[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
                            
                            
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]



                      U.S. GOVERNMENT PUBLISHING OFFICE
95-045 PDF                WASHINGTON : 2015                     
______________________________________________________________________________________ 
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). 
E-mail, [email protected].  
                
                 
                 
                 
                 
                 
                 
                 
                 
                 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
                            
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 


                              [all]