    [House Hearing, 115 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 FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                OCTOBER 3, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-44

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                      Kirsten Sutton Mork, Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        October 3, 2017..............................................     1
    Appendix:
        October 3, 2017..............................................    61

                                   WITNESSES
                            Tuesday, October 3, 2017

    Watt, Hon. Melvin L., Director, Federal Housing Finance Agency...     5

                                    APPENDIX

    Prepared statements:
        Watt, Hon. Melvin L..........................................    62

                  Additional Material Submitted for the Record

    Hensarling, Hon. Jeb:
        Letter from Mr. Doug Bibby, President, National Multifamily
          Housing Council............................................    76
    Watt, Hon. Melvin L.:
        Written responses to questions for the record submitted by
          Representative Beatty......................................    78
        Written responses to questions for the record submitted by
          Representative Hultgren....................................    80
        Written responses to questions for the record submitted by
          Representative Loudermilk..................................    82
        Written responses to questions for the record submitted by
          Representative Stivers.....................................    86

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

                                  ----------

                            Tuesday, October 3, 2017

                         U.S. House of Representatives,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:03 a.m., in
    room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Present: Representatives Hensarling, Royce, Pearce, Posey,
    Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross,
    Pittenger, Wagner, Barr, Rothfus, Williams, Poliquin, Love,
    Hill, Emmer, Zeldin, Trott, Mooney, MacArthur, Davidson, Budd,
    Kustoff, Tenney, Hollingsworth, Waters, Maloney, Velazquez,
    Sherman, Meeks, Capuano, Clay, Scott, Green, Cleaver, Moore,
    Ellison, Perlmutter, Himes, Foster, Kildee, Sinema, Beatty,
    Heck, Vargas, Gottheimer, Gonzalez, and Crist.
        Chairman Hensarling. The committee will come to order.
        Without objection, the chair is authorized to declare a
    recess of the committee at any time, and all members will have
    5 legislative days within which to submit extraneous materials
    to the chair for inclusion in the record.
        This hearing is entitled ``Sustainable Housing Finance: An
    Update from the Director of the Federal Housing Finance
    Agency.''
        I now recognize myself for 3-1/2 minutes to give an opening
    statement.
        Today, we welcome back our former colleague and committee
    member, Mel Watt, the Director of the Federal Housing Finance
    Agency. Director Watt served with distinction on this committee
    for many, many years and was respected on both sides of the
    aisle.
        Sir, it is good to have you back in our hearing room.
        As we know, the Federal Housing Finance Agency (FHFA)
    oversees the two enormous government-sponsored mortgage buying
    corporations, Fannie Mae and Freddie Mac, as well as the eleven
    Federal Home Loan Banks. As all Americans painfully remember,
    in 2008, taxpayers were forced to bail out these $5 trillion
    behemoths that imperiled not only the U.S. housing market, but
    also the entire global financial system. It was the largest
    taxpayer-funded bailout in history, and the government-
    sponsored enterprises (GSEs) have been wards of the state ever
    since. Taxpayers should never be put in that position again,
    yet Fannie and Freddie's 9-year conservatorship, little has
    fundamentally changed.
        The GSEs are today as big as they were before the financial
    crisis. They represent a virtual government monopoly in housing
    finance that lacks meaningful competition or innovation.
    Taxpayers remain on the hook for $5.3 trillion. Underwriting
    standards are being eroded. I fear a number of mistakes that
    led to the 2008 crisis are being repeated today.
        Clearly, it is time, in fact, it is well past time for
    Congress to enact sustainable housing finance reform with
    private capital at its center. It is time to get off the boom-
    bust-bailout cycle. In order to move forward, we need to first
    critically assess the state of the GSEs' 9-year
    conservatorship. This hearing provides an opportunity to do
    just that.
        The two most significant developments in the
    conservatorship clearly have been the credit risk transfer
    programs and the common securitization platform. Virtually
    everyone believes that these two developments are key points in
    the transition to a housing finance system in which private
    capital plays the predominant role. Yet despite these positive
    developments, there have been other changes under the
    conservatorship that are cause for concern.
        Those of us who worry about another taxpayer bailout should
    be worried about efforts to lower downpayment requirements,
    raise the debt-to-income ratio, and divert funds to a Housing
    Trust Fund that lacks accountability, all the while taxpayers
    who paid to bail out the GSEs in 2008 remain in harm's way.
        This Congress, in this moment, represents our best chance
    to move forward toward building a long-term sustainable housing
    finance system that allows Americans to buy homes they can
    actually afford to keep.
        Director Watt, I peeked at your testimony and I wish to
    quote it and save you a little effort later on. Quote: ``I have
    said repeatedly and I want to reiterate that these
    conservatorships are not sustainable and they need to end as
    soon as Congress can chart the way forward on housing finance
    reform. I reaffirm my belief that it is the role of Congress,
    not FHFA, to make these tough decisions that chart the path out
    of conservatorship and to the future housing finance system.''
        I agree completely with that portion of the director's
    testimony, and I look forward to working with him, and I look
    forward to working with my colleagues on both sides of the
    aisle to tear down the vestiges of the failed GSE experiment
    and build in its place a new housing finance system that
    provides opportunity, affordability, and sustainability for
    homeowners, for taxpayers, and for the broader economy.
        I now recognize the ranking member for 3 minutes for an
    opening statement.
        Ms. Waters. Thank you very much, Mr. Chairman.
        Today, we welcome back our former colleague and my good
    friend, Federal Housing Finance Agency Director Mel Watt. It
    has been more than 2 years since Director Watt last testified
    before us. I must note that, while he has been hard at work
    righting the path of Fannie Mae and Freddie Mac, this committee
    has been at a standstill on housing finance reform.
        Under Director Watt's leadership, the Federal Housing
    Finance Agency has systematically addressed many of the
    technical weaknesses in the housing system to better protect
    homeowners, taxpayers, and our economy. The GSEs have now
    transferred to the private sector an amount of credit risk
    comparable to that lost by the GSEs during the crisis, thereby
    protecting taxpayers in the future.
        Director Watt has also sought to improve affordability, by,
    for example, enabling qualified, creditworthy families to
    purchase homes with as little as 3 percent down, proving that
    such borrowers are just as responsible as those with more
    means. Unfortunately, for the last 7 years, under Republican
    control, the House has entirely failed to advance broader
    legislation reforms to end the GSEs' conservatorship. In fact,
    this committee has not convened a single hearing since Director
    Watt's last appearance before us more than 2-1/2 years ago on
    any topic related to reforming the GSEs. Even the Senate, known
    for its slow deliberation, has already convened two hearings on
    the topic this year.
        Unfortunately, our chairman refuses to abandon the failed
    ideas in the PATH Act, which is still opposed by industry,
    consumer groups, civil rights groups, all Democrats, and even a
    few Republicans. Those who oppose understand that the PATH Act
    hurts middle class families and is bad for America. Democrats
    and the American people know what is important in the housing
    finance reform debate: an explicit paid-for government
    backstop, a mission to promote affordability, the 30-year fixed
    rate mortgage, a robust Housing Trust Fund, strong Federal
    oversight, support for the multifamily housing market, and
    equal market access for our community banks and credit unions.
    Any proposal that fully embraces those principles should be
    taken seriously.
        I thank you, Mr. Chairman. I welcome you, Mr. Watt. And I
    yield back the balance of my time.
        Chairman Hensarling. The chair now recognizes the gentleman
    from Wisconsin, Mr. Duffy, the chairman of the Housing and
    Insurance Subcommittee, for 1-1/2 minutes.
        Mr. Duffy. Thank you, Mr. Chairman. And, Mr. Watt, welcome
    back to the committee.
        While the pivotal role that the housing crash played in the
    financial crisis is well-documented, we still haven't passed
    significant reforms to housing finance in over a decade. Since
    the 2008 crisis, significant reforms in this space haven't been
    addressed. We passed a big bill, Dodd-Frank, but as you are
    well aware, and so is this committee, this space for the most
    part was left alone.
        So this hearing kicks off what will be several hearings
    held by Chairman Hensarling and myself this fall as we look to
    finally address the root causes of the 2008 financial crisis.
        Mr. Watt has been at the helm of the FHFA for over 3 years
    now, and I want to hear exactly what he has done at the FHFA to
    reduce GSEs' risk to American taxpayers. In particular, I am
    interested in hearing updates in the area, as the chairman
    mentioned, on credit risk transfers, the common securitization
    platform, and how private sector capital can play a larger role
    in housing finance reform.
        I think the main question here is, are we better off today
    than we were in the lead-up to the 2008 crisis? What reforms
    have been undertaken to have learned the lessons from the 2008
    crisis? Or are we in a space where we believe that time heals
    all wounds? This was almost 10 years ago. We have forgotten the
    lessons learned and we are going back to the ways of old, which
    we understand is horrible for the American homeowner and
    devastating to the American economy.
        With that, I yield back, Mr. Chairman.
        Chairman Hensarling. The gentleman yields back.
        The chair now recognizes the gentleman from Missouri, Mr.
    Cleaver, ranking member of the Housing and Insurance
    Subcommittee, for 1 minute.
        Mr. Cleaver. Thank you, Mr. Chairman, Ranking Member
    Waters. Thank you for being here, Mr. Watt.
        Let me just say that, whether there has been significant
    reform over the 2 years since you have been there, I think it
    is also important to know that, legislatively, we have not done
    anything in terms of reform. And so I am not sure whether the
    suggestion is we should turn all reform over to the FHFA. I am
    willing to do that, at least for the next year and a half.
        But it has now been over 9 years since Fannie Mae and
    Freddie Mac have been placed in the conservatorship. And as we
    all know, at that time, the U.S. Treasury also entered into a
    preferred stock arrangement with Fannie and Freddie, and under
    that arrangement, $270.8 billion in dividends has been paid to
    the Treasury. And that far exceeds the amount that either
    enterprise has needed in assistance from the U.S. Treasury.
    Fannie has not needed to draw down assistance from the Treasury
    in the last 6 years, and Freddie has not needed it since 2020.
        Today's hearing, I hope, will give all of us an opportunity
    to hear more about the steps that have been undertaken by FHFA,
    and I hope that from your presence before our committee we will
    take the responsibility of legislating.
        I yield back. No time left.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Michigan, the
    vice ranking member, Mr. Kildee, for 1 minute.
        Mr. Kildee. Thank you, Mr. Chairman. And thank you, Madam
    Ranking Member.
        Welcome back, Mel. I was fortunate to serve with you, as
    most of us have. We miss you here, but the country's better off
    for having you working in the position you are in right now.
        Since the 2008 crisis, a lot of communities have realized
    restoration of housing values, which is obviously good news.
    But in a lot of places, including many of the places I
    represent in Michigan, they have not shared in that rebound.
    And so I am particularly concerned about policies that might
    impact that.
        And I will share that I am concerned about bulk sales of
    bank-owned houses and how these might contribute to an uneven
    recovery. I know Mr. Capuano and I both have voiced concerns
    over these sales, especially the recent $1 billion deal with
    the Blackstone Group. So I am anxious to hear how these bulk
    property sales to hedge funds and private equity groups fit
    within the responsibilities of FHFA.
        The bulk sale of foreclosed homes to people who don't live
    in these communities and are not really invested in these
    communities can actually stunt revitalization. So I am anxious
    to hear how we might work together and how Congress might act
    to support efforts to ensure that local development
    organizations, community-based organizations, focusing on
    affordable housing, public land bank authorities, there are 140
    of them that I helped create across the country, how they might
    be able to work to ensure that the disposition of the
    properties has a positive impact on the other investors who
    live in the houses that surround the subject property. I am
    anxious to hear how we might work together on that subject.
        Thank you, and I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        Before proceeding, I just wish to acknowledge how, as
    important as this topic is, it pales in comparison, of course,
    to the tragedy that took place in Las Vegas. And on behalf of
    the committee, our hearts remain heavy, our prayers remain
    earnest, and in the days and weeks to come, that simply will
    not change.
        Today, we welcome the testimony of the Honorable Mel Watt,
    Director of the Federal Housing Finance Agency. Director Watt,
    again, served with distinction with many of us on this
    committee, so it is good to welcome him back, and I believe he
    needs no further introduction.
        Without objection, the witness' written statement will be
    made part of the record.
        Director Watt, you are now recognized to give an oral
    presentation of your testimony. Thank you.

