, you have to have equity in a house for
    people to continue to be reliable homeowners and borrowers, it
    is just in the face of all of that. So we are trying to get to
    those people. We have done a series of meetings around the
    country in the highest concentrations where those people are
    and trying to get them to take advantage of the HARP refinance
    program.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, Mr.
    Mulvaney.
        Mr. Mulvaney. Thank you, Mr. Chairman. Mr. Watt, thank you
    for coming back. I also appreciate your dedication to following
    the law and following the statutes. I hope it is an example you
    can set for the rest of the Administration.
        Regarding the statutes, I think we have talked a little bit
    today about the statute regarding the suspension. What statute
    did you rely on in ending the suspensions?
        Mr. Watt. The Housing Trust Fund Statute, the Affordable
    Housing Allocations. That is in HERA. It was reauthorized by
    Congress in HERA.
        Mr. Mulvaney. Correct. Oh, okay. I misunderstood what you
    are saying. But that is the statute that says when to suspend,
    correct? Is there--
        Mr. Watt. Yes.
        Mr. Mulvaney. There is no statutory guidance for you on how
    to end a suspension, is there?
        Mr. Watt. It says the Director shall temporarily suspend. I
    would assume that the word ``temporarily'' has an inverse that
    says you can unsuspend. Technically, you may be right that
    there is no statute that specifically says--
        Mr. Mulvaney. Let's walk through it then.
        Mr. Watt. --that you do this if you unsuspend. But you
    apply the same criteria to suspend and unsuspend, and that is
    what we did.
        Mr. Mulvaney. I think that is fair. But by the same token,
    the mandate to suspend is not--there is no discretion there.
    You shall suspend if you find one of these three conditions,
    correct?
        Mr. Watt. Yes.
        Mr. Mulvaney. Okay.
        Mr. Watt. And I interpret that the same way; you shall
    unsuspend if you find that these three things don't apply
    anymore.
        Mr. Mulvaney. These things don't apply. Then let's walk
    through them. It says that they contribute--contribute--to the
    financial instability of the enterprise, causing--would cause
    the enterprise to be classified as undercapitalized or
    preventing it--preventing it from doing their capital
    restoration plan. But I heard you say something to Mr. Duffy
    earlier that was new, which is a reference to Fannie and
    Freddie making a profit. That is not in the statute, right?
    That is not one of the factors you can consider in making a
    decision to suspend or end a suspension, is it?
        Mr. Watt. Number one says are contributing or would
    contribute to the financial instability of the enterprises. If
    you are evaluating the financial stability or instability of
    the enterprise--
        Mr. Mulvaney. Is Fannie stable?
        Mr. Watt. --the primary factor you are looking at is
    whether they are making money or not--
        Mr. Mulvaney. Oh, really? So whether a bank is making money
    is the only issue we look at as to whether or not they are
    stable? Is that what you are saying? If Bank of America is
    making a profit, then therefore, they must be stable?
        Mr. Watt. I don't make decisions about Bank of America. I
    am following the statute that was written that applies to the--
        Mr. Mulvaney. And I am trying to press you on that.
        Mr. Watt. --Federal Housing Finance Agency.
        Mr. Mulvaney. Is Fannie stable?
        Mr. Watt. We think it is. And we built into the decision to
    reverse the suspension prudent, reasonable safeguards in the
    event that--
        Mr. Mulvaney. Again--
        Mr. Watt. --they go back in the other direction.
        Mr. Mulvaney. --and I appreciate that, and I read that in
    the letter. It says that if we ever have to go back to the
    Treasury, we will suspend the payments. I get that. Not in the
    statute, is it? The protection you have supposedly put in the
    letter is not part of the statutory consideration.
        I hear what you are saying, Mr. Watt, and I think it is a
    good idea. But it is not statutory. You can't take the position
    that you are following the statute and then say well, really
    what we are considering is profitability, and don't worry,
    because we put something in the letter that says if we ever
    have to go back to the Treasury, we will stop the suspension.
    You are rewriting the law, aren't you?
        Mr. Watt. I am following the conservatorship statute there,
    Representative Mulvaney.
        Mr. Mulvaney. Come with me then to number two, regarding
    the undercapitalized. Because I think you have taken the
    position several times that your agreement with the Treasury
    moots this section. Is that fair?
        Mr. Watt. Yes.
        Mr. Mulvaney. That--my understanding--and again, I am new
    to this--is that your agreement with Treasury is an agreement,
    right?
        Mr. Watt. That is correct.
        Mr. Mulvaney. How does an agreement trump the law?
        Mr. Watt. I think the law got trumped when they went into
    conservatorship and the taxpayers had to ante up $187 billion
    and there had--and so an agreement was made. That was before I
    got there. I didn't negotiate the agreement.
        Mr. Mulvaney. But you would agree with me typically--
        Mr. Watt. The agreement was in place when I became the
    Director of this agency.
        Mr. Mulvaney. --typically, an agreement between one agency
    and another department of government cannot trump the law. You
    can't get around the law--
        Mr. Watt. I absolutey agree with that. Right.
        Mr. Mulvaney. So if the conservatorship statute doesn't
    explicitly repeal Section (b)(2), then Section (b)(2) is still
    valid law.
        Mr. Watt. I don't agree with that. But I understand what
    you are saying. I just disagree with you.
        Mr. Mulvaney. Why don't you agree with that? If the
    conservatorship statute doesn't speak to (b)(2), why is (b)(2)
    still not good law?
        Mr. Watt. It just doesn't apply. I don't--I am not sure--
        Mr. Mulvaney. Well, what is your--
        Mr. Watt. We are engaging in a legal argument here that--
        Mr. Mulvaney. That is what we are supposed to do, though,
    isn't it?
        Mr. Watt. If you all didn't want to fund the Housing Trust
    Fund, you have the authority to stop the funding of the Housing
    Trust Fund.
        Mr. Mulvaney. And we exercised that authority, didn't we?
        Mr. Watt. Don't expect me to disregard the law and do it
    for you. If you want to do that, that is--
        Mr. Mulvaney. I would suggest to you, Mr. Watt, that we did
    just that. We said look, under these certain circumstances, we
    don't think we should be funding the trust fund, and all we are
    asking you to do is follow the law. And if you believe that it
    is undercapitalized or you believe it is unstable, then you
    should stop the payments. I yield back.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentleman from California, Mr. Sherman, for
    5 minutes.
        Mr. Watt. Mr. Chairman, do you think we could take a 2-
    minute break?
        Chairman Hensarling. The Chair declares a 5-minute recess.
        [recess]
        Chairman Hensarling. The committee will come to order.
    Members will please take their seats. The Chair now recognizes
    the gentleman from California, Mr. Sherman, for 5 minutes.
        Mr. Sherman. Mel, welcome back. The only thing that would
    be better than seeing you at a distance would be having you
    close at hand, but I have been--I have taken your advice on so
    many issues involving financial services, and I am sure to get
    some more. I look forward to your input over the next 5
    minutes.
        Good move on the Housing Trust Fund. I want to commend our
    colleague, Mr. Ellison, for organizing the letter, and unless
    he objects, I would like to put that in the record of this
    hearing. And so, I request unanimous consent to put this fine
    letter in the hearing.
        Chairman Hensarling. Without objection, it is so ordered.
        Mr. Sherman. And to commend Mr. Watt for his actions.
        First, a kind of a technical question. The HUD-1 is being
    phased out by the new integrated mortgage disclosure form that
    combines the TILA, or T-I-L-A RESPA forms and is intended to
    give consumers a better understanding of all itemized line item
    costs of the home closing. I wonder if you are focused on this
    rule, and what steps, if any, has the FHFA taken on this rule
    to make sure consumers are fully informed?
        Mr. Watt. I believe that is under the Consumer Financial
    Protection Bureau's jurisdiction. We haven't been actively
    involved in it. I do meet regularly with the Director of the
    Consumer Financial Protection Bureau to make sure that we are
    not at odds.
        And we are also members of the FSOC committee together,
    which allows us to exchange ideas at that level. But we are not
    directly involved in that.
        Mr. Sherman. I am sure that you are focused more on real
    estate lending than some of the more general folks involved and
    they benefit from your input. Your predecessor pushed for a
    lower conforming loan limit. You demonstrated your wisdom in
    going in a different direction, an action that has done more
    than anything else to impress me with your wisdom.
        Do you see that ugly proposal rearing its head again any
    time soon?
        Mr. Watt. It has to because statutorily it has to be
    reviewed regularly and so we are almost constantly in the
    process of reviewing conforming loan limits. And so, yes, it
    will raise its head again.
        Mr. Sherman. I look forward to continued wisdom on your
    part, and I yield back.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentleman from New Mexico, Mr. Pearce, for 5
    minutes.
        Mr. Pearce. Thank you, Mr. Chairman. Thank you, Director. I
    know that we haven't always agreed but I have always admired
    your fine language and straightforward responses, and I find
    myself admiring that today.
        So as we look back to the problems that put you into
    conservatorship, we found that Fannie began, and then everyone
    began, to expand the number of loans that were given to people
    who probably shouldn't have gotten them.
        And the OIG in 2012 found that Fannie--FHFA was somehow,
    somewhat responsible because they overlooked the fact that
    Fannie was beginning to relax its underwriting guidelines. They
    were beginning to buy loans that they said they wouldn't buy.
    And they didn't accomplish that with a page in law. They
    accomplished it with variances.
        And so I guess my question is, what are you all doing to
    see that the agency doesn't go around the rules again? They
    were being pushed, not by the White House. You said before you
    are independent from the White House. I just wonder if you are
    independent from us.
        Because as Members of this Congress and this body, we are
    pushing for the relaxing of those standards so that people
    could get loans. And I hear some of the same language today.