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

        Mr. Watt. Chairman Hensarling, Ranking Member Waters, and
    members of the committee, thank you for inviting me back to
    testify. I always look forward to being in this committee room
    where I spent so many years. And after more than 3-1/2 years at
    the Federal Housing Finance Agency, I look forward to talking
    about our work to support the Nation's housing finance system.
        In addition to FHFA's role as regulator of the Federal Home
    Loan Bank system, Fannie Mae and Freddie Mac, we also are
    responsible for Fannie Mae and Freddie Mac in conservatorship.
    These conservatorships are unprecedented in scope in that the
    enterprises back over $5 trillion of mortgages, and they are
    unprecedented in duration in that they have now continued for
    over 9 years.
        My commitment during my tenure as director of FHFA has been
    to uphold the statutory responsibilities assigned to FHFA as
    regulator and to operate Fannie Mae and Freddie Mac in
    conservatorship in what I often refer to as ``the here and the
    now.'' This is in line with my consistently repeated belief
    that it is the role of Congress, not FHFA, to decide on housing
    finance reform.
        We will continue to ensure that our regulated entities
    operate in a safe and sound manner and support liquidity in the
    housing finance market. As conservator, we will also work to
    preserve and conserve enterprise assets. Balancing all these
    responsibilities is woven into everything we do.
        Over the 9-plus years that the enterprises have been in
    conservatorship, FHFA has taken significant steps to reduce the
    risk of their operations. After an extensive review of the
    guarantee fees they charge, we determined that these fees have
    been raised to appropriate levels. We have continued to oversee
    reductions to the enterprises' retained portfolios, which are
    now over 60 percent smaller than in 2009.
        Another ongoing priority has been expanding and improving
    the enterprises' credit risk transfer programs in ways that
    attract private capital, reduce taxpayer risk, make economic
    sense, and broaden the private sector investor base. The
    enterprises now transfer a meaningful amount of credit risk to
    private investors on at least 90 percent of their targeted
    single-family loans. Since 2013, they have transferred a
    portion of credit risk on $1.6 trillion of mortgages, totaling
    $54 billion risk in force.
        We continue to make steady progress on developing a new
    securitization infrastructure that will be adaptable for other
    market participants to use in the future. Since late 2016, the
    common securitization platform is now processing the majority
    of Freddie Mac's existing securities. The next project
    milestone will be launching the Single Security Initiative in
    2019, after which the securities of both Fannie Mae and Freddie
    Mac will be processed on the common securitization platform
    (CSP).
        Responsibly broadening access to credit for creditworthy
    borrowers is another consistent effort. An example is our
    statutory mandate to oversee the enterprises' duty to serve
    three markets: manufactured housing, affordable housing
    preservation, and rural housing. The enterprises are on track
    to start implementing their duty-to-serve plans starting in
    January 2018.
        In my most recent testimony before the Senate Banking
    Committee and in my written testimony for this hearing, at
    pages 3 through 5, I provided details on the above steps and on
    numerous other steps we have taken to reform the enterprises
    over the 9 years the enterprises have been in conservatorship.
        While I like to think of the steps we have taken as GSE
    reform, I want to reiterate my strong belief that it is the
    role of Congress to make the tough decisions that I think of as
    housing finance reform. This will involve deciding how much
    backing, if any, the Federal Government should provide, and in
    what form; what process should be followed to transition to the
    new housing finance system and avoid disruption to the housing
    finance market; and who should lead or implement that process;
    what roles, if any, the enterprises should play in the reformed
    housing finance system; and what statutory changes to their
    organizational structures, purposes, ownership, and operations
    will be needed to ensure that they play their assigned roles
    effectively; and what regulatory and supervisory structure and
    authorities will be needed in a reformed system and who will
    have responsibility to exercise those authorities.
        It is important that these decisions get made
    expeditiously. Just as the conservatorships are unprecedented,
    I also firmly believe that the conservatorships are
    unsustainable.
        Before I close, let me take a moment to say a few words
    about the recent hurricanes that have affected so many people.
    FHFA and our regulated entities are working to assess the
    impact on the housing market and to assist those affected. The
    enterprises have implemented their disaster relief policies for
    affected homeowners, and we will continue to monitor the impact
    of these hurricanes closely.
        I thank you again for inviting me to be here today. I have
    provided much more detail about FHFA's activities in my written
    statement, and I look forward to answering your questions.
        [The prepared statement of Mr. Watt can be found on page 62
    of the Appendix.]
        Chairman Hensarling. The chair now yields himself 5 minutes
    for questions.
        Before proceeding with my questions, though, I do wish to
    take sad note that I believe since last we gathered, the
    national debt clock has now turned from $19 trillion to $20
    trillion, perhaps the greatest existential threat to our Nation
    that practically no one in the Nation's capital is paying
    attention to, but we will at least pay attention to it here
    since, if we do not correct this trajectory, we will wake up
    one day and find ourselves a second-rate military power, a
    second-rate economic power, and lose our moral authority.
        Mr. Watt, in June 2017--you are probably familiar with the
    Treasury Department report--in it, they spoke about the
    exemption the GSEs have been granted from the Consumer
    Financial Protection Bureau's (CFPB's) qualified mortgage rule
    and said that has resulted in a concentration of the mortgage
    market in the government-sponsored programs because the
    exemption allows the GSEs to securitize loans that obviously
    private institutions cannot. Treasury said this creates an
    asymmetry and regulatory burden for privately originated loans.
        Is there anything FHFA can do to help level this playing
    field or is this a matter for CFPB or perhaps Congress?
        Mr. Watt. Well, the qualified mortgage (QM) standards,
    which were adopted pursuant to legislation passed by this
    committee and the House and Senate and signed by the President,
    are important. And you know how important they are to me,
    because I was the originator of the idea of having a
    requirement that borrowers be able to document their ability to
    repay their loans.
        Chairman Hensarling. Well, should it apply to the GSEs,
    because today it doesn't?
        Mr. Watt. Well, the way the mechanism was set up with CFPB
    was to look at it. We were to responsibly, as conservator and
    regulator, look at alternatives to it, alternatives to QM. And
    then after a period of time, CFPB was to go back and reevaluate
    that. And that reevaluation process has now started and will
    culminate in perhaps a new QM standard that recognizes a merger
    of what we have been doing and testing as safe and sound.
        Chairman Hensarling. OK. But besides the asymmetry, the
    fact that GSEs do not adhere to the QM rule, doesn't this mean
    that they are underwriting riskier loans?
        Mr. Watt. No, I don't think so. What it--
        Chairman Hensarling. Then why should QM apply to private
    institutions?
        Mr. Watt. What it recognizes is that there are probably
    loans outside the QM standard that are safe and sound that will
    allow qualified borrowers who are able to pay their mortgages
    to have access to credit. And so if we responsibly oversee
    that, which we have, then we can develop, on a parallel track
    with QM, to test what will work in the marketplace without
    getting back into a--
        Chairman Hensarling. There still remains an asymmetry.
        Let's talk a little bit about underwriting standards.
    Former Chairman Barney Frank of this committee once said,
    quote: ``It was a great mistake to push lower income people
    into housing they couldn't afford and couldn't really handle
    once they had it,'' unquote. That was Chairman Frank.
        I am really wanting to know, again, focusing on
    underwriting standards, how do we ensure that we don't end up
    hurting the very people that we are trying to help and ensure
    they have homes they can afford to keep? And in that regard,
    you have lowered, at least on some of the loans, the
    downpayment to as low as 3 percent. So I am trying to figure
    out, what is it the FHA is doing to ensure these loans are
    sustainable and that taxpayers are not left holding the bag,
    particularly as you lower standards with 3 percent downpayment?
        Mr. Watt. This is exactly one of the things that we are
    doing on a parallel track with QM, testing to see whether that
    is safe and sound and sustainable. And you may be surprised to
    know that those loans, which represent about 3 percent of the
    enterprises' portfolio, the new loans that are being made,
    their default rates are equivalent to QM default rates, which
    is close to nothing, really, less than 1 percent.
        Chairman Hensarling. Well, Director Watt, I hope that
    proves true on a go-forward basis, because I fear similar words
    were uttered in this committee room a number of years ago, and
    we know where it led us.
        My time has expired. I now recognize the ranking member for
    5 minutes.
        Ms. Waters. Thank you very much.
        Since the chairman took a moment when it was time for him
    to speak about the national debt, I would like to include this
    in the record. Estimates say the proposed tax reform measures
    of the President and the Republicans could add more than $2
    trillion to the national debt over the next decade. The
    national debt, of course, is currently over $20 trillion, more
    than 100 percent of U.S. gross domestic product, a level that
    worries many economists and policy analysts.
        And I would just add, if the chairman is concerned about
    that, perhaps a second look should be taken at the tax reform
    measure that I think he now supports.
        Having said that, let me talk to Mr. Watt about the Housing
    Trust Fund. FHFA plays an important role in expanding
    affordable housing. And under your leadership, the Housing
    Trust Fund and Capital Magnet Fund have started to receive
    funding to do just that. In particular, the Housing Trust Fund
    is the only Federal housing program that is targeted for the
    creation and preservation of rental housing that is affordable
    for extremely low-income (ELI) households.
        Los Angeles is among the top three metro areas with the
    lowest availability of rental units affordable to extremely
    low-income households, with just 17 units affordable and
    available to ELI households for every 100 renter households.
    The Los Angeles metro area has a deficit of 382,106 units that
    are both affordable and available to ELI households.
        In the midst of the current rental housing crisis, the need
    for a Housing Trust Fund is abundantly clear, and I believe
    that preservation of the Housing Trust Fund should be retained
    in any GSE reform package that Congress passes.
        Can you discuss FHFA's broader strategy on expanding
    affordable housing and the progress you have seen since Fannie
    and Freddie have begun to fund this important program?
        Mr. Watt. So let me start with the funding of the Housing
    Trust Fund. You know it was suspended for a period of time, and
    I reinstated the contributions to the Housing Trust Fund. But
    you will recall, in my confirmation hearing in the Senate, I
    said, look, my role is to apply the statutes that you all have
    adopted. I come from the legislative branch, so I have the
    highest respect for laws that get passed. I practiced law for a
    long time.
        And the statute said what the funding formula would be. And
    the statute said, unless we could demonstrate that funding them
    contributed to the financial instability of the enterprises,
    that we were required to fund them. And for a period of time
    they were not funded, because they would have contributed to
    the financial instability. But Fannie and Freddie are back on
    stable financial ground, and that was no longer true. So all I
    was doing was applying the statute as it was written, and I
    will continue to do that.
        Now, we have made additional steps outside the Housing
    Trust Fund. Of course, FHFA does not control the disposition of
    the funds that go into the Housing Trust Fund. The Treasury
    Department controls part of them and the U.S. Department of
    Housing and Urban Development (HUD) controls the other part. We
    have nothing to do with the actual application of the funds.
    Those funds go into the Trust Fund. They get distributed by
    other agencies.
        We have taken steps outside of that to increase access to
    credit in a responsible, safe, and sound manner, as one of the
    programs that I just described to Chairman Hensarling, but we
    always do it conscious of--we always do it in a very narrow
    way, and we do it monitoring it consistently and making sure
    that we are not doing anything that is unsafe and unsound to
    the system. And we do it in a way where we try to make sure
    that every borrower has the ability to repay his or her loan.
    Because if payment is not sustainable, it gets the enterprises
    into trouble, it causes taxpayers problems, and as importantly,
    it causes borrowers problems, and we have no interest in doing
    either one of those things.
        Ms. Waters. Thank you very much. I yield back.
        Chairman Hensarling. The chair now recognizes the gentleman
    from Wisconsin, Mr. Duffy, Chairman of our Housing and
    Insurance Subcommittee.
        Mr. Duffy. Thank you, Mr. Chairman.
        And, again, welcome, Mr. Watt. I am going to drill into
    this issue on the QM rule. Do you think the GSEs should adopt
    the QM rule as written?
        Mr. Watt. No. And for the same reason that I just explained
    to Chairman Hensarling. The process was set up to have a QM
    rule; and parallel to that, with somebody intensively
    supervising what was happening in the space, a process was set
    up to determine whether other non-QM loans could be
    sustainable. And over time, those two things will be merged and
    the information will be collected and a determination will be
    made.
        Mr. Duffy. I will accept your answer. Let me take a step
    back, because you have indicated I am concerned about borrowers
    and are borrowers getting loans that they can't repay? And
    shouldn't we as policymakers--you were one of them on this
    committee--say, let's look at the debt-to-income of the
    borrower to make sure they can pay their loan? Right? That was
    the concept that you had.
        So if you look at the QM rule, and you can have a debt-to-
    income ratio of 43 percent as a non-GSE borrower, but if I go
    to the GSEs, I can have a debt-to-income ratio of 50 percent,
    me as the borrower, how is it different for me if I have my
    debt held by the GSEs or securitized by the GSEs or a private
    entity? For me, the debt is the same. Why do we let you have
    debt-to-income ratios that are much higher if you care about
    the people who are getting the loans? Do you understand the
    question?
        Mr. Watt. Yes, I understand your question. Let me respond
    to it. What you find out very quickly if you are in the
    mortgage lending or any lending space is that one size does not
    fit all. There is nothing magic about a 43--
        Mr. Duffy. Mr. Watt--
        Mr. Watt --debt-to-income ratio.
        Mr. Duffy. Mr. Watt, hold on a second, because I don't have
    much time. I don't mean to interrupt you and I know I am. But
    you supported a QM rule that was a one-size-fits-all. That was
    the idea in this. One-size-fits-all, 43 percent, but we are
    going to exclude the GSEs and get us to 50 percent. So this
    rule is one-size-fits-all.
        Mr. Watt. Let me ask this question: Do you think there are
    people between the 43 percent debt-to-income ratio and the 50
    percent debt-to-income ratio that can afford to pay a loan? All
    of the research that we have suggests that there are multiple
    people, if you are careful about making loans to them, if you
    give them credit counseling, if you are very careful in the
    selection of them. And to do otherwise would be to deprive
    those people who deserve to have home ownership, just like you
    and I do, of the ability to do that. And that is not the
    concept that this country has ever followed.
        Mr. Duffy. We are dancing together now, because then we are
    going to both agree that maybe the concept of a hard-and-fast
    qualified mortgage rule might have been flawed, or the--
        Mr. Watt. Well, we both agree on that because, over time,
    we are going back to look at whether it should be 43 percent or
    whether it should be higher. We don't disagree on that. You and
    I are--you are right, we are in--
        Mr. Duffy. We are talking--maybe we are going to join and
    say Richard Cordray at the CFPB got this wrong. Maybe he made a
    hard-and-fast rule. Maybe we have to look at other factors in
    how we look at what a qualified mortgagee looks like. And so I
    will join you in saying Richard, Director Cordray, he missed
    the boat on this.
        And I am going to pivot. Isn't it fair to say too that we
    have given a benefit now to the GSEs far over the private
    sector? And no doubt you have expanded your role in housing
    finance, because the rule--
        Mr. Watt. It is fair to say that, yes.
        Mr. Duffy --the rules play in your favor. And if we wanted
    to really adopt the concept that you take credit for, I would
    hope that you go, yes, Director Cordray might have got this
    wrong.
        Mr. Watt. Well, I don't think Director Cordray made the
    decision. A whole intersection of his various agencies
    contributed to that decision. And when the decision is made the
    next time, Director Cordray won't be there--
        Mr. Duffy. I hope not.
        Mr. Watt --so somebody else will make that decision,
    because it is about 2 or 3 years out beyond--
        Mr. Duffy. We are on the same page. Hard-and-fast rules I
    don't think work. They don't take into account many factors
    that we--
        Mr. Watt. Which is exactly why FHFA and the enterprises--
        Mr. Duffy. But I would also say, if you support this rule
    and you are the one who takes credit for it, I think you should
    live by it. And you should say, if it is good for the private
    sector, it should be good for the GSEs. If you live by the
    sword, you die by the sword. And to say I get a benefit of the
    GSEs for a rule that I promoted to the exclusion of private
    capital I think is unacceptable.
        I yield back, Mr. Chairman.
        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.
        Welcome, Mr. Watt.
        Mr. Watt. Thank you.
        Ms. Velazquez. As you know, Hurricane Maria slammed into
    Puerto Rico and the Virgin Islands almost 2 weeks ago, causing
    unimaginable destruction, the likes of which the island has
    never seen before. I am not saying this. General Buchanan,
    three-star general appointed to oversee the relief effort,
    stated that this morning in an interview.
        Thousands of American citizens and families remain
    homeless. This season, hurricanes have also ravished parts of
    Texas, Louisiana, Florida.
        What steps is the FHFA taking to help homeowners in Puerto
    Rico and the Virgin Islands and other parts of the country that
    are suffering as a result of this storm?
        Mr. Watt. Congresswoman, we learned a lesson from Hurricane
    Katrina. The enterprises established standard programs to help
    homeowners in areas declared a major disaster with individual
    assistance trying to help people.
        The enterprises have a standard 90-day forbearance option
    that can be extended to up to 12 months. At the end of this
    temporary payment break, you won't have late fees. You won't
    have delinquencies reported to credit bureaus. You won't have
    to catch up on all your payments at once. You can work with
    your servicer to resume making a mortgage payment that is
    smaller or similar to what you paid before the disaster. Or if
    you need additional modification help, you can work with the
    servicer to modify the loan under existing modification
    programs.
        Foreclosure, sale, and eviction moratoria are in effect.
    Fliers have been sent to every Member of Congress advising them
    of this so that they can advise their constituents.
        Ms. Velazquez. The issue that they are facing today is, in
    Puerto Rico, 95 percent of the households do not have
    electricity, as well as in the Virgin Islands. Out of 1,600
    telecommunication towers, 1,300 are down.
        So how is the FHFA trying to reach homeowners in Puerto
    Rico and other parts of the country?
        Mr. Watt. Well, we don't have the capacity or authority
    or--I mean, we don't control electricity.
        Ms. Velazquez. I understand.
        Mr. Watt. We just control the mortgage part of it. And what
    we try to do is take that burden off of these homeowners so
    that they don't worry about that as an additional thing that
    they have got to worry about for a protracted period of time.
    So--
        Ms. Velazquez. If there is a timeline, how long will people
    have? Because if they don't have a way to learn about this, it
    doesn't do any good.
        Mr. Watt. We have been very open about making that public
    announcement. We have given the information to Members of
    Congress so that they can distribute it. We have publicized it.
    And in addition, the Federal Home Loan Banks have stepped up.
    The New York Federal Home Loan Bank placed $1 billion to try to
    help Puerto Rico and the Virgin Islands and Florida.
        But we also have to acknowledge that we don't have control
    over all of the things that are adversely impacting hurricane
    victims, and I don't know how to address that.
        Ms. Velazquez. OK. Mr. Watt, as you know, Congress recently
    passed legislation that reauthorizes the National Flood
    Insurance Program (NFIP), but that reauthorization only lasts
    until December 8.
        First, can you please speak to the critical role the NFIP
    plays on the national housing market? And then can you please
    speak to the importance of passing legislation that not only
    reforms the program, but also reauthorizes it for the longterm?
        Mr. Watt. I think it is critical to have a flood insurance
    program. I think it is critical for the government to be
    backing it and for private participants to be participating in
    it. And as long as the private participants and the government
    participants are playing by the same rules and required to meet
    the same standards, we contract with them equally at the
    enterprises.
        But the flood insurance is critical, and we have found it
    now in these hurricane seasons that it is even more critical
    than most people had assumed it was.
        Ms. Velazquez. Thank you.
        Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The chair now recognizes the gentleman from Missouri, Mr.
    Luetkemeyer, Chairman of our Financial Institutions
    Subcommittee.
        Mr. Luetkemeyer. Thank you, Mr. Chairman. And welcome,
    Director Watt.
        One of the things that I have been concerned about and
    expressed a lot of support for over the last several years here
    is I would like to see a greater number of front-end credit
    risk transfers, a move that I believe would drive more business
    to the private companies, private sector, but it, in my
    judgment, has been sidelined and not being very effective right
    now.
        In your testimony, Director Watt, you asked the rhetorical
    question, what do the role--what role does the GSEs have to
    transfer more of these transactions to the private sector? I
    think it is one of your stated goals is to reduce risk by
    increasing the amount of these transfer deals. But to date,
    most of these transactions have involved the GSEs like yourself
    onboarding the risk, holding it on your balance sheet up to 15
    months, and then laying off the second loss risk using capital
    markets executions.
        So my question is, when can we expect an actual up-front
    risk share of these transactions? And how can we ramp it up and
    minimize what the GSEs are doing?
        Mr. Watt. We definitely started the process of risk
    transfer with back-end risk transfers. And we have been working
    vigorously to try out various mechanisms, both on the back end
    and on the front end.
        In the first quarter of 2017, the portion of risk
    transferred through back-end transfers was 77 percent. Through
    transactions with insurers and reinsurers, it was 19 percent.
    And it was 4 percent on the front-end transaction. So we are
    tracking this and trying to turn more to front-end if it meets
    the criteria, if it is viable and it is sustainable.
        Mr. Luetkemeyer. It is hard to wind the GSEs down, though,
    when you take in more on the front end than you go out the back
    end, is it not?
        Mr. Watt. I don't think that has anything to do with
    winding down or not winding down. And I don't see anything in
    my statute that requires me to wind down. If Congress wants to
    wind down, Congress should wind down the enterprises.
        Mr. Luetkemeyer. Well, I think you made the statement a
    while ago you got $1.6 trillion that you have transferred off
    the books. Is that not correct?
        Mr. Watt. That is correct. That is reducing risk to
    taxpayers. That is not winding down the enterprises. We still
    have to provide liquidity in the market, and we are doing that
    and then transferring that risk to the private sector to get it
    off the enterprises' books and potentially off the taxpayers'
    backs.
        Mr. Luetkemeyer. OK. Before my time runs out here, I have
    one more question for you. I chair the Subcommittee on
    Financial Institutions, and one of the things that we are
    looking at is data security, cybersecurity. In this next 2
    days--
        Mr. Watt. I am sorry, you are looking at what?
        Mr. Luetkemeyer. We are looking at data security and
    cybersecurity as the top topics of the day here. And this week,
    in fact, we are having Secretary Clayton, the SEC, in tomorrow
    to testify in front of this committee. I think on Thursday we
    have got another hearing with regards to data security that
    deals with Equifax.
        So these are top of mind. And I know you made a comment
    here in your 2016 annual report to Congress that operational
    risks associated with information security and cyber risks are
    significant for the enterprises, as they are for all financial
    institutions. So if you believe they are significant, Director
    Watt, what are you doing to protect that data, because we just
    had a breach with SEC? And what kind of liability do you have?
    Have you assessed that liability risk?
        Mr. Watt. We are doing the same things that everybody is
    doing in the private sector and in government--to try to
    protect against cybersecurity risk. I think everybody is behind
    the curve, because the people who are trying to hack are
    generally one step ahead of us. But we are doing exactly the
    same things, and we are vigorously pushing it.
        Mr. Luetkemeyer. Forgive me for interrupting, but I have 30
    seconds left here. One of the problems, though, with the SEC
    was they knew this breach many, many months ago and we just now
    found out about it. Do you have in place in your agency any
    protocols that say, when we know that a breach has occurred, we
    will notify everybody within a certain period of time, or is
    there nothing in your protocols that--
        Mr. Watt. If there is a breach at the enterprises, we know
    about it instantaneously. There are protocols in place that
    they have to notify FHFA immediately. And if it were a breach
    that impacted the public, we would notify the public
    immediately.
        Mr. Luetkemeyer. OK. My time has expired.
        Thank you, Mr. Chairman. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from New York, Mr.
    Meeks.
        Mr. Meeks. Thank you, Mr. Chairman.
        Mr. Watt, I know it has been 3-plus years, but I can't get
    used to you down there as opposed to sitting up here, but it is
    good to see you.
        Mr. Watt. Today I would rather be sitting beside you, I
    think.
        Mr. Meeks. Let me ask you, section 113 of Dodd-Frank
    provides the Financial Stability Oversight Council (FSOC) with
    the authority to subject nonbanks to enhanced supervision and
    prudential standards. And the designation process requires a
    two-thirds vote, as mandated in Dodd-Frank. And then I noticed
    last week that FSOC voted to relieve the American International
    Group (AIG) of its designation. However, there are legitimate
    questions about whether the vote was conducted properly and if
    the two-thirds vote was achieved, considering the recusal of
    the SEC chair, Clayton, and the opposition of three members,
    including yourself.
        So I have two questions on that matter. One, do you think
    the vote in favor of de-designating AIG was properly conducted,
    and if not, what is your reasoning? And two, could you discuss
    your no vote and your perspective on the risk you believe AIG
    may still pose to our financial system?
        Mr. Watt. So I dissented from the FSOC decision both on
    substance grounds and on process grounds. There are 10 members,
    voting members of FSOC. A designation or de-designation
    requires a two-thirds vote. And the question was whether the
    denominator was going to be 10 or whether it was going to be 9,
    because SEC was recused from the vote.