        So what are we doing to make sure this doesn't occur again?
        Mr. Watt. First of all, at that point Fannie and Freddie
    were not in conservatorship, and so the regulatory role was a
    lot looser than the conservatorship role that we are playing
    now. We are involved in virtually every decision that Fannie
    and Freddie make, and we take very seriously our statutory
    mandate, both to do things safely and soundly, and to do things
    in a way that will provide liquidity in the housing finance
    market.
        And that is why I said in my opening statement that we are
    constantly walking that balance. So we would be as responsible
    for those decisions now as Fannie and Freddie would be because
    they are in conservatorship, and as part of our
    conservatorship.
        Mr. Pearce. I understand, but someday they will be out of
    conservatorship, and so I again wonder about the oversight
    mechanism that will take a look at what they are doing. Because
    it was them that facilitated.
        If Fannie had not bought those mortgages that were never
    going to pay off, and people knew they would never pay off--
    they didn't care because they were able to get rid of them out
    of the banks and send them on to someone else and let them
    worry about it. And so as we go through into the future, I
    worry about that same thing.
        I wonder also, so Fannie and Freddie are making a profit
    and so I guess you were talking about the models that you all
    have done. Do you have models that tell you at what rate of
    growth we are going to start experiencing troubles? Should we
    increase our surveillance? What rate of growth would that be?
        Mr. Watt. We don't do it at what rate of growth--
        Mr. Pearce. Well, whatever you have.
        Mr. Watt. We do it on a loan-by-loan basis and we set
    prudential standards that apply to loans so we make sure we
    never get to determining where you fall off that cliff or don't
    fall off that cliff. We are nowhere close to the level of risk
    that was being--
        Mr. Pearce. Let me claim my time. Having run a business
    with 50 employees, I find it beyond imagination that you can
    take a trillion dollar portfolio and look loan-by-loan, with
    all due respect. I appreciate your saying it, but I find that
    really hard to believe.
        Mr. Watt. I apologize. That probably was an overstatement.
    But we set prudential standards that have to apply to loan-by-
    loan--
        Mr. Pearce. But those standards existed before.
        Mr. Watt. Yes.
        Mr. Pearce. Those standards existed before and under the
    table or wherever, the people who were getting tremendous
    bonuses at that period of time began to cheat the system. They
    began to rig it to where they could get bigger bonuses and so
    until you re-evaluate human nature.
        The last point I think I want to make is that another great
    pressure in the system was the low interest rates. And so at
    some point the Federal Reserve, whether they like it or not, is
    going to have to go up on interest rates. That is going to put
    more pressure into the housing market.
        I see that if we don't have our ship really right when it
    goes into the troubled waters of lower growth rates, higher
    interest rates, that we are going to have exactly the same
    thing, the same problems with an agency that is way
    undercapitalized.
        You have to admit that they are in shaky financial shape as
    we move forward, and if we get into troubled waters.
        With that I yield back my time, Mr. Chairman.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentlelady from Wisconsin, Ms. Moore, the
    ranking member of our Monetary Policy and Trade Subcommittee.
        Ms. Moore. Thank you so much, Mr. Chairman, and Ranking
    Member Waters. It is so good to see the Honorable Director Watt
    here with us. He is here in really good form. Just the facts.
    And really it is a relief to have you around. And the chairman
    just rode off into the sunset.
        I would like to start out by just sort of making a comment
    before I engage the Director in a question. Because much has
    been said today about the creditworthiness of borrowers with
    the 3 percent down, and there has been much intimation that
    lower-income borrowers were the cause of the financial crisis
    in 2008, so I just would like, Mr. Chairman, to ask unanimous
    consent to put into the record a report done by Manuel Adelino
    from Duke University, and Antoinette Schoar of MIT.
        Chairman Hensarling. Without objection, it is so ordered.
        Ms. Moore. Thank you. And Felipe Severino from Dartmouth.
    And also a seminar from Harvard Business School and MIT.
        Chairman Hensarling. If the gentlelady will suspend, we
    seem to have a little audio problem here with the gentlelady's
    microphone. Maybe you ought to hit it once or twice. Try again.
        Ms. Moore. Thank you. This is a 42-page report, Mr.
    Director, and Mr. Chairman. But its conclusions are that the
    higher default rates can be attributed to loans made to middle-
    and upper-income folks but not low-income folks. And so I just
    wanted to clarify for the one millionth time that the lower-
    income borrowers were not the primary reason for the financial
    meltdown.
        I don't know if you have any comment about that research,
    but I would like to enter that into the record.
        Mr. Watt. I am glad I don't have to participate in that
    debate any more.
        Ms. Moore. Thank you. I was looking through your prepared
    testimony, and you talked about mortgage servicing, and I guess
    I didn't--it wasn't really clear to me through your testimony
    what was the product of the--there haven't been any changes in
    the compensation structure, better aligning of servicers and
    senses with those of the enterprises.
        And I was wondering how that translated into better
    mortgage servicing for customers?
        Mr. Watt. That is a very difficult subject because it is
    massive. What essentially has happened over time as a result of
    the meltdown is that servicing went from just collecting money
    on mortgages to a much, much more difficult process of dealing
    with people who were in default.
        And so that whole industry has evolved, and most of it was
    done originally by lenders themselves in-house, and much of it
    now has gone to outside people who specialize in servicing. And
    that has created a set of issues that we have had to deal with
    because some of them, even though they might have been better
    servicers, were not necessarily as financially sound for the
    long term, so we have had to deal with that.
        There is a wonderful study that was just put out by the
    Urban Institute that talks about that evolution and the costs
    that have been associated with servicing that, where you could
    service a performing loan for like $50 a loan, now it is up
    over to well over $2,000 as a result of the increased
    responsibilities for nonperforming loans.
        But it is a very difficult area, and we internally at FHFA
    have had difficulty because this whole meltdown has put
    stresses on the servicing industry. I made a speech over at
    Brookings where I said it was easy to service when all you had
    to do was collect money. It is very difficult servicing
    mortgages now when people are in--
        Ms. Moore. Reclaiming my time, I would assume that--well, I
    have another question.
        Chairman Hensarling. The gentlelady may have another
    question. She is just simply out of time, so she can submit the
    question for the record, and the witness can respond as quickly
    as possible. The time of the gentlelady has expired.
        The Chair now recognizes the gentleman from North Carolina,
    Mr. Pittenger.
        Mr. Pittenger. Thank you, Mr. Chairman. Mr. Watt, it is
    good to see my friend from Charlotte.
        Mr. Watt. It is good to see you.
        Mr. Pittenger. You seem to be relishing your new job, and
    we wish you well.
        Mr. Watt. Thank you.
        Mr. Pittenger. Frankly, we want you to be successful. And
    as noted by our comments today, we share--or have the concern
    that what would come out of the current policies--easy credit,
    we believe was complicit in the housing crisis that we have
    just previously experienced.
        Mel, as you know, former Acting Director DeMarco proposed
    these increases for the guaranteed fees that GSE's would charge
    the lenders. And under your leadership you suspended the
    implementation of those increases.
        This last December the CBO made a public statement, a
    report that suggested how we should attract new capital into
    the secondary mortgages, and I could quote them. They stated,
    ``Policymakers should continue to increase the two GSEs'
    guarantee fees to attract new private capital to the secondary
    market.''
        And even a small increase in guarantee fees from the
    present level would allow private firms to immediately compete
    for the highest quality loans. You have also stated that you
    want to find ways to bring additional private capital into the
    system in order to reduce taxpayer risk.
        Now for your own decision, you have chosen to go against
    the former Director, and you have chosen to go against the
    thinking of the CBO. If you are not willing to increase the
    guarantee fees, what additional steps would you recommend to
    increase the role of private capital, and to decrease the role
    of exposure of Fannie and Freddie, and frankly, the American
    taxpayer?
        Mr. Watt. Let me just put in perspective one thing. I have
    never done anything in opposition to the former Acting
    Director. I have the greatest amount of respect for Acting
    Director DeMarco and the decisions--
        Mr. Pittenger. Contrary to his proposal.
        Mr. Watt. Yes. So I just want to be on record as making
    that clear. And I have taken some abuse for saying that, but I
    just have to say it.
        The primary means that we are using is to test different
    risk-sharing models, and they have been very successful. We
    have tripled, quadrupled the amount of risk-sharing we have
    done in the 1 year that I have been there.
        The enterprise has had a goal of $30 billion in 2013. We
    increased it in the scorecard to $90 billion and shot right
    past it before the third quarter of 2014 was over. We have
    increased it again in the 2015 scorecard. We are encouraging
    them to look at different risk-sharing alternative models to do
    it, not just the ones that have already proven successful.
        We have encouraged them to look at whether it is practical
    to even go back and risk-share some of the legacy book of
    loans. All of this risk-sharing we have done essentially have
    been with new loans, the more pristine loans. So we are very
    active in that space.
        We are also looking at the g-fee question. The conclusion
    that you reached that we are not going to change or are going
    to change I think is premature. We just don't know yet whether
    we are going to change it or not, and we are taking into
    account the study that was done, our own study, the input that
    we got to a series of very cogent questions about how g-fees
    should be set, what factors should be considered in setting
    guarantee fees.
        And when we come out with our report, hopefully by the end
    of this quarter, I think we will add a lot of information. In
    fact, even in the request for input, we put a lot of
    information out there that people had never known about how g-
    fees were set.
        Mr. Pittenger. Quickly, may I ask, you have suggested--or
    you have stated one of your policy changes is that you would
    allow these downpayments to be as little as 3 percent. And you
    stated, well, there are offsetting measures that you implement.
        Would you give more clarity to what those are? Given that
    we believe that easy credit--you saw the chart earlier--was a
    major factor in the current demise.
        Chairman Hensarling. Very brief answer, please.
        Mr. Watt. Homeownership counseling, mortgage insurance,
    private mortgage insurance, higher FICO scores; there are a
    number of factors that we are taking into account that would
    offset the lower downpayment.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr.
    Ellison.
        Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member
    Waters. My colleague, Brad Sherman, beat me to it about putting
    the letter that we sent you into the record, but I just wanted
    to say that I was glad to see that we had 61 Members of
    Congress, including almost half of this committee agree that
    your action to end the temporary suspension of contributions to
    Fannie and Freddie to the Housing Trust Fund was the right
    thing to do. I am so very happy about it. The letter is already
    in the record so I don't need to enter it in, but I just want
    to make note of that.
        And I also want to comment, too, that it is true that you
    have to take a lot of questions from folks who believe that the
    real problem of the crisis of 2008 was GSEs and borrowers. But
    it is also true that you have to contend with people who think
    that you ought to be moving faster in the other direction.
        And I know that because I have had constituents of mine
    say, well, why doesn't Director Watt do this and do that and
    move quicker, things like that.
        I think that one of things that your office has done after
    taking a lot of care, a lot of time, and a lot of research, is
    decide to review the process of the arm's-length transaction
    and not doing any arm's-length transactions and reviewing that
    policy.
        I wonder, could you talk about some of the thinking that
    you entertained as you were reviewing that policy and why it is
    that you came up the way that you did?
        Mr. Watt. There was a concern that if you allowed a
    borrower to default and then turn around and buy a piece of
    property at a lower rate that you would be incentivizing that
    kind of negative behavior. And that had kind of taken hold and
    was wagging the dog. There probably are 1, 2, 3 percent of the
    people in the world who could think that far ahead that they
    would default on the loan and then after foreclosure go back
    and buy it at a lower price and come out better.
        But we thought the moral hazard, which is what people were
    calling that, we could minimize that by putting some prudential
    factors around that decision, and so that is what we did. It is
    not automatic that somebody can do that, go back and buy the
    home back for a lower price.
        And we put a time period on it so that we could test it
    going forward to make sure that we didn't do something that was
    irresponsible. But it was a slow, evaluative research process,
    as are every one of these things.
        You kind of put your finger on something. What I found in
    this position is that there is nothing generally as simple as I
    thought it was, right? All of these decisions are very
    difficult and require good research, and that is what we try to
    bring to every decision.
        Mr. Ellison. Yes, I just want to also say that you have
    been available to talk to everybody who wants to talk to you.
    You have met with ordinary homeowners, you have met with
    policymakers. You have done an exhaustive thing, and I want to
    commend your staff. Actually, you have a pretty good staff
    member, Carrie Johnson. She used to work at my office, and she
    has gone on to bigger and better things, but I am glad she
    landed in the right place over there.
        So could you just talk about why you think it is so
    important to do all the outreach you have done and consult
    everybody you have consulted and do all this research you have
    done?
        Mr. Watt. I think one of the Members over here pointed out
    that he appreciated plain talk. There is a lot of
    misinformation in this territory, and I think the more you can
    kind of break things down and explain them in terms that
    borrowers can understand, that the public can understand, de-
    mystify this whole process, the better off we are.
        But most of the outreach we have done in going out has been
    about specific things that would benefit borrowers, such as the
    HARP program, or the neighborhood stabilization initiative in
    Detroit. I have kept a very, very low profile. I have no
    interest in being in front of a camera.
        Mr. Duffy [presiding]. The gentleman's time has expired.
        Mr. Watt. We have a different approach to it.
        Mr. Ellison. Thank you, sir.
        Mr. Duffy. The Chair recognizes Mr. Rothfus from
    Pennsylvania for 5 minutes .
        Mr. Rothfus. Thank you, Mr. Chairman. Can you hear me?
        Director Watt, welcome back to the committee, for a couple
    of hours anyway. I want to talk a little bit about the 3
    percent downpayment program.
        Fannie Mae, in its 10Q that it filed with the SEC, their
    third quarter 2014, mentioned the program, and here is what
    they said. ``We also plan to offer a 97 percent LTD ratio
    product to all customers in 2015. To the extent we are able to
    encourage lenders to increase access to mortgage credit, we may
    acquire a greater number of single family loans with higher
    risk characteristics than we have acquired in recent periods.
    However, we believe our single-family acquisitions will
    continue to have a strong overall credit risk profile, given
    our current underwriting and eligibility standards and product
    design.''
        So it seems to me that Fannie Mae, in its filing with the
    Securities and Exchange Commission, has admitted that the
    program is going to result in loans with a higher risk. Would
    you agree with that assessment?
        Mr. Watt. I have admitted today too, that that possibility
    exists if you are not careful, which is exactly why we are
    being careful. That was a third-quarter analysis, and you
    notice they didn't announce this until December because we were
    putting all of these constraints around them to make sure that
    we minimized that risk.
        Mr. Rothfus. So if I looked at when they file a 10Q for the
    quarter we are in right now, I would not expect to see
    something like that?
        Mr. Watt. You may see something similar to that, yes.
    Because 10Qs, as you know, are designed to give the public and
    people out there the worst possible case that you could
    present.
        Mr. Rothfus. And awareness of the risks.
        Mr. Watt. That is right.
        Mr. Rothfus. The Administration in 2011 released its so-
    called White Paper entitled, ``Reforming America's Housing
    Finance Market.'' On page 14 of that document, the
    Administration recommends that: one, the FHA market share
    should be reduced; two, FHA should return to its pre-crisis
    role as a targeted provider of mortgage credit access for low-
    and moderate-income Americans; and three, FHA mortgage
    insurance should be increased.
        Moreover, the Administration recommends a coordination
    between Fannie, Freddie, and the FHA to help ensure that the
    private market, not FHA, fills the market opportunities created
    by reform.
        Do you believe the recent policy announcement by HUD,
    effective yesterday, to lower FHA annual mortgage insurance
    premiums by 50 basis points will affect the return of private
    capital to the markets?
        Mr. Watt. I don't have an opinion on that, Representative,
    because HUD is not under--FHA is not under my jurisdiction and
    HUD is a part of the Administration. We are an independent
    regulatory body.
        Mr. Rothfus. How many new homeowners had you anticipated
    with the 97 percent LTD program?
        Mr. Watt. I'm sorry?
        Mr. Rothfus. How many new homeowners have you anticipated
    with the 97 percent LTD--
        Mr. Watt. It is a very, very small percentage of the
    overall portfolio, will be a very small--we anticipate that it
    will be a very small percentage of the portfolio of both Fannie
    and Freddie. And we have those numbers. I am not sure I can
    access them quickly enough to give them to you here--
        Mr. Rothfus. We will follow up with you on that.
        Mr. Watt. --but we will be happy to provide them to you.
        Mr. Rothfus. When we talk about the 3 percent downpayment,
    you have been talking a little bit about the creditworthiness
    of people paying back their mortgage as they are able to pay it
    back. But we do have an issue out there with people who are
    underwater.
        And one of the concerns I have is, when you have
    institutions such as Fannie and Freddie and the scale that they
    are able to influence the market, coming up with a program like
    this--I read an article just this weekend, and you may have
    seen it in the Washington Post, about a family in Prince
    George's County where they have a $550,000 mortgage but the
    home is worth $480,000.
        And while that family may continue to pay on that mortgage,
    there is really another issue here, and it is families who do
    not feel as though they are getting ahead, and families who may
    feel trapped in their house.
        And when we have a program that has a chance to encourage
    this--we saw a significant increase in mortgages that were
    underwater following the crisis. What would you say to a family
    like that, who buys into a program?
        Mr. Watt. They are in a very difficult situation, and I
    have been in rooms with them and had discussions with them, and
    all you can do is tell them you regret that they are in a
    situation, and we are trying to make sure that future borrowers
    don't get themselves in that same situation.
        Mr. Duffy. The gentleman's time has expired. The Chair now
    recognizes the gentleman from Delaware, Mr. Carney, for 5
    minutes.
        Mr. Carney. I hope this doesn't mean I have to sound as
    smart as Mr. Foster. Mr. Chairman, Ranking Member Waters, thank
    you for the opportunity to ask a few questions.
        Mr. Director, welcome back to the committee. We certainly
    miss your common sense and straight talk here, and personally I
    miss your North Carolina drawl over my right shoulder most of
    the time during the hearings.
        You have said several times that you are not going to
    comment on the specifics of GSE reform; that is a legislative
    responsibility. But you have made some public comments on
    whether or not it is necessary.
        Could you comment for us now about the sustainability of
    the current situation, what we should be concerned about and
    your thoughts on that, without going into any specifics about
    what we should do?
        Mr. Watt. There is nothing worse, I have found, in this
    area of the market than uncertainty, and the longer this drags
    out, the more uncertainty there is. So you have that risk and
    imperative for Congress to do something. And that is not about
    what they do. It is about providing more certainty.
        We have challenges at Fannie and Freddie maintaining an
    employee base in this environment because they don't know what
    the future of Fannie and Freddie is. So, there are multiple
    implications that follow from the failure to do GSE research.
        Mr. Carney. So would you say it should be a high priority
    for us, for the Congress, and the Administration to get that
    done? When I first came here, the former chairman was
    criticizing the Administration for not doing anything on GSE
    reform. The former ranking member, Mr. Frank, was criticizing
    the Republicans for not doing anything on GSE reform.
        There have been a lot of proposals. I am part of a team
    with Mr. Himes and Mr. Delaney that has come up with a proposal
    that I would like to talk to you about, but do you think it is
    time for that to get done?