        I thought the statute required 7 out of 10 rather than 6
    out of 9. So that would have been a two-thirds vote. And I
    understand the reasoning that went into it, but that is where
    I--after looking carefully at the law and having our general
    counsel's office research it, we landed there, that 10 should
    be the denominator, not 9.
        On the substance, there are two standards under FSOC for
    determining whether somebody should be designated for a higher
    standard of supervision. And the designation of AIG was made on
    one of those standards, never looked at the second standard.
    And when it came time to de-designate or consider de-
    designation, they again looked at only the one standard as
    opposed to looking at the other standard.
        I actually agreed with them in their assessment on the one
    standard. My dissent was based on the fact that they had never
    looked at the second standard and that I thought it was
    improper to de-designate without making an independent
    evaluation under the second standard. It was a legal--and,
    actually, I was the only member of FSOC that--one other member
    joined me in the dissent, but I was the only member that raised
    this.
        Congress set two standards, and I think we are obligated to
    do what Congress tells us to do under the statute. And I don't
    believe FSOC did what we were obligated legally to do, because
    we looked at only one of the standards and ignored the second
    standard.
        Mr. Meeks. So do you see any prospective risk still as far
    as the de-designating as far as AIG is concerned, any dangers?
        Mr. Watt. Well, it is clear that AIG is somewhat smaller in
    some respects than they were. They have gotten out of some of
    the businesses that led--particularly in the mortgage market,
    they were just insuring mortgages with no basis for insuring
    them. They are out of that business now.
        So I think if we looked at the second standard, we may find
    that they still should be de-designated, but I don't think we
    can ignore the statutory requirements and just ignore one of
    the two standards. And that was the basis on which I dissented
    substantively from the decision.
        Mr. Meeks. I am out of time. I yield back.
        Chairman Hensarling. The gentleman's time has expired.
        The chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, Chairman of our Capital Markets Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman. And welcome back,
    Director Watt.
        Mr. Watt. Thank you.
        Mr. Huizenga. Real quickly, I am going to try and move
    through a couple of issues here. One on Puerto Rico, as my
    colleague from New York was asking. You had said--and I wrote
    this down. I think you said that you anticipated that taking
    the burden off of homeowners would be for a, quote,
    ``protracted time period.''
        Mr. Watt. Ninety days up to a year. I don't want you to
    read protracted beyond a year.
        Mr. Huizenga. OK. That is why I wanted clarification,
    because we know that the banking system is not up, and we have
    been asking a number of those questions. Payment systems are
    not up. So does that mean that there is going to be a
    suspension of any of their payments or is it going to be
    accrued that they will have to pick up those payments later?
    How is that going to work?
        Mr. Watt. They would pick them up, but they would pick them
    up on the back end, unless they modified the loan.
        Mr. Huizenga. Basically--
        Mr. Watt. Now, there are modification programs that they
    could get, but they wouldn't be penalized. They wouldn't be
    doubled up immediately. They would be just put on the back end.
        Mr. Huizenga. And that is not just Puerto Rico. The same
    thing is happening for Harvey and for Irma, correct?
        Mr. Watt. Yes.
        Mr. Huizenga. Yes, OK. All right. I just wanted to make
    sure that that was the case. It is vital that we get help to
    those folks.
        Secondarily, I want to touch on a couple of IG reports that
    have come to light. One, I am assuming that you are familiar,
    the report December 6 of 2016, regarding vehicle usage and FHFA
    employees' use for personal travel. I am not going to beat you
    up too badly on it. What I am confused about--
        Mr. Watt. I hope you will, because--
        Mr. Huizenga. But I am confused on it because why it was
    redacted as extensively as it was, and then last night there
    was a leaked nonredacted copy of that. And it seems vehicle
    usage with security and all those kinds of things.
        What my question is is, there was, I believe, seven very
    specific items that the IG had recommended. Are you
    implementing those recommendations?
        Mr. Watt. We have already implemented all of them. And the
    newspaper coverage made it sound like I somehow demanded this.
    I was told that this was the policy.
        Mr. Huizenga. And I read the report, and the acting
    director prior to you had death threats and they were extending
    some of those things, I think.
        Mr. Watt. And it is exactly what Members of Congress--I had
    been used to it for 21 years as a Member of Congress, having my
    personal travel done by my office here. It is just a
    coordination issue, from my perspective.
        Mr. Huizenga. And that was my question. I just wanted to
    make sure that you were familiar with it and you were doing it.
        What I think is more troubling, though, is the second
    report, June 2016, and then, last week, there was an updated
    issue and report of Fannie Mae's new building in downtown D.C.
    It said, quote: ``We believe there are''--this is from 2016--
    ``that there are significant financial and reputational risks
    from the projected costs associated with Fannie Mae's
    relocation of its headquarters that warrant immediate and
    sustainable comprehensive oversight from FHFA.''
        Last week, the FHFA IG issued a followup report, just last
    week, noting, quote: ``We learned that the project's build-out
    costs had risen dramatically, from $115 million when the agency
    approved the project in January 2015, to $171 million in March
    2016, and that the plans for it included high-end features,
    such as multimillion dollar glass walkways between the towers
    Fannie Mae would occupy,'' end quote.
        It has also been reported that the budget for the
    headquarters includes bars, quartz and glass countertops in the
    wellness room, town center cafe, freestanding decorative wood,
    quote, ``lunch huts,'' whatever in the world that is, custom
    wood menus.
        Mr. Watt, we are talking about spending hundreds of
    millions of dollars, tens of millions of dollars certainly of
    hardworking taxpayers' dollars on walkways, decorative
    walkways, and decorative wood lunch huts. I do want to see a
    picture of one of those.
        Is that consistent with how we need to treat those taxpayer
    dollars? And are you concerned by this? And what are you doing
    to address these, what I would view as, outrageous overruns?
        Mr. Watt. Well, first of all, I don't agree with you that
    they are outrageous overruns.
        Mr. Huizenga. OK. Please then--here's my formal request--
    provide me with a photo of a wooden lunch hut. I want to see
    what this is. I am in developing. I am a builder.
        Mr. Watt. You know, I--
        Mr. Huizenga. I know what overruns are.
        Mr. Watt. But you also know what projections are. And the
    original IG report was based on projections, and this IG report
    is also based on projections.
        Mr. Huizenga. So it could be higher?
        Mr. Watt. No. They are coming down every time we get a
    report, which is exactly what I told the IG.
        Mr. Huizenga. What decisions have you--
        Mr. Watt. Look, I did this when I was in the private
    practice of law. You set up a tenant improvement allowance and
    you work toward trying to bring this in under the tenant
    improvement allowance if you are in the real estate business.
    And that is what we have been doing.
        Mr. Huizenga. Mr. Chairman, I will followup with some
    written questions, and hopefully I will get--
        Chairman Hensarling. The time of the gentleman--
        Mr. Huizenga. Thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Massachusetts,
    Mr. Capuano.
        Mr. Capuano. Thank you, Mr. Chairman.
        Before I get to Mr. Watt, I also want to talk about the
    debt clock. I will be very clear: Democrats have some blame for
    the debt clock. I voted for the stimulus. I am glad I did. I
    thought it was a good thing. I voted for the bailouts. I
    thought they were a good thing. And by the way, all those
    bailouts, almost all of them have been repaid. But I will take
    my share of the blame. But also, the Republicans on the other
    side voted for tax cuts under George Bush that were unnecessary
    and for two wars that are still going on that have been
    unfunded. So we all have something to share in the number that
    is there. But be warned, the minute you vote to increase it $2
    trillion to $5 trillion additional dollars, it belongs entirely
    to you.
        So with that being said--and by the way, I want to be real
    clear. If you want to cut spending by $2 trillion to $5
    trillion, I will disagree, but at least I will think it is
    internally consistent. The only thing I will say to that is I
    have no doubt whatsoever that the chairman would do so; and
    that being the case, that is one of the reasons I respect him,
    though deeply disagree.
        So with that being said, Mr. Watt, I would like to talk
    about--the one thing normally we talk about is bulk sales, but
    we have had that conversation repeatedly. I think you have
    taken some steps in the direction I think is right. Obviously,
    you know I would like you to do more and quicker, but a
    discussion for another day.
        I would like to talk a little bit about capital reserve. As
    I understand it, in the last 5 to 6 years, Fannie Mae and
    Freddie Mac have pretty much both made a profit, for the lack
    of a better word. Their revenues exceed their expenses. Is that
    right?
        Mr. Watt. If you define profit that way, yes.
        Mr. Capuano. Well, I am using the term loosely, mostly so
    average people, including my colleagues here, can understand. I
    will speak slower for some of them.
        And so if they have what normal people would call a profit,
    that means their cash-flow has been positive over the years.
    That means your capital reserve must be incredibly good. You
    must have a lot of money there. So God forbid there is another
    bump in the economy, you will be able to cover it without a
    taxpayer bailout. Is that a fair assessment?
        Mr. Watt. Well, not without drawing on taxpayer funding. We
    have taxpayer backing, but we have no capital buffer.
        Mr. Capuano. No capital reserve? What has happened with all
    the money you made?
        Mr. Watt. We have $600,000 until--$600 million until the
    end of the year, but then it goes to zero.
        Mr. Capuano. And so what happened has with all the money
    you made?
        Mr. Watt. It has gone to the Treasury under the--
        Mr. Capuano. To the Treasury? To the general fund?
        Mr. Watt --under the preferred stock purchase agreement
    (PSPA).
        Mr. Capuano. Who pays all the revenue that you get? Am I
    wrong to think that the vast majority of your money comes out
    of fees that are charged to middle-income homeowners on top of
    their mortgage? Is that where most of the money comes from--
    almost all of it?
        Mr. Watt. Yes. Disproportionately more and more of it is
    coming from that as opposed to portfolio income.
        Mr. Capuano. So middle-income homeowners are paying extra
    on their mortgage so the United States Government's books look
    better than they should. By the way, those people are still
    paying income taxes and corporate taxes and all the other taxes
    that everybody else pays.
        So they are paying extra for the ability to own a home? Do
    they know this? Have they been told this?
        Mr. Watt. Well, I don't get into that part of it. What I
    have been very transparent and open about is that it is really
    irresponsible to try to run any business without some kind of
    capital cushion.
        Mr. Capuano. So would you, if you have your druthers, would
    you like to increase that reserve?
        Mr. Watt. Yes. And we are working with the Secretary of the
    Treasury to try to resolve that issue.
        Mr. Capuano. It is my understanding that he doesn't think
    you should.
        Mr. Watt. Well, I wouldn't say that. We are working with
    him now to try to resolve the issue.
        Mr. Capuano. As I understand it, you need the permission
    and the agreement of the administration in order to do that.
    But you don't need--
        Mr. Watt. No, I don't absolutely need it. I could do it by
    myself.
        Mr. Capuano. Oh, good.
        Mr. Watt. But I don't think that would be the best way to
    do it.
        Mr. Capuano. I would agree with your interpretation, but
    some people might disagree with that. And I know there will be
    a family fight about who has the authority to do what. But it
    is unequivocal that you have the authority to lower fees on
    your own. No one has to approve those.
        Mr. Watt. Well, I wouldn't lower fees to solve this
    problem.
        Mr. Capuano. No, no, it won't solve the problem. But if the
    money is--if I am paying a mortgage and I know you are taking
    money and not building up a reserve and not using it to help
    me, and I am just adding, it is like an extra tax on me.
        Why would you want to do that? If you can't buildup a
    reserve and therefore help provide housing to America, why
    don't you just cut the fees and that will solve all the
    problems. They are not going to let you keep it or give it back
    to your investors or reduce mortgages. Just cut the fees, that
    way you would effectively be reducing mortgages.
        Mr. Watt. I don't think I could statutorily, consistent
    with the statutes, cut the fees to take that into account
    because I have an independent statutory responsibility in
    setting guarantee fees that are reasonable.
        Mr. Capuano. I think you could, but we will talk about that
    later.
        Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Kentucky, Mr.
    Barr, Chairman of our Monetary Policy and Trade Subcommittee.
        Mr. Barr. Director Watt, welcome back to the committee.
    Good to see you.
        I know you share the general concern that the government
    has a near monopoly in the mortgage market. I think the most
    recent statistic, from 2017, is that 97 percent of all
    mortgaged-backed securities issued this year are explicitly
    backed by the Federal Government.