        Mr. Watt. I would say there are implications for not doing
    it. For me to put a priority on it, I think is an inappropriate
    role for me, because there are a lot of things that Congress
    deals with that are priorities, and that is just not my role,
    to set those.
        Mr. Carney. So one of the things that our legislation does
    is invite--require private capital to be in a first-loss
    position over an explicit Federal guarantee, in some ways
    similar to the White Paper that Treasury presented here in this
    chamber when you were a member of the panel 4 years ago.
        You have done some of that in terms of--my question is,
    what is the appetite for private capital to enter into this
    space, and do you have any sense as to what the premium might
    be for that first-loss position?
        Mr. Watt. Private capital, there is an appetite. I don't
    know that I can assess the magnitude of the appetite, but I
    think they are playing an important role in the availability of
    housing finance in this country--private capital, that is--and
    we are trying to facilitate that role by taking loans off of
    their books so that they can make more loans. That was the
    whole philosophy under which Fannie and Freddie were founded in
    the first place.
        And we are facilitating it through transferring risk back
    to the private sector. But that still does not negate the
    importance of providing certainty in the future by doing GSE
    reform.
        Mr. Carney. Well, thank you. A number of us, as I said, are
    working on that, and we have had discussions with Members of
    the Senate, and with Democrats and Republicans both off and on
    this committee, and hopefully there will be an opportunity in
    this Congress to move something forward that basically contains
    a Federal guarantee--I happen to believe--the question was
    asked to you earlier about the importance of a 30-year fixed
    mortgage and you had some observations about that.
        I happen to believe it is important from an affordability
    perspective, and the only way to sustain that is through some
    government guarantee.
        Let me just close by thanking you. I was one of the Members
    who signed Congressman Ellison's letter requesting that you end
    the suspension of the fee to fund those two, the Housing Trust
    Fund and Capital Market Fund. I appreciate your decision to do
    that, and good luck to you.
        Mr. Watt. Thank you.
        Mr. Duffy. The gentleman's time has expired. The Chair now
    recognizes the gentleman from Arizona, Mr. Schweikert, for 5
    minutes.
        Mr. Schweikert. Thank you, Mr. Chairman. Is it Chairman
    Duffy now?
        Director Watt, earlier you said something I truly
    appreciate and I wish everyone had sort of embraced, that your
    current position is substantially risk management. And I am not
    sure a lot of folks appreciate that really is the core of your
    job at this moment.
        But I have a handful of things I wanted to run through, and
    there is never enough time for all the questions. First one,
    you had an interesting discussion around servicing. I accept
    that a lot of this servicing can actually be fairly
    complicated, but a couple of mechanics.
        For a low-cost servicer, great. The ability to transfer
    impaired paper that may need some additional love and touches
    to a specialty servicer that deals with impairment issues. How
    is that harmonization of servicing standards that I believe
    your folks have been working on, do you know where progress is?
        Mr. Watt. We are making progress. We encountered a
    different set of circumstances after the meltdown. We went from
    a situation where lenders were primarily doing their own
    servicing to a situation where they wanted to get out of the
    servicing business--it was either too complicated or because
    they had to have higher capital requirements if they stayed in
    it. Various and sundry reasons.
        And so a lot of the servicing rights got transferred, and
    that imposed upon FHFA and Fannie and Freddie the
    responsibility to look closer at not only the ability to
    service a loan but what are the longer-term implications of
    that. Are you capitalized well enough to be in this business
    for the long haul if things go south?
        Mr. Schweikert. My great hope, and I know it is complicated
    and a lot of folks don't appreciate that, is that as you work
    on that harmonization--
        Mr. Watt. We are definitely doing that.
        Mr. Schweikert. --for paper or loans that has some
    difficulties, to be able to be moved easily, efficiently, low
    costwise, to servicers that will actually do that, reach out to
    both protect the securitization over here, but also work with
    those homeowners. Second--
        Mr. Watt. Can I just make a point? I think you would be
    happy with the most recent set of things we have been working
    on in that area to try to encourage loans to servicers,
    transfer of loans to servicers who have a history in working
    well with borrowers. So staying out of foreclosure as opposed
    to going to foreclosure.
        Mr. Schweikert. The only obligation there on your side is a
    simple, efficient, low-cost ability to move paper back and
    forth when necessary.
        Second one, and this is more just from a--being from the
    West. And I know you have said you are working on it. You are
    working on sort of the risk pricing models and you saw it pop
    up. For those of us out in the West, we are deed-of-trust
    States. We are very efficient, we are very low cost, with the
    ability to do sometimes what is difficult.
        Some States are mortgage States that put on lots and lots
    of consumer protection but have raised the cost. And it is only
    appropriate, only fair that those different cost structures be
    priced into the product because for those of us, particularly
    out West, we often feel like in our pricing, if you have
    universal national pricing on that risk, that we are
    subsidizing States that have made it much more difficult to
    move through that foreclosure process.
        So it is just something that is there, and it is math, so
    hopefully you will treat it that way.
        The thing I am most interested in--and some of this I am
    going to have to give you in writing because we will never have
    time--is, was it last week you did the STACR deal?
        Mr. Watt. Yes. Well, we are regularly doing STACR.
        Mr. Schweikert. But the most recent one, was it the first
    loss piece that was transferred out? Which is fascinating to
    me, because in that sort of model you are actually creating a
    securitization where the GSE ultimately is a catastrophic
    coverage. Help me understand in the remaining seconds how that
    works. And in some ways how that may help us drive toward GSE
    reform.
        Mr. Watt. When we started doing risk transfers, we started
    by having the GSEs, Fannie and Freddie, retain the first loss,
    transferring risk on some subsequent loss, and then coming back
    in with the GSEs retaining catastrophic loss.
        We are now experimenting and looking at the process of
    having--transferring the first loss position back to the--
        Mr. Schweikert. Director Watt, I am going to--
        Mr. Duffy. The gentleman's--
        Mr. Schweikert. --submit questions to you in writing, and I
    thank you for your patience.
        Mr. Duffy. Time has expired. The gentleman yields back. The
    Chair now recognizes Mr. Kildee from Michigan for 5 minutes.
        Mr. Kildee. Thank you, Mr. Chairman. And at the risk of
    redundancy, Mel, it is good to have you back. I only got to
    serve a year with you, but as you can see, in the year that you
    have been gone, I have become the second ranking member on the
    Democratic side for the committee. At least for the moment.
        Before I ask some questions, I would ask you to comment, I
    would like to submit for the record some comments from the
    Homeownership Preservation Foundation regarding strengthening
    of the U.S. housing finance system through provision of housing
    counseling services.
        And we talked about credit score and downpayment-related
    risk mitigation factors. And as you have stated, there are
    other factors to be considered. We had a panel here some months
    ago, and I think it may have been after you left--you probably
    heard similar panels where we had a number of representatives
    from the mortgage industry talk to us in general about mortgage
    lending and the risks associated with mortgage lending.
        We happened to have an individual from an organization that
    does a lot of affordable housing work, and some of the lenders
    referenced that if they used the same process--which include a
    heavy emphasis on homeownership counseling--that they would
    have default rates that were lower.
        Could you quickly comment on that particular point? And Mr.
    Chairman, if you don't mind, I would like to have these
    comments entered into the record. And then I have a couple of
    other questions.
        Mr. Duffy. Without objection, it is so ordered.
        Mr. Watt. I don't think there is any question that somebody
    who gets good homeownership counseling, either pre-ownership,
    or in some cases post-ownership--it makes them better
    borrowers. It can't be just any counseling. It has to be good
    homeownership counseling, but it really has an impact because
    especially first-time homeowners have little appreciation for
    the responsibilities that go with homeownership, that are
    different than being a renter.
        Mr. Kildee. It is a really important point. And I hope that
    as we move forward on whatever process we engage in, we make
    sure to consider those factors.
        I would like to turn to another somewhat related question,
    and it has to do with access not just to credit but access to
    mortgages even for creditworthy individuals in markets such as
    the markets I represent. I represent Flint, Michigan, my
    hometown, where the average home price is $47,500.
        And for many legitimate borrowers with decent credit--many
    banks, many mortgage lenders, say that mortgages of that size
    just don't make economic sense. And I wonder if there is
    anything that you are working on or could refer to us in terms
    of the work of FHFA that will make sure that in those markets
    we still have opportunity for homeownership. Because otherwise
    we are basically consigning those communities to rent.
        And your point about the effect of vacant properties on
    surrounding values is an important one. But it is also--the
    percentage of homeownership of those occupied properties that
    has a similar effect, and I wonder if you could comment on
    that.
        Mr. Watt. We put in the 2015 scorecard an obligation on the
    enterprises to work with community smaller banks and State
    housing finance agencies to try to get to those lower-cost
    areas and underserved areas.
        And I think we are going to make some progress on that this
    year. I think the 97 percent loan product will have some
    bearing on that, although it is not specifically designed for
    that category.
        Mr. Kildee. I would agree. And this question--I obviously
    listened as you answered questions, particularly related to
    downpayment thresholds. I think we could all sort of agree--you
    don't even have to bother to answer the question, is if we
    decided that a 20 percent downpayment standard would be
    enacted, that we would have a far lower default rate. Or if you
    had to have a million dollars in net value, net assets in your
    own personal portfolio, you might have a lower default rate.
        The question is, how do we balance these interests so that
    the maximum number of Americans have the opportunity to achieve
    homeownership, understanding that there are many, many ways to
    mitigate risk associated with people who are in a financial
    condition that does not allow them, because they are dealing
    with other exigencies in their life every day, to save the kind
    of money that it takes.
        One of the ways, and I would just--you may comment on this.
    You may not be able to because of the rulemaking process, but
    the membership standards question for Federal Home Loan Banks
    is an area of some concern for me because in some ways, by
    limiting membership standards, we might actually cut off
    another source of revenue that can be directed to help some of
    these local community-based organizations that are working on
    homeownership.
        Mr. Duffy. The gentleman's time has expired. You, Mr. Watt,
    can respond to Mr. Kildee in writing. The Chair now recognizes
    Mr. Barr from Kentucky for 5 minutes.
        Mr. Barr. Director Watt, welcome back to the committee.
        Mr. Watt. Thank you.
        Mr. Barr. And congratulations on your confirmation. As you
    know, the Consumer Financial Protection Bureau has finalized
    its ability-to-repay qualified mortgage rule, and the purpose
    of that rule is ostensibly to encourage safe and sound mortgage
    loans.
        But a recent survey of mortgage lenders showed that about
    two-thirds of respondents would restrict lending because of--
    directly because of the qualified mortgage rule as defined by
    the regulators under Dodd-Frank, and about 80 percent of those
    respondents expected the new regulations to measurably reduce
    credit availability.
        Obviously given your agency's, FHFA's, recent moves, recent
    policy changes, you appear to share the concern about credit
    availability and access to affordable mortgage credit. The
    changes to guarantee fees, the guidelines allowing GSEs to buy
    loans with ultra-low 3 percent downpayments. And all of this
    appears to conflict with the Bureau's qualified mortgage rule.
        So my question is, is the FHFA pursuing a policy of
    encouraging mortgage lenders to originate non-QM loans that the
    Bureau would deem risky?
        Mr. Watt. No. We are not. We are not, without prudent
    compensating factors to take whatever that increased risk might
    be into account.
        Mr. Barr. Wouldn't it make sense that a borrower who can
    only afford 3 percent down is likely to run into the debt-to-
    income ratio limitations imposed by the QM rule?
        Mr. Watt. Yes.
        Mr. Barr. Okay, so I guess--again, I am just curious to
    understand how the American public is to interpret what the
    Federal Government is doing sending mixed signals of
    encouraging more credit availability on the one hand, your
    policy changes, versus what the Bureau appears to be doing,
    which is tightening and restricting access to mortgage credit.
        Mr. Watt. I think a judgment has been made that because
    Fannie and Freddie are under conservatorship, during the period
    that they are in conservatorship we could make those judgments
    without being subject to the qualified mortgage rules, for a
    period of time. Now I don't know if that will sustain itself
    forever, but that is where we are at this moment.
        Mr. Barr. Director, I have introduced legislation called
    the Portfolio Lending and Mortgage Access Act. I am going to be
    re-introducing that legislation. It has some bipartisan
    interest in it. It is motivated by the same concern that you
    have about access to mortgage credit for responsible borrowers.
        And the idea would be to modify the QM rule to allow
    lenders to retain the risk, which was a primary motivating
    policy in the Dodd-Frank Act, retain the risk, portfolio those
    loans to get the same safe harbor that other QM loans would
    get.
        And my question is, wouldn't that be a more sensible
    approach to dealing with these 3 percent loans so that the risk
    is on the shareholders of the bank and not on the taxpayer?
        Mr. Watt. I think that is a judgment for Congress to make.
    It wouldn't be a judgment for me to make. If you have
    introduced the legislation, then I am sure Congress will
    evaluate it.
        Mr. Barr. Thank you. Let me just quickly follow up on some
    of the questions that Congressman Duffy was asking you about
    the Housing Trust Fund. With roughly $3.3 trillion in assets
    and $9.5 billion in capital, Fannie Mae is currently leveraged
    at 341 to 1 and features a leveraged capital ratio of .29
    percent.
        Freddie Mac has roughly $2 trillion in assets and has a
    leveraged capital ratio of .64 percent. The typical bank, I
    understand, is leveraged at about 10 to 1. So the current
    amount of leverage of Fannie and Freddie is far, far greater
    than the typical financial institution.
        I heard your testimony earlier that you believe that Fannie
    and Freddie are adequately capitalized and you are just
    following the statute. Is that right? Given those capital
    ratios, is that true?
        Mr. Watt. I don't think I expressed any opinion about the
    adequacy of the capital. What I said was that we are operating
    under a preferred stock purchase agreement that has basically
    taken capital out of the equation during the period of the
    conservatorship.
        Mr. Barr. My time has expired, but I would suggest that if
    they are adequately capitalized, I would wonder why they are
    still in conservatorship.
        Mr. Duffy. The gentleman's time has expired.
        Mr. Watt. Chairman Duffy, could I trouble you all for
    another 2-minute break?
        Mr. Duffy. No objection. The Chair will recess for 5
    minutes again. Second time.
        [recess]
        Mr. Duffy. The committee now reconvenes. The Chair
    recognizes the gentlelady from Ohio, Mrs. Beatty, for 5
    minutes.
        Mrs. Beatty. Thank you so much, Mr. Chairman. Let me just
    say to Director Watt what a pleasure it is for me to be here. I
    notice you looked at me when you saw this thick book and list
    of questions. In full disclosure, Director Watt was my mentor,
    and I recall him always saying to me, read everything and
    always have good questions.
        With that said, let me just say on a very serious note how
    much I appreciate the work that you and your team are doing to
    protect all of my constituents and constituents across the
    country with housing and those regulations.
        But today I would like to lend my voice to one of the
    questions that we have heard from both sides that centered
    around membership in the Federal Home Loan Bank (FHLB), related
    to the September FHFA issued ruling revising the membership
    requirement of FHLB.
        Of those 1,300-and-some comments that you received, my
    district was not silent there. So on behalf of my district, the
    Ohio Capital Finance Corporation, which serves thousands of
    households, raised concerns expressed by other community
    development financial institutions.
        They hold dearly the affordable housing program. It is one
    of the most important sources of funding for nonprofit housing
    communities. So the question is regarding the requirement to
    meet one and two ratio tests of mortgages to total assets.
        And what they want to know is, since they don't hold
    mortgages--``they'' being the Ohio Capital Fund--that range
    from 1 to 10 percent depends on the type or the asset size,
    that when that goes into effect it would cause them to
    terminate their membership with the Federal Home Loan Bank in
    Cincinnati because it doesn't hold mortgages.
        So would you or your team give any consideration to doing
    an evaluation on the impact of the burden to community
    development financial institutions of a less severe remedy than
    loss of membership?
        Mr. Watt. We are looking at every aspect of this. We have,
    as I indicated before, approximately 1,300 comments in response
    to the proposed rule and we are going through them. Our
    preliminary analysis indicates that despite the fact that there
    are 7,500 members of the Federal Home Loan Bank System now,
    only 50 to 100 of them would be adversely affected by the rule.
        And that is not to minimize the value of that 50 to 100,
    but we--that is definitely one of the factors that we will take
    into account.
        Mrs. Beatty. Thank you for that. Mr. Chairman, may I ask
    unanimous consent to have the letter from the Ohio Capital
    Finance Corporation entered into the record?
        Mr. Duffy. Without objection, it is so ordered.
        Mrs. Beatty. Thank you. The second question I have goes to
    OMWI. I am very honored that Ranking Member Maxine Waters asked
    me to be involved and to chair that committee. You certainly
    know through your organization, having OMWI prior to Dodd-Frank
    that there are different regulations.
        With Dodd-Frank they now have the whole issue of
    transparency, reporting back to the public on the number.
    Diversity is very important to me for a whole host of reasons,
    but can you briefly share with us what you are doing since you
    came under the Recovery Act, of how you are being transparent
    in sharing the diversity through OMWI?
        Mr. Watt. There are statutory reporting requirements and we
    obviously are complying with those. But more importantly, what
    we have done is try to take a look at how to make the OMWI
    office an important ingredient of our organization, not just
    keeping numbers but embed them in decisions that are being
    made.
        And in the selection of our Director of the OMWI office we
    found somebody who had transactional background, not just OMWI
    background, so that we could get that person involved in the
    kinds of decision-making that would have some impact on
    diversity.
        Mrs. Beatty. Thank you.
        Mr. Duffy. The gentlelady's time has expired. The Chair
    now--yes?
        Ms. Waters. I ask unanimous consent to enter into the
    record an article that ran in the Washington Post on the
    disparities in wealth between Black and White.
        Mr. Duffy. Without objection, it is so ordered.
        Ms. Waters. Thank you.
        Mr. Duffy. The Chair now recognizes Mr. Tipton from
    Colorado for 5 minutes.
        Mr. Tipton. Thank you, Mr. Chairman. Director, thank you
    for taking the time to be here. I would like to follow up
    actually on a comment that Mrs. Beatty was just making in
    regards to our Federal Home Loan Bank.
        You made a comment earlier in our conversation here to my
    colleague from Oklahoma, Mr. Lucas, that we are following
    statute in regards to establishing some new rules in regards to
    membership in the Federal Home Loan Banks.
        And I would like to follow up with you on that, and looking
    in through the Bank Act, it does not address a minimum level of
    mortgage loans. That is not cited. And I guess my concern over
    this issue is Mrs. Beatty, and I think Mr. Lucas, both spoke to
    these issues.
        In my particular State of Colorado, we have over 200
    community banks, credit unions, and insurance companies that
    are members of the Federal Home Loan Bank. And these financial
    institutions do responsibly utilize the liquidity that is
    provided in order to be able to deploy credit out in support of
    housing, finance, agricultural production, small business
    formation, and community development. And they do this
    currently in full compliance with the Federal Home Loan Bank
    Act, and the congressional intent, as I read it, through the
    existing programs.
        This proposed rule, issued on September 12th, has the
    potential to be able to decrease Federal Home Loan Banking
    System membership. Have you quantified the potential impact
    that may have on rural America right now? Because while we may
    have pockets of prosperity in the country, rural America is not
    feeling it.