        Given some of the changes that you started to make at FHFA,
    do you agree that additional steps should be taken to encourage
    greater private sector participation in the housing finance
    market?
        Mr. Watt. Yes, and we are in the process of doing that
    through the risk transfer program.
        Mr. Barr. Right. And I have read your report on risk
    transfer, and I want to get to that in a minute, and I applaud
    you for that, and I think more can be done.
        But let me just revisit a little bit of the discussion from
    Chairman Hensarling and Chairman Duffy, a little bit more about
    the asymmetry with the qualified mortgage rule.
        I agree with you that one size does not fit all. I also
    agree with your comment that there is nothing magic about the
    43 percent debt-to-income ratio. And that is exactly why I have
    introduced legislation called the Portfolio Lending and
    Mortgage Access Act. And that bill would allow a credit union
    or a community bank to portfolio a mortgage that doesn't fit
    within the CFPB's credit box, but where there is a personal
    relationship between that community banker and that farmer in
    rural Kentucky. And that farmer has never missed a payment in
    30 years, but may not fit within the rigid, one-size-fits-all
    CFPB QM rule.
        My question to you is, given our agreement on this point,
    would you support that legislation? And don't you agree that
    this one-size-fits-all CFPB QM rule is a regulation that is
    keeping private capital from coming back into this market? And
    given your goal of bringing private capital back in the market,
    wouldn't you support that legislation?
        Mr. Watt. Well, we don't support legislation one way or
    another. That is just not in my portfolio to either support. We
    apply legislation after it is passed and signed into law, but I
    just don't have the--
        Mr. Barr. Let me ask the question this way. Under the CFPB
    QM rule, if a bank or credit union originates a loan with a DTI
    greater than 43 percent, that lender is liable, is subject to
    legal liability to a defaulting borrower. Is that correct?
        Mr. Watt. They would be subject to legal liability to a
    defaulting borrower whether they were within QM or outside QM.
        Mr. Barr. Right.
        Mr. Watt. So that is not the difference between QM and--
        Mr. Barr. Under the GSE exemption, the GSEs are not--are
    not subject to that same liability.
        Mr. Watt. We would be subject to the same. If somebody
    fails to pay a mortgage, there is no free lunch in this space.
        Mr. Barr. The point is, why would we want to limit
    affordable housing options, but instead of putting the risk of
    a riskier loan on the taxpayer, why wouldn't we want that risk
    to go on the shareholders of a private community bank,
    especially one that is not systemically risky?
        Mr. Watt. That risk is still there if credit unions and
    other lenders can make loans outside QM, they just don't have a
    safe harbor presumption. So there is nothing legally to
    restrict them from doing that.
        Mr. Barr. So I think, just to conclude the conversation
    here, I think a portfolio lending solution for community banks
    and credit unions is a lot better way to bring private--No. 1,
    to provide that affordable housing flexibility, but do so in a
    way that doesn't put the taxpayers at risk and brings back
    private capital into housing finance.
        So I think we are on the same page here, I just don't think
    the GSEs should be doing it. I think community banks and credit
    unions should be doing it, particularly those that are not
    systemically risky.
        Let me move on to the credit risk transfer issue. And one
    question I have for you is, how have the high capital
    requirements affected dealers' ability to make markets in
    credit risk transfers? So the high capital requirements, are
    they precluding the credit risk transfer progress that you are
    trying to make?
        Mr. Watt. I am not sure exactly that I understand your
    question.
        Mr. Barr. Do they--do the high capital standards prevent--
        Mr. Watt. What I found out pretty quickly is in this area
    you have to have capital to do about anything. And there are
    capital requirements associated with virtually everything that
    we do, which is one of the concerns that I have expressed to
    Mr. Capuano.
        Mr. Barr. Well, of the total 5 trillion in GSE credit
    guarantees, how much of that risk has been transferred away
    from the GSEs through these transfer programs?
        Mr. Watt. I am sorry, repeat the question.
        Mr. Barr. Of the 5 trillion in credit guarantees, how much
    have you transferred away to the private sector?
        Mr. Watt. We have transferred part of the credit risk on
    $1.3 trillion over the last 3 years. Now, those are new loans,
    and we have other programs to transfer older loan credits, and
    we are doing that.
        Mr. Barr. My time has expired. I think more can be done.
    Thank you for your testimony.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Georgia, Mr.
    Scott.
        Mr. Scott. Yes. Thank you, Mr. Chairman.
        Welcome home, Mel. Good to see you.
        Listen, I want to take my 5 minutes so that you can have
    time to share with the American people what you have been doing
    over there that is very beneficial.
        Now, I have followed your career over there since you left.
    Worked with you. And there are three pillars that I would like
    for you to address that go right to the heart of some of the
    comments from my Republican friends.
        First of all, HARP, the Housing Affordable Refinance
    Program. Is it not true that because of your efforts with HARP,
    over 3 million underwater or near underwater American families
    have benefited?
        Mr. Watt. You know, Congressman Scott, one of the untold
    stories of this meltdown will be the people whose homes went
    underwater and they continued to pay their mortgages. And the
    HARP program was designed to help that category of people,
    people who, against all odds, they may have had a debt-to-
    income ratio of 80 percent, not 50 percent, but they continued
    to pay their mortgage because they knew they needed that home.
        Mr. Scott. Right.
        Mr. Watt. And the HARP program has been very successful in
    helping those people.
        Mr. Scott. Exactly. I only have 5 minutes, but I want to
    get to another point, because a lot has been made here about
    the common securitization platform. And I want to make sure
    that folks understand. C-SPAN has a big audience, this gives
    you an opportunity.
        But let's talk about that credit risk transfer that my
    colleague on the other side just talked about. Isn't it true
    that you used the credit risk sharing with the private sector,
    which has greatly reduced taxpayer exposure to Fannie and
    Freddie? Is that not true?
        Mr. Watt. Yes, that is true.
        Mr. Scott. Absolutely.
        Now, let's go to the common securitization platform. Under
    your leadership at the FHFA, you have made moves to develop
    what is known as single security. Please explain how that is
    beneficial.
        Mr. Watt. So in the marketplace, Fannie Mae and Freddie Mac
    securities were trading at different values, and Freddie Mac
    has been subsidizing for years its security to try to equalize
    it. So the single security will make both Fannie Mae and
    Freddie Mac securities fungible, so to speak, and eliminate
    that trading differential. We project that it will save the
    taxpayers well over a billion dollars a year or close to a
    billion dollars a year when that is implemented. And it will be
    implemented in 2019.
        Mr. Scott. Absolutely.
        The other thing is this. As we look at your position--and I
    am so delighted that your position will go on until 2019. I
    hope it could go further. But we are, as a Nation, at a very
    critical point as far as affordable housing. All we have to do
    is turn on the television, and we look at what Maria, the
    hurricane, has devastated, almost utterly destroyed, homes of
    American families, American citizens, and Puerto Rico. And
    there is a huge cry for this Federal Government to do much,
    much more, and it is very critical that we have you in this
    position to do that.
        But not only that. When we look at Texas, we look at
    Florida, I don't think there has ever been a time in American
    history where we had this convulsion of hurricanes that have
    utterly destroyed homes that put you in the position of needing
    to provide the help of restructuring it and making sure it is
    affordable.
        And that, my friend, is what I think, and why I think you
    have done an extraordinary job, and we look forward to you
    continuing to do more.
        Mr. Watt. I thank you for the compliment.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Ohio, Mr.
    Stivers.
        Mr. Stivers. Thank you, Mr. Chairman.
        Thank you, Mr. Watt, for being here. I appreciate your
    service and what you do.
        I want to ask a few questions. The first, as you know, the
    GSEs are enormous and they are concentrated in one asset class,
    and that is housing. Fannie and Freddie are the very definition
    of systemically important financial institutions, without
    actually having that designation.
        So if the GSEs were to one day come out of conservatorship,
    can you give us your thoughts on what the capital requirements
    should be of Fannie and Freddie post-conservatorship, and do
    you think they should have systemically important financial
    institution (SIFI)-level capital requirements?
        Mr. Watt. Well, the last part of the question is easy. I
    think they would certainly qualify as SIFIs if they were not in
    conservatorship. And, in effect, being in conservatorship gives
    them the enhanced supervision that being a SIFI would provide
    to them, just that FHFA is providing it rather than the Federal
    Reserve providing it. So that is the easy part.
        The capital question is more complicated. And if you ran it
    on bank standards, you would be talking, what, 4, 5 percent of
    $5 trillion. That is a lot of money.
        Now, we wouldn't do it, I don't think, on bank standards,
    because if you take the risk transfers that we are doing, that
    would reduce it some. But I would say probably in the range of
    2, 3 percent of 5 trillion would be the capital requirements.
        Mr. Stivers. So I want to followup on something that
    Congressman Duffy talked about earlier. He talked about it in
    terms of the new Fannie Mae headquarters. But from an expense
    perspective, because any money the GSEs don't currently spend
    is swept to the Treasury, doesn't that create a rather perverse
    incentive for the GSEs today to spend money?
        Mr. Watt. No, because you would think--if you think about
    the GSEs, Fannie Mae and Freddie Mac, they are the most
    regulated enterprises in America. They are in conservatorship
    under the Federal Government's control. And there is no
    incentive for them to go out and do anything other than try to
    be efficient. We have replaced their boards in conservatorship.
    We have replaced substantial parts of their top management in
    conservatorship.
        The notion that there is some irresponsibility going on out
    there that is running rampant is just--it is fiction. And even
    in the space context that I was asked about, if you look at the
    whole dynamic, we are going to save the taxpayers millions of
    dollars by making the move from Fannie's current location to
    the new location.
        Mr. Stivers. So you see the headquarters in your
    conservator role as a cost-saving measure?
        Mr. Watt. Absolutely. And if you haven't read the reports
    on it, you should read it. We have run the numbers. And it is
    in somebody's interest, sometimes it is in the IG's interest to
    make it sound like there is irresponsibility going on, but that
    is, you know--don't get me started talking about my ideas.
        Mr. Stivers. OK. So last question. You talked a little bit
    about, in your testimony, how you review the gaurantee fees
    (Gfees), try to make sure they are at an appropriate level. Can
    you help us understand what criteria you use when you review
    the Gfees?
        Mr. Watt. Well, Gfees are designed to cover administrative
    costs, the risks that are associated with loans, operating
    costs. And we have factored all of those things into a
    determination of what the Gfees are, and we are constantly
    reviewing them and reporting to Congress annually.
        Mr. Stivers. One quick followup. Do you think there is any
    way some private sector evaluations could be used in evaluating
    that risk?
        Mr. Watt. We use private sector evaluations. We use the
    same standards that anybody else would. And if you look at what
    the private sector is paying in the risk transfer space, it has
    actually verified the reliability of the Gfees that we set.
        Mr. Stivers. I yield back.
        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.
        Mr. Watt, you were here, as well as I, and Ranking Member
    Mrs. Maloney and the chair, in 2008 when Ed DeMarco suspended
    payments to the two funds, the Housing Trust Fund and Capital
    Magnet. And I think it was last year, I can't remember exactly
    when, you--
        Mr. Watt. Year before last.
        Mr. Cleaver. Year before last. You actually ordered the
    payments being made to those two trust funds.
        I live here in D.C., not far from the Capitol. My rental
    payment is significantly higher than my mortgage payment in
    Kansas City. And every time I make the payment at the beginning
    of each month, I think about the fact that for the extremely
    low income, they are paying more than half of their income on
    rent. And I think we are about 7 million units short of
    affordable rental units. So your decision is something that I
    applaud.
        Do you think this rebalancing is enough? And if not, what
    other steps should be taken, at least either administratively
    or legislatively?
        Mr. Watt. First, let me go back to the beginning of your
    question and make it clear that when I reversed the decision
    not to fund the Housing Trust Fund, I made it clear that that
    decision, when it was made, I thought was the appropriate
    decision, because Fannie and Freddie at that time were bleeding
    blood, so to speak.
        So my decision was made on a different standard--on the
    same standard at a different time, let me put it that way. So I
    have been clear on the record, my reversal was not a criticism
    of the decision that Ed DeMarco made as director of this
    agency.
        Now, the funds go into--half the funds go to Treasury and
    half the funds go to HUD. What they do with the Housing Trust
    Fund funds, we don't have any control over.
        What we try to do outside that space, outside the Housing
    Trust Fund, is to come up with criteria that are reliable
    criteria of when and how and whether a borrower will make loan
    payments.