        Mr. Watt. As I have said in response to Representative
    Beatty, our preliminary analysis indicates that only 50 to 100
    of those 7,500 members would be adversely affected by either
    the 1 percent requirement or the 10 percent requirement.
        There is a statutory requirement. The question is whether
    it will be applied only when a member becomes a member of the
    Bank, or whether it will be applied on an ongoing basis. That
    is really what the rule addresses. The statute clearly says
    that you will have 1 percent of assets in home mortgage loans.
    That has been in the past applied only at the time of becoming
    a member, not on a continuing basis, right?
        So we are looking at whether that undermines the purpose,
    not to require it on an ongoing basis, not just a one-time
    basis.
        Mr. Tipton. I guess what I would like to be able to express
    is that often in Washington, a smaller amount is often
    trivialized. In some of the small communities that I
    represent--I have 54,000 square miles of Colorado. If one of
    those banks happens to be in that 50 to 100 that would then be
    shut down, it would be a reasonable assumption, obviously, that
    we weren't going to be able to extend credit in that local
    community because it is going to be a small community.
        Mr. Watt. We will certainly take that into account.
        Mr. Tipton. That is going to be critically important, I
    think, for us, as our communities truly are struggling under
    those what we feel are over-regulation coming in out of the
    Federal Government.
        So thank you on that, and with that I yield back, Mr.
    Chairman.
        Mr. Duffy. Do you want to yield to the Chair?
        Mr. Tipton. I will yield.
        Mr. Duffy. Mr. Watt, I just want to follow up on some
    questions I had for you for the next minute. Is it fair to say
    that the g-fee is based on risk? It is risk-based, right? The
    g-fee is risk-based?
        Mr. Watt. The question is, what will the g-fee be designed
    to cover. Will it be only risk, will it be accumulation of
    capital, will it be--
        Mr. Duffy. Today, is it--
        Mr. Watt. But one element is definitely risk.
        Mr. Duffy. But are you charging more than the risk for the
    g-fee? Some would argue that in our assessment if you have a
    credit score of 740 and you put 40 percent down, you might be
    paying a little more for your risk, and if your credit score is
    650 and you only put 3 percent down, you get a little subsidy
    based on the risk of the g-fee. This is actually from your
    data.
        Do you disagree with your data? I can--
        Mr. Watt. No, I am not arguing with the data. I am trying
    to put it in a frame here that--
        Mr. Duffy. I am going to have to gavel myself down in a
    second. And I guess maybe you could think about this, and maybe
    we will have a chance to come back to it. Are you charging more
    on the g-fee than the actual risk? Or are you undercharging for
    the risk or are you hitting it just right?
        Mr. Watt. One of the things that a lot of people on this
    committee have been advocating is that we charge more than risk
    so that we can attract private capital. So, you kind of meet
    yourself in these arguments going and coming.
        Mr. Duffy. I don't want to abuse the gavel. Maybe we can
    come back to it later. The Chair now recognizes the gentleman
    from Texas, Mr. Williams, for 5 minutes.
        Mr. Williams. Thank you, Mr. Chairman, and thank you,
    Director, for being here today. We have covered a lot of
    ground. I appreciate your service.
        I am a private sector guy, I own businesses in Texas, and I
    am one of those who believes the private sector is the answer,
    not the Federal Government, to a lot of the issues we have.
        I do want to say one thing. You had mentioned earlier that
    you had a hard time with your employees with Fannie Mae and
    Freddie Mac because of the fact they weren't sure what their
    future might be. I heard you say that.
        Mr. Watt. Yes.
        Mr. Williams. And I would just say, welcome to the private
    sector. The private sector is going through that every single
    day, wondering what their future is as small business owners,
    moms and dads and so forth. So that feeling is not unique to
    your group of folks. It is all over our country because of
    government regulations.
        My first question would be this: What is the Treasury doing
    with the money they get from the GSEs every quarter? If the
    Treasury spends the money now they get from Fannie Mae and
    Freddie, won't they have to borrow more or tax more to raise
    the money in the future to meet the normal losses that could be
    coming in?
        Mr. Watt. I can't answer that, Representative Williams,
    because I am not at Treasury. We sweep the money to Treasury,
    it gets applied to the deficit, it gets applied to government
    operations. I guess the argument is, should it be doing that or
    should it be building up a reserve, a capital reserve of some
    kind. That is not a decision that I can make.
        Mr. Williams. I think the concern is that we have such a
    big deficit and it is going in the hands of the Federal
    Government. You know where is it going.
        Also, just to kind of help me understand a little bit, like
    I said, we have covered a lot of ground today. What is the
    average credit score of a 3 percent customer?
        Mr. Watt. I don't know that I can tell you that off the top
    of my head, Representative Williams.
        Mr. Williams. And we may have covered, I heard a figure of
    2 percent, but what is the foreclosure rate in your portfolio,
    percent to the total? I thought I heard a figure of 2 percent.
    Would that be right?
        Mr. Watt. I can tell you that, if you will let me get to--
        Mr. Williams. And while you are looking at that, when do
    you decide to foreclose? How far behind in payment? How far
    past due are homeowners before you say we need to foreclose on
    this piece of property?
        Mr. Watt. There is no fixed answer to that. We get
    concerned if somebody gets 30 days behind in payment. We get
    more concerned if they get 60 days behind. We get more
    concerned--at what point you quit working with a borrower to
    try to get them back current, or alternatively make a decision
    to go to foreclosure is a very complex set of determinations.
        So I don't know that I could give you a rule that would
    apply across-the-board on that.
        Mr. Williams. What is your foreclosure percent to the
    total?
        Mr. Watt. You got me off on--
        Mr. Williams. I'm sorry. I think I heard 2 percent.
        Mr. Watt. Let us provide that information in writing.
        Mr. Williams. Provide that back to us.
        Mr. Watt. We have the information about the loans since the
    meltdown. We have it overall for the whole history. We have it
    prior to the meltdown. I just--I am not finding it--
        Mr. Williams. That is fine. You can get that to me. And
    another thing, too. Of course equity is important to everybody.
    We want everybody to have equity, and of course the bigger the
    downpayment, the more equity they are going to have going in.
        There are some people, though, I guess, who can't afford a
    home. And do you advise these people as such, that possibly now
    is not the time for them to buy a house? Maybe they need to go
    another direction, start renting or something so they can--
        Mr. Watt. When I was practicing law, and when I was a
    Member of Congress, I used to give that kind of advice, but I
    don't have the opportunity to give that kind of advice, nor is
    it my role to give that kind of advice. Fannie and Freddie
    don't make loans. We buy loans off of lenders' books and
    guarantee them and put them into a secondary market. So there
    is just not an opportunity for me to be engaged in those kinds
    of discussions with borrowers now.
        But when I was practicing law, there were thousands of
    people to whom I would say, if you can't afford to make a
    mortgage payment, you shouldn't be a homeowner. Yes.
    Homeownership is not for everybody.
        Mr. Williams. I appreciate you being here. I hope that one
    day we can get the government out of the homeowner business and
    get it back in the private sector where it belongs.
        Mr. Chairman, I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Maine, Mr.
    Poliquin.
        Mr. Poliquin. Thank you, Mr. Chairman. Thank you very much
    for being here, Director Watt. I understand from your
    background you spent a little bit of time in New England, and I
    want to thank you very much in advance for rooting for the
    Patriots. Not that we will need it, but on Sunday I appreciate
    that very much. Thank you very much.
        Mr. Watt. I'm sorry. I can't make that commitment to you.
        Mr. Poliquin. I was hoping we would start off on a good
    foot, Mr. Watt, but that is okay.
        Everybody that has been with you today, sir, understands
    that Fannie and Freddie are in conservatorship, and we of
    course understand that your organization is the in fact
    conservator. And I have also heard you say a couple of times
    today--actually several times--that one of the roles that you
    are playing in this role, if I am not mistaken, is to be sure
    to the best of your ability that Fannie and Freddie are safely
    and soundly managed such that we keep the credit flowing to
    those who want to buy a home and are able to buy a home, and
    also to protect our hardworking taxpayers.
        Now I am going to be very honest with you, Mr. Watt. I have
    a little bit of a concern. If you look at Fannie, this is an
    organization that is connected to our Federal Government, was
    created by our Federal Government. It is responsible for $3.3
    trillion in home mortgages and they use our hardworking
    taxpayers to backstop those mortgages.
        I am also concerned that Freddie Mac is also putting U.S.
    taxpayers on the hook for an additional $2.2 trillion.
        Now my other point I would like to make is that, if I am
    not mistaken, in 2014 Fannie and Freddie together were
    responsible for holding 51 percent of all home mortgages in
    America. That being the case, sir, would you agree with me that
    Fannie and Freddie are large financial institutions?
        Mr. Watt. Absolutely, they are large financial
    institutions.
        Mr. Poliquin. Good. Dodd-Frank, as I am sure you know, Mr.
    Director, requires nongovernment large financial institutions
    to hold substantial amounts of capital in reserve in the event
    that something goes wrong.
        Now I am not here advocating that those capital
    requirements for nongovernment entities be increased. However,
    don't you think it is appropriate, sir, that Fannie and
    Freddie, especially organizations of this size that are
    backstopped by the taxpayers, also ought to live by the same
    rules as our nongovernment financial institutions when it comes
    to capital requirements?
        Mr. Watt. I don't know if that is my decision to make,
    whether I agreed with it or not.
        Mr. Poliquin. Well, you are the Director--
        Mr. Watt. When I testified in the Senate, I said in
    response to a question, that I don't have any personal opinions
    anymore. Every opinion I express now is an FHFA opinion, so I
    try not to express those personal opinions.