        You never want to make a loan to somebody who can't pay it
    back. But the ability to pay back a loan is an individual
    person-by-person-by-person decision. And at some point the
    system got out of whack and loans were being made to people who
    had no ability to pay them back.
        I recognize that on this committee, three terms of Congress
    before we passed Dodd-Frank. And we introduced bills, if you
    will recall, that would have set up an ability-to-repay
    standard before Dodd-Frank, but nobody took it seriously
    because everything was going great.
        So there is not a person in America who will be more
    forward-leaning about not making a loan to somebody who cannot
    afford to pay it, because it devastates them if they can't
    afford to pay it, it devastates the lender if they can't afford
    to pay it, and in this case, because Fannie and Freddie are in
    conservatorship, it increases risk to taxpayers.
        So every decision we make, the 3 percent downpayment
    decision, every decision we make is calculated with the notion
    that we are trying to find out what are the triggering factors
    that make it possible, likely, that a borrower will pay a loan.
    And that is the space in which we have been operating, and we
    have been doing it with the utmost care and responsibility, I
    can assure you.
        Mr. Cleaver. Thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from New Mexico, Mr.
    Pearce, the Chairman of our Terrorism and Illicit Finance
    Subcommittee.
        Mr. Pearce. Good to see you, Director. It has been many
    years since we served together on this committee, and I
    appreciate your service currently.
        Mr. Watt. Thank you.
        Mr. Pearce. The last two questions, Mr. Stivers and the
    last question, really started digging into the heart, I think,
    of the challenge that we are faced, and that is this assessment
    of risk.
        Now, I was in business and we were in a high capital
    business, the oil and gas. We did down hole repairs, a lot of
    equipment and a lot of expensive equipment. And the real
    challenge was figuring out if we could replace that equipment
    downstream. We could borrow for the equipment now, but are we
    going to have enough money to replace it 15 years down the
    road?
        Pricing and assessing risk are so, so difficult, and they
    can't be done by numbers. I had good friends in the same
    business. Somewhere along our 14 years in business, they went
    out and we were able to stay in, and it was a constant juggling
    act.
        So I am sympathetic when I hear you say that you are using
    the same standards, but that really doesn't--is not going to
    get us there, because you have got one advantage that
    businesses don't have. And that disadvantage businesses face
    is, at the end of the day, they have to pay the bills and,
    frankly, you all don't. You can simply go to the taxpayer, and
    say, ``Well, we are underwater a couple billion dollars and
    things.''
        And that is a great--it is a great flaw in the idea that
    somehow we can let government run business-type operations,
    because there is always that safety net and always that ability
    to go straight to the taxpayer.
        Even this idea of the downpayment amount, the 3 percent
    versus 10 or 20 or whatever, that is a huge question. And the
    assessment of people who are going to pay or not is basically
    how much skin they have got in the game. If they have got
    enough left on the table, they are going to figure it out. If
    they didn't have to put anything on the table, then they are
    not going to figure it out.
        So I probably would come to different conclusions, but I
    appreciate the fact that you are there trying to work your way
    through very difficult stuff.
        Now, the Second District of New Mexico has more dirt in it
    than most districts, it is 70,000 square miles, and it is
    mostly rural. A lot of dirt and not much water, so people just
    struggle for a living. It is one of the poorest districts in
    the country. Fifty percent of our housing is manufactured
    housing. They call them row houses up here, but we don't get
    the wheels with them.
        So we have been discussing with Director Cordray over the
    past several years what CFPB is doing to hurt rural housing.
    Last time he was here he had explained how he had taken care of
    all of it, and I disagreed with him here in this format. And I
    wonder, my question for you is, are you watching what they are
    doing over there as it affects rural housing?
        Mr. Watt. Well, I have enough responsibility watching what
    I am doing at FHFA. I am sure you all are providing oversight
    to CFPB.
        Mr. Pearce. But surely you have conversations.
        Mr. Watt. Yes, we are in regular conversations with each
    other. But they have a set of responsibilities and we have a
    set of responsibilities. I can tell you what we are doing to
    try to help with rural housing and--
        Mr. Pearce. What did you do on qualified mortgages?
        Mr. Watt. If you look at the Duty to Serve requirements,
    which is a statutory requirement, we are aggressively moving
    into trying to level the playing field for the rural
    communities.
        Mr. Pearce. The qualified mortgages was very difficult, and
    then that brought along the balloon note, which the CFPB said
    all balloon notes are prejudicial. I can't find anybody in any
    of these Eastern States that are willing to come out and loan
    money for 30 years on a trailer house, frankly.
        Mr. Watt. Nor will we, unless you put the land under it, at
    this moment. Now, we are looking at the--
        Mr. Pearce. My point is that the prejudicial nature of the
    qualified mortgages and the balloon notes and the rural
    definitions they started with over there made it very
    difficult. And, frankly, I don't know that I see it changing
    much, even with your agency, that people in rural areas are
    still 52 percent less likely to be able to buy houses because
    of the impediments that are brought up by the system. And I
    know you don't technically run that, but you have to be over
    there sitting, saying, what about those people out in the rural
    areas?
        Mr. Watt. That is exactly what we are doing.
        Mr. Pearce. There are more rural areas than there are urban
    areas and we are limiting their ability to own houses.
        Mr. Watt. That is exactly what we are doing under Duty to
    Serve. I hope you will look carefully at what we are doing
    there.
        Mr. Pearce. I trust you will get to it. Thank you, sir. I
    appreciate it.
        I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentlelady from New York, Mrs.
    Maloney, Ranking Member of our Capital Markets Subcommittee.
        Mrs. Maloney. Thank you.
        And welcome back to Congress. Good to see you. We miss you.
        Mr. Watt. Thank you.
        Mrs. Maloney. In December 2014, you made the decision to
    restart the annual funding that Fannie and Freddie provide to
    the Housing Trust Fund and the Capital Magnet Fund, which had
    been suspended during the financial crisis. These two funds are
    critically important because they provide hundreds of millions
    of dollars for affordable housing every year. So I want to
    thank you for that again.
        And when you made this decision to restart the funding for
    these two funds, you stated that if Fannie or Freddie took a
    draw from Treasury, then the company that took a draw would not
    make its required annual payment to the Housing Trust Fund or
    Capital Magnet Fund.
        My question is, is this still your position? And is that
    one of the reasons why you believe Fannie and Freddie should be
    allowed to hold a modest capital buffer?
        Mr. Watt. It is still my position, but it has nothing to do
    with the buffer from my perspective. We need a buffer because
    any business to operate effectively needs to have some capital
    cushion for things that could go wrong or things that really,
    in our case, not even things that go wrong, there are just
    fluctuations that take place.
        So my discussions about the buffer have nothing to do with
    the Housing Trust Fund, from my perspective. The Housing Trust
    Fund would become relevant because if one would presume if we
    were in a position where we were making a draw, we may not be
    meeting the statutory standards, because the standard to
    contribute or suspend payments to the Housing Trust Fund, the
    standards are statutory. And if we found that it was going to
    increase the instability of the enterprises, that is where the
    intersection takes place.
        But that is a different discussion than the buffer
    discussion, in my mind. I haven't connected the two. Now, I
    know that publicly some people have tried to connect those
    things, and I understand what they are saying. But from my
    reasoning, the two are totally separate issues.
        Mrs. Maloney. And as you well know, Fannie and Freddie's
    multifamily housing divisions performed extremely well even
    during the crisis. And the multifamily businesses already do a
    lot of risk sharing with the private sector, and they share
    upwards of 15 percent of the risk with the private sector on
    each and every deal.
        So in your view do any changes need to be made to Fannie
    and Freddie's multifamily housing divisions in order to
    adequately protect taxpayers, or should we just try to spin
    their current multifamily businesses out in a housing finance
    reform bill?
        Mr. Watt. Well, I don't think I should address the question
    of whether they should or should not be spun out in a housing
    reform bill, that would be a decision for you all to make. But
    we are constantly looking at improving and solidifying the
    multifamily part of Fannie Mae and Freddie Mac, just like we
    are the single family part of Fannie Mae and Freddie Mac.
        They did do well during the crisis. There is risk sharing.
    Fannie Mae generally is in partnership with the private sector,
    and so there is generally 15, 20, 25 percent risk sharing
    there. And we are trying to figure out ways to risk share
    beyond that.
        On the Freddie Mac side, they make the loans or they take
    the loans in and they immediately securitize them as soon as
    they can do that. So they have the risk only for a very short
    period of time until they resecuritize.
        So in a sense they are risk sharing all of their risk off
    of their books in the multifamily space.
        Mrs. Maloney. My time has expired. Thank you.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The chair now recognizes the gentleman from Illinois, Mr.
    Hultgren.
        Mr. Hultgren. Thank you, Mr. Chairman.
        Thank you, Director.
        I am going to start my questions actually by yielding to my
    good friend and colleague, the Chairman of the Capital Markets
    Committee, for a very brief time, Chairman Huizenga.
        Mr. Huizenga. I appreciate it.
        And good news, Director Watt. I have saved you a couple of
    million dollars on the $56 million overrun. This is a photo of
    the bridges, plural, that are connecting the buildings. There
    is one on floor 11, one on floor 13. The $2 million additional
    cost for one on floor 9, you could cancel that bridge and save
    a couple of million bucks.
        Mr. Watt. You could cancel the bridge under the thing to
    the Capitol.
        Mr. Huizenga. If we can go to the next--
        Mr. Watt. But you would become a lot less efficient.
        Mr. Huizenga. I am sorry. My time. It is my time. I will be
    following up with questions.
        Chairman Hensarling. The time belongs to the gentleman from
    Michigan.
        Mr. Huizenga. If we can go to the next photo. Good news, I
    discovered what a wooden lunch hut is. Keep the wooden lunch
    hut. Cancel the damn spiral staircase. All right? I have built
    those and paid for people to build those. It is outrageous that
    you would have that kind of--you are making K Street law firms
    and lobby shops jealous. They want to move to 15th and L. They
    want to move off K Street if this is your headquarters.
        So with that, I yield back to the gentleman from Illinois.
    I appreciate it.
        Mr. Hultgren. Thank you. Reclaiming my time.
        Thanks, Director Watt. Good to have you here.
        Mr. Watt. Thank you for reclaiming your time.
        Mr. Hultgren. In previous hearings with the FHFA the
    committee has raised questions about the policy rationale
    behind the current level of conforming loan limits and why
    taxpayers should be subsidizing homes that approach and in many
    cases exceed half a million dollars or more.
        While previous responses to our questions were based on the
    lack of private capital and capacity in the private label
    securities market, it is certainly clear to me today and others
    that the appetite in prime jumbo markets would comfortably
    support additional capacity.
        Wouldn't lowering conforming loan limits serve the dual
    purpose of reducing taxpayer exposure and also help to
    reinvigorate the private market?
        Mr. Watt. Again, loan limits are statutory. We apply the
    statute as it is written, and we do it annually. If you all
    wanted to change the statute, we would apply it as rewritten.
    But as long as the statute is on the books, we are going to
    apply it the way it is written.
        Mr. Hultgren. I think the concern is providing funding for
    these half-million-dollar-plus mortgages.
        Let me move on. Recognizing that the QM patch has allowed
    creditworthy borrowers to obtain access to credit at
    competitive rates with the GSEs but not with other commercial
    lenders, and given that the QM patch will expire in 2021, what
    specific steps is the FHFA undertaking to cede market share in
    order to facilitate smooth transition from a GSE-dominated
    market to a market where private lenders can also provide
    access to credit at competitive terms?
        Mr. Watt. Just about everything we do is calculated to move
    in that direction.
        Mr. Hultgren. How is it coming?
        Mr. Watt. We are waiting on housing finance reform to
    really be able to move more aggressively. But we have taken
    about every step that we can take and continue to take
    additional steps to try to reinvigorate the private market. I
    am a very strong supporter of private market involvement in
    every aspect of business in this country.
        Mr. Hultgren. In your testimony you point out that FHFA and
    the GSEs are working on initiatives to help individuals achieve
    home ownership that may be creditworthy, but are unable to make
    a substantial downpayment.
        I agree that it can be difficult in many places across the
    country for individuals or families to be able to save a 20
    percent downpayment. But we also know a downpayment or
    actuarially equivalent offset, such as mortgage insurance, is
    essential to limiting moral hazard and minimizing risk in the
    financial system.
        Over the last couple of years the GSEs have allowed some
    lenders to use very low down payment programs, such as 1
    percent. You mentioned that the GSEs price their guarantee fees
    as if they are held to risk-based capital standards.
        Recognizing that this is only a theoretical exercise, why
    hasn't the capital model been made public? Is it possible for
    any of us to understand GSE pricing unless we have access to
    the capital model? Will you commit to releasing the capital
    model for each of the GSEs?
        Mr. Watt. Let me send you a response that we are sending to
    Senator Elizabeth Warren. You all seem to be in the same
    position on that. You will be surprised to find that, I am
    sure. But we are developing a response to her question, which
    was almost identical to yours.
        Mr. Hultgren. Well, yes, anything that would be responsive
    to my concerns and I think others' concerns of what we see as
    some potential overreach.
        I would also argue that this is a dangerous road where you
    look at the name of affordability and not only increase risk of
    the loans being backed by the GSEs but also really reducing
    taxpayer protection on those very same loans by not requiring
    mortgage insurance.
        My time has expired. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Connecticut,
    Mr. Himes.
        Mr. Himes. Thank you, Mr. Chairman.
        And welcome, Mr. Director. It is good to see you back.
        Mr. Watt. Thank you.
        Mr. Himes. In the spirit of my friend from Michigan, I have
    a long list of interior decorating tips, too, but I am going to
    run those by my staff, or at least my wife, before I submit
    them to you.
        Instead, I want to talk with you a little bit about
    something that we have gone back and forth on a little bit,
    which is alternative credit scoring models. You will recall
    that about 4 years ago Representatives Maloney, Royce, Bachus,
    and I urged you to take action, I will quote the letter, ``to
    ensure that Fannie Mae and Freddie Mac revise their seller
    servicer guidelines to foster competition among credit score
    providers.''
        As you know, competitive markets are important because they
    help ensure innovation and guarantee that the providers will
    provide the best product. Today lenders are still required to
    use certain credit scoring models despite the fact that more
    inclusive and predictive models exist.
        Now, I know in the last 3 years the scorecards for the GSEs
    have instructed Fannie and Freddie to, quote, ``assess the
    feasibility of alternative credit score models.'' On August 1,
    you announced that any credit score model change would not go
    into effect before 2019.
        It seems like a long time. My worry is, of course, that
    millions of creditworthy potential mortgage applicants could be
    denied an opportunity for home ownership because of the
    sticking to one model.
        So my question, Mr. Director, is would FHFA under your
    leadership be willing to authorize a pilot program utilizing
    competing credit score models that claim to be more predictive
    and more inclusive than currently used models? And I wonder
    whether you might be willing to initiate such a pilot program
    on a schedule a little faster than your projection of 2019?
        Mr. Watt. I think in this space it would be very difficult
    to do a pilot. We rely a lot on pilots to move carefully and
    study issues. But in this space, it would be very difficult
    because anything we put in that pilot would have to be held out
    of the risk transfer program.
        And I think we are moving in the direction that--this is
    not an access question. Once we started delving into it, we ran
    into a host of other concerns that we had about competition in
    this space. How do you provide--how do you ensure that the
    competition is just not scoring more people as opposed to
    having competition to assess the ability of people to pay? How
    do you ensure in the long run that one of the credit scoring
    companies which is owned by the credit repositories doesn't
    have an advantage over the credit scoring company that is not
    owned by the credit repositories?
        This got to be a much, much more complex analysis than we
    ever thought it would be. I started at the same place you
    started, saying, how could anybody question competition?
    Competition is always good. I think we always assume that. But
    once we got into trying to analyze the benefits and how to
    assure real competition in this space, it got to be more and
    more and more complex.
        So what we are doing now is we are getting ready to go back
    out and ask a series of questions in a request for input to get
    additional information about some of the concerns that have
    come up as a result of this initial assessment.
        I don't think it is going to adversely impact access to
    credit because both Fannie and Freddie are using a lot of
    information other than credit scores to increase access to
    credit anyway. They have probably as much information about
    people's ability to pay as the two credit scoring companies'
    competitors have. And we just didn't find that there was
    significant difference in these credit scores from an access
    perspective.
        I am not trying to take your time, I am just telling you,
    this turned out to be a much, much more complex issue than any
    issue that I have dealt with since I have been over there.
        Mr. Himes. Thank you. I yield back.
        Chairman Hensarling. The time of the gentlemen has expired.
        The chair wishes to alert members that in approximately 10
    minutes the committee will recess for 10 minutes.
        The chair now recognizes the gentleman from California, Mr.
    Royce, chairman of the Foreign Affairs Committee.
        Mr. Royce. Thank you very much, Mr. Chairman.
        Director Watt, nice to have you back. It must feel like a
    homecoming of sorts.
        Mr. Watt. An adversarial homecoming.
        Mr. Royce. Oh, no, I am trying to reach common ground here
    on something.
        Mr. Watt. I am not the prodigal son coming home,
    unfortunately.
        Mr. Royce. Well, I appreciated the comments in your
    testimony that the FHFA is working with the GSEs to, in your
    words, further refine and improve the risk-sharing programs in
    ways that reduce taxpayer risk, make economic sense, and help
    attract a diversified and broad investor base. Now, this is
    something we have talked about in the past.
        But here is the conundrum. It has been noted that the GSEs
    have included more than 1.6 trillion in mortgage loans in
    expanded risk sharing since 2013, but that means only 54.2
    billion of risk has actually been transferred.
        Now, that is 1.3 percent on the more than 4 trillion in
    mortgages purchased by the GSE. So, clearly, more could be
    done, and that is where I want to take the conversation.
        The long-term goal here should not be to preserve the GSEs'
    business model by simply allowing them to develop a new
    business activity. The objective for us should be the transfer
    of credit risk in the most effective, efficient, transparent,
    and reliable means.
        Mr. Watt. And cost-effective, I hope.
        Mr. Royce. And cost-effective means.
        And we are setting the stage for future comprehensive
    reform here. And, as you know, Congresswoman Gwen Moore and I
    introduced H.R. 3556, this is the Taxpayer Protections and
    Market Access for Mortgage Finance Act of 2017. This is a
    bipartisan bill that directs the FHFA director to establish
    guidelines requiring that Fannie Mae and Freddie Mac engage in
    significant increasing and varied credit risk transfer.
        I wanted to ask you a few questions about your comments in
    support of expanding the diverse investor base that will
    increase the likelihood of having a stable CRT market through
    different housing and economic cycles, something our
    legislation would support.
        So we have heard, as you have explained these points,
    including we have heard from the GSEs, that they have commented
    that back-end transactions decrease counterparty risk exposure,
    but they are also--you add this caveat--volatile, they can be
    volatile and not available in all market cycles.
        You mentioned in response to Mr. Luetkemeyer that you were
    doing more to encourage front-end transfer structures, but,
    clearly, if you have only got 4 or 5 percent at the end of the
    day, that is not enough if the goal here is balance through all
    cycles. If that is where we are headed, I think we need to look
    at both ends of the equation.
        Do you have a target in terms of where we should end up and
    how quickly? And shouldn't this be a priority, given the mere
    1.3 percent?
        Mr. Watt. My target is as much as we can do meeting the
    criteria that we have been very transparent about setting. And
    one of the concerns that I have is, if you require a specific
    number, we will not necessarily be able to meet that cost-
    effective criteria, which is why--
        Mr. Royce. Let me followup with one other question. In
    terms of back-end, you also reference the work FHFA is doing to
    improve CAS and STACR, including a proposal for future
    offerings to be issued as notes that qualify as real estate
    mortgage investment conduits. And you said, ``We expect that
    the proposed structure would satisfy asset and income tests for
    real estate investment trust investments.''
        Now, I am hearing reports that this is well past the point
    of the proposal stage. The rollout now is planned, I guess,
    January 1, and that is not that far off.
        I think we need to get past expectations and ascertain
    whether the structure will or will not qualify for real estate
    investment trust (REIT) investors. Could you share details
    about the rollout of the technical aspects of this proposal to
    the REIT community and how documents and--maybe you can just
    lay that out for us, the details on some of that.
        Mr. Watt. Well, I can tell you that we have been
    transparently meeting with people to try to make this work. And
    some of the concerns are legal concerns and may require
    statutory changes. We think we have been able to work around
    some of those, but I don't think we have indicated that we are
    planning to implement this January 1 of 2018. We are trying to
    get there as quickly as we possibly can, though.
        Mr. Royce. Thank you, Director Watt.
        Thank you, Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Minnesota, Mr.
    Ellison.
        Mr. Ellison. Before I start, Mr. Chairman, I do have a
    parliamentary inquiry for you.
        Chairman Hensarling. The gentleman will state his inquiry.
        Mr. Ellison. My inquiry is simply this, Mr. Chairman.
    Several weeks ago, back on September 14, 11 members of this
    committee sent you a letter asking for a hearing to explore
    what financial institutions can do to help customers avoid
    financial devastation when there is a disaster. Director Watt
    already mentioned that there is a 90-day period, to be extended
    up to a year, but we still think that there should be more
    focus given the disasters our country has seen in the last
    several days.
        So my inquiry is, can we have a hearing on how financial
    institutions, insurance and realty firms, can best respond to
    disasters?
        Chairman Hensarling. The gentleman has not stated a proper
    parliamentary inquiry, but I would be glad to continue to work
    with the gentleman on his request.
        Mr. Ellison. Thank you, sir.
        Mr. Watt, thank you. Welcome back to the committee. I want
    to join my colleagues in remembering fondly the tremendous
    contributions you made on this committee, and thank you for
    your service as director.
        My first question is, if nondepository community
    development financial institutions (CDFIs) could pledge their
    loans to a Federal Home Loan Bank, could they make more loans
    and create more jobs and expand more businesses?
        In other words, if we expanded the loans that they could
    make, could that make a difference in terms of economic
    development in, particularly, underserved communities?
        Mr. Watt. Yes.
        Mr. Ellison. Could you talk a little bit about what
    possibilities that might include?
        Mr. Watt. Well, CDFIs, obviously, first have to go through
    qualification with Treasury to get designation to even qualify
    to join the Federal Home Loan Banks. And then CDFIs, after they
    join a Federal Home Loan Bank, have to meet collateral criteria
    that are consistent with other members. And that has been the
    biggest impediment, because a lot of the CDFIs don't have the
    robust collateral.
        So we have been trying to work with them and expand their
    collateral base, work with some of them to try to get them to
    have investors so that they have more capital.
        But our responsibility is to protect the Federal Home Loan
    Banks, and we have a statutory responsibility to do that. So
    whatever we do in this space, we have to do it very carefully
    and with that in mind.
        Mr. Ellison. I wonder what your thoughts are about the
    findings of the 2015 Government Accountability Office (GAO)
    report that collateral requirements discourage some community
    development financial institutions from seeking membership,
    that the inability of CDFIs to pledge small business and
    community development collateral has limited the ability of
    CDFIs to join the Federal Home Loan Bank and invest in economic
    development projects like healthcare facilities, community
    boathouses, shopping centers.
        Do you have any thoughts on the GAO report and its
    findings?
        Mr. Watt. I am not familiar with the GAO report, but that
    certainly is consistent with one of the impediments that is
    holding them back, because we normally look more to housing
    collateral than to other kinds of collateral. The GAO finding
    does not surprise me.
        Mr. Ellison. I would like to just mention that I have a
    bill, which is bipartisan in scope, Mr. Stivers, Mr. Pittenger,
    other Members on both sides of the aisle, we have come together
    for a bill we call the Small Business and Community Investment
    Expansion Act. It would allow nondepository CFDIs to pledge
    nonhousing loans to a Federal Home Loan Bank. I would encourage
    Members to join the bill. I think it would be a great
    bipartisan way to get more loans out there to improve community
    and strengthen the community economic activity.
        We know that positive economic activity is not just because
    of private sector activity. Local, state, and Federal
    Governments also have important roles to play. So I think we
    should use resources we have, like the Federal Home Loan Bank
    and community development financial institutions to help
    businesses succeed and thrive in their communities.
        So, Mr. Watt, again, thanks for the great work you are
    doing, and we look forward to working with you in the future.
        Mr. Watt. I will tell you the same thing I have told other
    Members. If you all get the bill passed, we will apply it.
        Mr. Ellison. I hear you, sir.
        I yield back.
        Chairman Hensarling. The gentleman yields back.
        The committee stands in recess for approximately 10
    minutes.
        [Recess.]
        Mr. Huizenga [presiding]. The committee will come to order.
        And with that, the chair will recognize the gentleman from
    Pennsylvania for 5 minutes, Mr. Rothfus.
        Mr. Rothfus. Thank you, Mr. Chairman.