        Mr. Poliquin. I appreciate that very much, Mr. Watt. But
    with all due respect, you are in a position of great authority.
    You are the regulator for the GSEs, and I would like to beg to
    differ with you a little bit, that your opinion is greatly
    appreciated.
        And what I am trying to get across, if I may, is that we
    have two very large institutions that do not abide by the same
    capital requirements as other nongovernment institutions around
    this country.
        I might also add, if I may, that if you are looking at
    Fannie Mae, with $3.3 trillion in assets--and this has been
    said here before--they have roughly $10 billion in assets but
    they are asking the taxpayers to backstop $3.3 trillion in
    loans.
        Now if you are looking at Freddie Mac, they have about $13
    billion in assets and are backstopping $2.2 trillion. So I
    think we could both agree--I hope so--that these organizations
    are grossly undercapitalized and represent one heck of a risk
    to the taxpayers if something goes wrong.
        Would you agree with that, sir?
        Mr. Watt. I have two responses to it, one of which I have
    already given, which is I didn't set up the preferred stock
    purchase agreement. I wasn't even there when it was created. So
    I am living under that. I can't change it without--but the
    second response is, you all can change that. Everything that
    you just talked about you can change by doing GSE reform.
        Mr. Poliquin. Mr. Watt, everybody wants a healthy economy.
    And the taxpayers in my district in Maine, who are some of the
    hardest-working, most honest people you could ever meet, they
    want to make sure they have a government that works for them
    and not against them.
        And I happen to believe that accountability in all stages
    of government, all levels of government is a good thing. Now I
    am very concerned about these large institutions that are
    highly leveraged, with very little capital, that are requiring
    the taxpayers to backstop then. When we have interest rates at
    historic lows, with a rise in interest rates that could cause a
    problem with the housing market and also our economy, wouldn't
    you agree that it makes sense to take a look at these
    institutions?
        Chairman Hensarling. The time of the gentleman has expired.
    A brief answer, please.
        Mr. Watt. I think I have already answered your question to
    the best of my ability to do it, Representative.
        Mr. Poliquin. Thank you very much, sir.
        Chairman Hensarling. That was brief. The Chair now
    recognizes the gentlelady from Utah, Mrs. Love.
        Mrs. Love. Welcome, Director Watt. I appreciate the
    opportunity to meet you here today.
        Mr. Watt. It is nice meeting you.
        Mrs. Love. I just wanted to say, as a former mayor I have
    had to ask myself three questions before making any new
    commitments or changes or going to a certain direction: is it
    affordable; is it sustainable; and is it my job?
        One of the questions I have today is, in your studies did
    you determine how many people the lowering of this standard was
    going to help?
        Mr. Watt. You are talking about the 97 percent product now?
    Is that the--
        Mrs. Love. I am talking about getting the standards to
    that, to the 3 percent payment. Did you determine how many
    people this was going to help get into homes, how many people
    it was going to hurt? Did you have any--
        Mr. Watt. We have some projections that it would be a very
    small percentage of the overall portfolio of either Fannie or
    Freddie, and I probably have those percentages but not the
    actual numbers.
        Mrs. Love. Okay, so a certain--a small percentage this was
    going to help, bringing down these was actually going to help
    get into homes.
        Mr. Watt. Yes.
        Mrs. Love. So obviously we talked about some risk and
    risking the taxpayer dollars. You have no guarantee--is it fair
    to say that you have no guarantee that the people who are going
    to get in and borrow will be able to get into homes that they
    can afford and not default on their loans?
        Mr. Watt. I don't think we are ever in a position to
    guarantee that. We make responsible decisions based on risk
    assessments, and I can guarantee you that we have made a robust
    risk assessment. I don't think you could guarantee that anybody
    could pay a loan that they paid 99 percent down, because
    something might come up next week that would prevent them from
    doing that.
        So this is not about being able to guarantee it. It is
    about assessing the risk and likelihood of it, and we have done
    what we can to minimize--
        Mrs. Love. Okay, so when I asked those questions, the
    reason why I asked those questions is because when we get into
    risk involvement, and asking myself is it affordable, is it
    sustainable, is it my job, we realize inevitably we have
    actually taken a lot of the risk out of that decision-making.
        I believe, and I believe that Utah believes, and the
    majority of hardworking Americans believe that if Washington
    bureaucrats actually asked those same questions, we wouldn't be
    in the financial crisis that we are in today.
        As I witnessed as a mayor, I have actually seen how these
    heavily-involved government policies have actually hurt many
    cities in their ability to thrive and to grow. We have watched
    homes being built and actually seen those homes a year later
    completely empty. And hardworking families lose their credit
    and their ability to get into a home.
        And so that is why I asked those questions about how does
    this actually help hardworking Americans get into a home and be
    able to sustain a future. Too many times I am afraid that these
    government-backed programs that vow to help and protect
    hardworking, poor Americans, it has actually done the opposite
    and hurt those that it vowed to protect.
        If the Administration, or as you would say, an independent
    regulatory agency, goes down this road of bigger government
    policies and getting involved more in what the free market
    should be involved in, I just want it on record that as
    hardworking Americans start losing their homes, that you
    remember this warning today.
        I have been in the trenches of this. I have actually seen
    this happen. I am not taking a 60-foot view of what has
    happened. I have actually been a mayor, and I have actually
    seen my city have a really hard time with the housing market,
    and I don't want to go back in that direction.
        This is an area where I have said, this is not about
    hardworking Americans trusting you to do the right thing. It is
    about you trusting hardworking Americans to make decisions and
    do the right things for their future.
        I yield back my time.
        Chairman Hensarling. If you are about to yield, would you
    yield to the gentleman from Wisconsin?
        Mrs. Love. Yes, I will yield my time to Chairman Duffy.
        Mr. Duffy. I appreciate the gentlelady for yielding. Mr.
    Watt, going back to my previous question, the g-fee, which we
    were talking about was risk-based, basically is to make sure
    that the GSEs aren't losing any money, right? You are trying to
    find that balance to go, boom, what does it cost. I am not
    trying to trick you. This is a pretty simple, straightforward
    question.
        Mr. Watt. It is a straightforward question, but it is
    inconsistent with the approach that a number of people have
    used that we should be using g-fees to attract private capital.
    Because if we raise g-fees to that level, we would be making a
    bunch more money, but is that an appropriate thing to do--
        Mr. Duffy. My question, Mr. Watt--
        Mr. Watt. --an appropriate purpose for g-fees.
        Mr. Duffy. I am not asking anybody else. I am asking what
    you--are you trying to get the g-fee to hit just right to be
    able to cover your costs. You are not trying to bring in any
    extra money, you are not trying to lose any money, you are
    trying to hit the nail right on the head, hit the g-fees right
    on.
        Or are you trying to make money? Are you trying to lose
    money when you set the g-fee?
        Mr. Watt. We certainly don't want to lose money, that I can
    assure you.
        Mr. Duffy. Are you trying to make money?
        Mr. Watt. But I think it would be more appropriate to wait
    until we come out with what we are going to do on g-fee,
    articulate the reasons that we are doing it--
        Mr. Duffy. But this is an important--
        Mr. Watt. --and then you will see where we come out. Right
    now, I don't have an opinion about the things you are asking.
        Mr. Duffy. You don't know if the g-fee, if you are trying
    to set it a little bit higher than the actual cost or are you
    trying to hit it right on. You can't tell us today in this
    hearing how you are--
        Mr. Watt. Representative Duffy, if I knew that, we would
    have--I wouldn't be studying the issue. That is the reason why
    we are going through this expensive study, to keep from--
        Mr. Duffy. So what is the goal?
        Mr. Watt. --applying my own opinion about that.
        Mr. Duffy. Let us say, what is the goal?
        Mr. Watt. Our agency is research-based, and we are going to
    apply the research that we have to that question.
        Mr. Duffy. Is the goal, though--let us take reality aside
    for a second--to get the g-fee just right? Whether you can or
    not, in theory you want to get it just right. We are not really
    making any money and you are not losing any money. You are
    charging for the services consistent with the risk and other
    factors that you referenced.
        Mr. Watt. One of the purposes is certainly not to lose
    money. We are not trying to set a g-fee that is going to lose
    money. Now, are there other factors in addition to covering the
    risk and breaking even that should go into setting the g-fee?
    That is a question that we are evaluating in the agency at this
    point. That is--
        Mr. Duffy. But the intent is to look at all those things
    and try to hit it just right, correct? Not make any money, not
    lose any money, but take all those factors and hit the number
    just right. It is a pretty simple question. I would imagine the
    answer is yes, that is of course what we are trying to do here.
    We are trying to get it just right.
        Chairman Hensarling. The gentleman is going to need to wrap
    up this line of questioning.
        Mr. Duffy. So, very quickly, if you take a sweep for the
    Affordable Housing Trust Fund of 4.2 percent, right, you are
    going to sweep that money--it is not a tax, you are saying. But
    if you hit the g-fee just right but then you sweep 4.2 basis
    points away to go into the Affordable Housing Trust Fund, you
    are actually now below the cost of your risk.
        And so the taxpayers are going to bear that cost. Or if you
    go above the actual cost of the g-fee, you are actually
    charging then the end homeowner an extra fee to drive money
    into the Affordable Housing Trust Fund. Either it is taxpayers
    who are going to pay or it is those who have a mortgage who are
    going to pay. But someone is going to pay.
        To come here and say that it is magical fairy dust and no
    one pays this money isn't really being totally forthright.
    Taxpayers on the hook or mortgagees are on the hook. I would
    ask if Mr. Watt agrees with that.
        Mr. Watt. I have tried to answer this question as
    forthrightly as I can. With the size of our portfolio, I don't
    think we could ever set g-fees to just break even. That could
    never happen. So if the question is, are you setting it just to
    break even, the answer is, no, we have to have some margin,
    even if we don't take anything into account other than risk.
        Mr. Duffy. Mr. Watt, you are a very good lawyer, and I can
    recognize that and I appreciate it, but you are not answering
    my question. With that, I yield.
        Mr. Watt. I don't understand the question--
        Chairman Hensarling. We will allow the two very good
    lawyers to perhaps have this conversation online. The Chair now
    recognizes the gentleman from Washington, Mr. Heck.
        Mr. Heck. Thank you, Mr. Chairman. Director Watt, let me
    add my voice of congratulations to all those that have been
    expressed here today. Much deserved.
        You had indicated in your written testimony, and it has
    been alluded to, that on the 22nd of December you approved a
    merger between the Federal Home Loan Banks of Seattle and Des
    Moines. I believe that is the first, is it not?
        Mr. Watt. It is. Yes.
        Mr. Heck. I am going to confidently predict it won't be the
    last. Mr. Lucas also referred to the concerns among many of us
    in Congress about the new membership rules, which I don't want
    to re-litigate this but I want to state for the record--and you
    and I had a private--semi-private disagreement about this.
        I think both FHFA and Congress are missing an opportunity
    here to take a step back and reexamine just exactly what the
    role of the Federal Home Loan Bank should be going forward.
        Mr. Watt. To be clear, that is exactly what we are doing in
    this evaluation process. We received 1,300 comments. We are
    going through every single one of them before we make a final
    determination of what the final rule is. So we are in that,
    taking a step back, looking at all of the input that we have
    received.
        Just because we put out a proposed rule, a proposed rule is
    not a final rule. So we are doing exactly what you suggest.
        Mr. Heck. It is not the specific rule that I am focused on.
    It is the larger issue of what role do we want the Federal Home
    Loan Banks to play in this new world that doesn't look like it
    did when they were created in 1932 or thereabouts.
        Mr. Watt. But Congress has made that determination. That is
    not a determination that I--
        Mr. Heck. Which is exactly what you said to me earlier
    during our semi-private disagreement. I think it is something
    that you could do to advance to us policy proposals.
        I also think that it is an issue that members of this
    committee could well take up and ask the basic questions. What
    role do we want them to play? Is it strictly housing, is it
    liquidity? Are there other ways that it can be constituted,
    given the way that the whole world--but that is not really my
    question.
        I do have a question. My question does relate to the
    approved merger--again, which I don't believe will be the last.
    I had communicated to you in correspondence deep concerns held
    by people in the region about the continuing commitment of any
    merged regional bank to invest in housing.
        I also communicated to you concerns about governance. And I
    also communicated to you concerns about operational issues
    because after all, Director Watt, this is a five time-zone
    Federal Home Loan Bank region now. And we have repeatedly asked
    for the letter setting forth the terms and conditions. We have
    been repeatedly told we cannot have it, we cannot know what
    those are.
        I want you to know that as that relates to sensitive
    financial matters, I completely understand. But I do not know
    what compelling public policy good is served by withholding
    information about how we will proceed with respect to the
    concerns that had been brought to you by many in the region.
        Mr. Watt. But during the pendency of a merger, for us to be
    putting out information that is still in the process of being
    discussed and negotiated, I think as an independent regulator
    would be irresponsible. I am sure every one of these things
    will be addressed.
        But we have a fiduciary responsibility, we have a trust
    responsibility as regulator here not to put out information
    that could jeopardize the discussions. And I hope you
    understand that.
        Mr. Heck. I acknowledge and embrace your fiduciary
    responsibility. Issues relating to housing investment and
    governance, and operational issues that allow for access I
    don't personally believe fall within that realm.
        Mr. Watt. I can assure you that the merged Federal Home
    Loan Bank will be held to the same high standards on those
    issues that we have held the two independent banks to. So we
    are not going to relax the standard just because--the standards
    that we expect of them just because they are a merged bank. You
    can be assured of that.
        Mr. Heck. Knowing you as I do, I would expect no less, sir,
    and I thank you.
        One last quick question. Insofar as both Freddie Mac and
    Fannie Mae are under conservatorship, insofar as you are moving
    pretty quickly toward a common securitization platform, can you
    identify any compelling public benefit for these two entities
    other than it is status quo, to be separate as opposed to one?
        Mr. Watt. That is a public debate that I think should be
    had. There is a value to competition because it makes both
    enterprises better. We have aligned Fannie and Freddie's
    practices on a number of issues that were important to the
    public policy objectives. But I think there is some value to
    allowing them to compete on things that don't have a public
    policy imperative to them.
        But we have aligned them on a number of issues.
        Mr. Heck. I would take it that quality of service would be
    an example of that.
        Mr. Watt. If you talk to one of them as opposed to the
    other, they will tell you that their quality of service is
    higher than the other one, depending on which one you talk to.
    But it is important for them to continue to compete on the
    quality of the service that they deliver. That is one of the
    things that it is important for them to compete on--not on a
    race to the bottom to extend more and more irresponsible
    credit. There is a whole range of things that we don't want
    them competing on and there are some things that we continue to
    allow them to compete on.
        Mr. Heck. So it seems arguable to me whether or not that
    benefit trumps the economies of scale, given that for all
    practical purposes we--but with that, I yield back the time I
    do not have and thank the Chair for his indulgence.
        Chairman Hensarling. The Chair now recognizes the gentleman
    from Arkansas, Mr. Hill.
        Mr. Hill. Thank you, Mr. Chairman. Director Watt, once
    again, it is nice to see you. Thank you for appearing before
    the committee for an extended period of time.
        I think back to one of my favorite engravings in the City
    of Washington, which is on the National Archives building: What
    is past is prologue. And so I am having a terrible flashback
    from a very, very bad movie listening to this discussion today.
        In 1984, when I was a staffer over on the Senate Banking
    Committee staff, Fannie and Freddie had about one in 400 loans
    that were at a LTV of 3 percent. And when I came back to
    government in 1990 and was at the Treasury, that had moved to
    one in 10. And then at the height of the crisis it had moved to
    one in two-and-a-half, or 40 percent of the loans in their
    combined portfolios were at that low downpayment.
        And at the same time, that same direction took place in the
    debt-to-income ratios as well. So I just want to be on record
    with you that I share the concerns of many on this committee
    about this decision to lower downpayment rates, notwithstanding
    counseling and FICO scores and mortgage insurance.
        My question to you is, I want to turn back to a line of
    questioning that Mr. Duffy had on this subject of the preferred
    stock arrangement with Treasury. For you to accrue money for
    the Housing Trust Fund, pay it out potentially in the Housing
    Trust Fund, did you seek a waiver from the preferred stock
    arrangement with Treasury to do that?
        Mr. Watt. No, I did not.
        Mr. Hill. And so it is purely on your judgment that--from
    reading the statute that you have taken that money out of the
    system and not swept it to Treasury?
        Mr. Watt. There is no money to sweep unless there is a
    profit at the end of the year, and there won't be any swept if
    there is not a profit.
        Mr. Hill. Right, but you have made the decision to sweep
    money if there is a profit to the Housing Trust Fund.
        Mr. Watt. You mean put into the--yes. Unless doing that
    would put them into a deficit situation.
        Mr. Hill. But did you seek approval from Treasury to do
    that?
        Mr. Watt. No.
        Mr. Hill. And don't you think that since they are the owner
    of that preferred stock on behalf of all the taxpayers, you
    should have checked with them first before taking money to the
    Housing Trust Fund as opposed to sweeping all the profits to
    the Treasury?
        Mr. Watt. No.
        Mr. Hill. And tell me again--I know you have covered some
    of this ground before. Tell me again why you believe that is
    the case.
        Mr. Watt. Why I should--
        Mr. Hill. Why you believe you don't have--
        Mr. Watt. Why I shouldn't get Treasury's approval?
        Mr. Hill. Correct.
        Mr. Watt. Because there is nothing in the preferred stock
    purchase agreement, under which we operate, that addresses the
    Housing Trust Fund. And so we are not violating the terms of
    the preferred stock purchase agreement in doing this. We are
    just simply complying with the law. So there is no reason for
    me to get Treasury's approval for that.
        Mr. Hill. It just seems like when we own the shares of that
    company as the taxpayers that we should want to have all the
    proceeds until there is a change, a structural change made all
    the earnings of the company outside the core business
    operations, any profit that is left should be sent to the
    Treasury.
        Mr. Watt. That is still the rule. And I keep reminding you,
    I wasn't there when these preferred stock purchase agreements
    were negotiated. If they had put it into the agreement then I
    would be obligated by it. But there is no provision in the
    agreement that requires me to get approval to fund the Housing
    Trust Fund, or to comply with any other law that is in
    existence. So I didn't get the approval.
        Mr. Hill. But you were there and made the decision to take
    money away from the sweep and put it in the Housing Trust Fund.
    That was your decision to do that.
        Mr. Watt. I made the decision to reverse the temporary
    termination of contributions to the Housing Trust Fund, yes. I
    was there for that.
        Mr. Hill. Thank you very much. I yield back.
        Chairman Hensarling. The gentleman yields back. No other
    Member is in the room to be recognized. So again, I wish to
    thank Director Watt for coming to testify before us, our former
    colleague, and former and still current friend of this
    committee.
        The Chair notes that some Members may have additional
    questions for this witness, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to this witness and to place his responses in the record. Also,
    without objection, Members will have 5 legislative days to
    submit extraneous materials to the Chair for inclusion in the
    record.
        This hearing stands adjourned.
        [Whereupon, at 1:58 p.m., the hearing was adjourned.]
                                A P P E N D I X

                                January 27, 2015

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