        Good afternoon, Director Watt. I want to followup a little
    bit on some of the issues we have been talking about this
    morning. As of August of this year, the GSEs either owned or
    guaranteed 53.2 percent of all new residential mortgage loans.
    I would also point out that the private label securitization
    market for residential mortgages comprises only one one-
    hundredth percent of the overall U.S. market.
        Can you give some insights as to why you think the private
    sector participation in these markets has been so limited?
        Mr. Watt. Well, I think there are a number of factors.
    Capital standards is a factor. The fact that a number of them
    got burned during the meltdown was a factor. There was
    litigation that resulted after the meltdown.
        Mr. Rothfus. My colleague Congressman Duffy, who is not
    here right now, had a conversation with you about the
    exceptions with respect to QM as being an example. Are there
    other regulatory examples that would limit the participation in
    the private--
        Mr. Watt. Can I say a word about the QM first, just to be
    clear?
        Mr. Rothfus. Yes.
        Mr. Watt. The enterprises comply with most of the QM
    standards. They require all loans that they back to be fully
    amortizing.
        Mr. Rothfus. If we talk about the debt-to-income ratio,
    they don't have to comply with that.
        Mr. Watt. The debt-to-income ratio is the only one that we
    are not required--that we don't comply with, and that is
    because of the reasons that I explained earlier. Additionally--
        Mr. Rothfus. You made the point during your conversation
    with Congressman Duffy about the default rates being comparable
    between QM and the GSE non-QM loans, but really, I might
    suggest that is given the relatively stable market that we have
    had over the last several years. And also, you take a look at
    Fed policy, low interest rates, and what has been happening
    there. But should we expect the same to be true if interest
    rates start to go up?
        Mr. Watt. Well, as far as their mortgage payments are
    concerned, since we don't back loans that have adjustable rates
    to them, the mortgage part of the obligations would remain the
    same in adverse times and in good times. So now we might start
    looking at new loans in a different fashion as a result.
        Mr. Rothfus. Is that necessarily the case? Because if
    interest rates go up and there is a slowdown in the economy, if
    people are struggling with a job they have a mortgage, maybe
    they got their mortgage with a 3 percent downpayment, and these
    are--
        Mr. Watt. I have tried to explain we don't control every
    aspect of life. We just try to control what we can control in
    the mortgage space. And while we couldn't solve all the
    electrical problems associated with the hurricanes, we did our
    part in the mortgage space. In the same way, the parallel to
    what you are asking is, we can only do what we do in the
    mortgage space. We can't control every other aspect of life. We
    can't control--
        Mr. Rothfus. But that is true with the private sector. That
    is true with the GSEs.
        Mr. Watt. Well, the private sector didn't do very well in
    this space during the meltdown either.
        Mr. Rothfus. Well, we have been talking about the unlevel
    playing field between what the GSEs have been doing and the
    private sector and how that has tilted the playing field toward
    the GSEs.
        In your speech earlier this year, you said, between 2015
    and June 2017, the Enterprises have purchased over 130,000
    mortgages with a 3 percent downpayment, and the program has
    continued to grow.
        Now, that would amount to over $23 billion in new loans
    with a very low downpayment. Earlier, you had said that only 3
    percent of your portfolio are with these 3 percent downpayment
    mortgages. Would that apply--
        Mr. Watt. That is the current figure.
        Mr. Rothfus. So would that apply--looking at that period
    between 2015 and June 2017, when you purchased over 130,000
    mortgages, what percentage of those 130,000 mortgages might
    only have a 3 percent downpayment? You talked--
        Mr. Watt. I thought you were talking about the--the
    question was about the 130,000 mortgages.
        Mr. Rothfus. Well, I am talking about--yes. You testified
    earlier that 3 percent of your portfolio has those 3 percent
    downpayment mortgages in them. My question is, of the 130,000
    mortgages that were purchased between 2015 and June 2017, what
    percentage of those have a 3 percent? It would be a subset of
    your entire portfolio.
        Mr. Watt. I think we are like ships passing in the night
    here. The 130,000--
        Mr. Rothfus. My time has expired, but we will followup with
    you.
        Mr. Huizenga. The gentleman's time has expired.
        Mr. Rothfus. I am going to followup with you on some
    questions on that and looking for some more detail on that.
        Mr. Huizenga. The gentleman's time has expired.
        Mr. Rothfus. Thank you.
        Mr. Huizenga. With that, the chair recognizes the
    gentlelady from Ohio, Mrs. Beatty, for 5 minutes.
        Mrs. Beatty. Thank you, Mr. Chairman. Thank you to our
    ranking member. But more importantly today, thank you to our
    witness, Director Mel Watt, for being here.
        To save my time, let me just echo what all my other
    colleagues have said positively about Director Watt and his
    work. I am, in part, here on this committee because of his
    mentoring and his encouragement. And, Mel, I still rise.
        So, with that, I have two questions I will try to quickly
    get through. The first question, because we have had a lot of
    questions about housing and finance, quite appropriately, but
    we have not had a lot of questions about people. And when I
    think about your work, it can't be absent of the people, and
    especially what we are witnessing now, whether it is in the
    Virgin Islands, whether it is in Puerto Rico, which I just
    returned from a couple of weeks ago. The devastation is beyond
    the bricks and mortar.
        So, with that, I think it is so important, as we look at
    diversity and inclusion, to state more for the record, but to
    commend you on your people services. Unlike many of the other
    Federal directors who are only held to section 342 of the Dodd-
    Frank on the Office of Minority and Women Inclusion (OMWI), you
    also have, under the Housing and Economic Recovery Act, 1116,
    diversity issues, and you have exceeded them. So, for the
    record, I want to applaud you and thank you for your leadership
    and your commitment.
        And the point I am trying to make is beyond just saying
    thank you to you. When you put people in the room who look like
    you and I, I believe, like the Rooney rule, like the Beatty
    rule, it makes a difference. And maybe we would have had
    quicker reactions in the Virgin Islands and in Puerto Rico if
    there were more people who were women and minorities to
    understand it.
        So I wanted to enter that in the record, and take this time
    to say thank you for doing what every director should do.
        Now, Ranking Member and Mr. Chairman, and to you, Mr. Watt,
    I have a question on the other side. As we look at your work, I
    want to ask you, as we know it, the mission of the FHFA is to
    ensure that Freddie and Fannie operate in a safe and sound
    manner, to serve as a reliable source of liquidity and funding
    for the housing finance and community investment. Through that
    Housing and Economic Recovery Act of 2008, it grants you, the
    director, broad authority to assure that this mission is
    carried out.
        There has been a lot of discussion about whether you allow
    Fannie and Freddie to keep some of the capital as a buffer to
    shield against the future draw on the U.S. Treasury, with their
    capital reserves set to be depleted by the end of the year. So
    I guess my question is, do you believe you have the authority
    to make this change?
        Mr. Watt. Yes, I believe we have the authority to make it.
    But at the same time, we are under a contractual arrangement
    with the Department of Treasury, and my preference, strong
    preference would be to work through this in coordination with
    the Secretary of Treasury. And we have been having some
    constructive discussions recently that hopefully will lead us
    to that conclusion.
        Mrs. Beatty. OK. And for the remainder of my time, Director
    Watt, if there is anything else you would like to say, I will
    allow my time to do that. And before I do that, let me just say
    again, thank you for your work and also for your team that is
    behind you. So often we don't thank people for bringing people
    with them who also do a good job. And I want to say to them
    that I am making a commitment that we talk about more than the
    staircases of bricks and mortar, but the staircases of saving
    lives and spending more time on the staircases of getting
    people out of poverty, flood insurance, and bringing relief to
    those in the territories.
        Mr. Watt. Well, of course, you mentioned staircases, so
    this gives me an opportunity to talk about the staircases. That
    has to do with the efficiency of operation. Just like the
    tunnel underground makes you all more efficient in going to and
    from, imagine how many times during the course of the day
    Fannie and Freddie employees have to go and interact with each
    other. If they had to go all the way down to the lobby and then
    go across and take an elevator all the way back up, imagine how
    inefficient that would be.
        You know, we don't make any decisions that don't have
    thoughtful impacts, and so I just--I am glad you gave me the
    opportunity to get that in the record, because the chair now--
        Mr. Huizenga. The gentlelady's time has expired.
        Mrs. Beatty. I yield back.
        Mr. Huizenga. With that, the chair recognizes the
    gentlelady from Utah, Mrs. Love, for 5 minutes.
        Mrs. Love. Hello, Director Watt. How are you doing?
        Mr. Watt. Hello.
        Mrs. Love. It is nice to see you again. The last time you
    and I were here at the committee about 2-1/2 years ago, you and
    I talked a little bit about the negative consequences of
    putting people in homes that they could not afford. As a former
    mayor and a city council member, I have witnessed the downturn,
    the housing downturn on a municipal level. I know that
    firsthand--I know firsthand that the last thing that vulnerable
    Americans need is access to credit so that they can buy homes
    that they can't afford.
        It is something that I have actually seen firsthand when
    you see a family that has really worked hard to get into a
    home, and then all of a sudden they are having to pack up all
    of their things. You can't imagine how devastating it is. Their
    children are leaving a school that they know. They are leaving
    their friends. They are leaving a neighborhood. The communities
    are hurting.
        I think it is incredibly important that we help people be
    able to have access to the American dream, but what do we do?
    What happens when that family isn't able to keep that home that
    they afford? I think that that is incredibly devastating.
        Specifically, we talked about, at your last appearance
    here, the issue of ultra low 3 percent downpayments. This
    summer, I am going to note that speech, the National
    Association of Real Estate Brokers, where you said, quote:
    ``Between 2015 and 2017, the enterprises have purchased over
    130,000 in mortgages with 3 percent downpayment, and that
    program is continuing to grow.''
        Given the amount, given the thought that the average amount
    of these loans are about $180,000, this represents $23.4
    billion in new loans, with a 3 percent downpayment. So I just
    wanted to get your thoughts on some concerns that I have and
    wanted to get some of your ideas. First of all is the risk to
    individual families that may get in over their head when they
    get into a home, and what are your thoughts about that?
        Mr. Watt. Well, if you look statistically, and this is
    historically going back, there is not a direct correlation
    between downpayment and people's payment of mortgages. And, in
    fact, disproportionately, people paid their mortgages with no
    equity in their homes during the meltdown. So that correlation
    that we--
        Mrs. Love. Well, that was just one of the things that we
    talked about, but you would think that the debt-to-income ratio
    would actually affect that.
        Mr. Watt. It would, you would think, but it has not up to
    this point, and we are monitoring it carefully. Now, the
    question was asked could that change during adverse economic
    times. It could change during adverse economic times--
        Mrs. Love. So what do you think--
        Mr. Watt --and we would be monitoring that to make sure
    that--and that is why we put into place modification programs
    that would allow those people to modify those loans in that
    space.
        Mrs. Love. Let me ask you a question, because I am truly
    trying to figure this out. I have seen a lot of these families.
    I am a mayor. I was there when the housing market went under.
    It was devastating, not just for those families, but for
    communities all around. If you understood the Utah culture,
    your neighborhood, those are the people that you go to church
    with, those are the people that--you are ripping families--
    families are being ripped away from that. And also, you are
    left with a home that lowers the values of so many other homes.
        So something is happening. Something is happening there,
    and so I am trying to figure out what has happened. What
    happens with--because there are families that have gotten into
    homes that they could not truly afford.
        Mr. Watt. You are absolutely right. And you weren't on the
    committee at that time, but me and one other member from North
    Carolina recognized that three terms of Congress before the
    meltdown, which is how we got to a qualified mortgage standard,
    an ability to repay rule in the first place. We wrote it into
    the statute for that reason. Now--
        Mrs. Love. There is--I have 20 seconds. I have 20 seconds.
    There was one more thing I wanted to get into. You can roll it
    into your answer.
        The second is, the policies that we have right now would
    indicate that we have learned nothing from the last housing
    crisis, especially if we are sticking with our standards. Are
    we setting up the Nation for the next housing bubble that I
    think is foreseeable?
        Mr. Watt. We are constantly monitoring to try to figure out
    and to make sure that that does not happen also. And I think
    the way to do that is to make responsible loans when you make
    them, not irresponsible loans. You can't make an irresponsible
    loan at the time that it is made and expect that it is going
    to--
        Mrs. Love. My time has expired. Thank you so much for
    your--
        Mr. Huizenga. The gentlelady's time has expired.
        Mrs. Love. Thank you.
        Mr. Huizenga. With that, the chair recognizes the
    gentlelady from Wisconsin, Monetary Policy and Trade
    Subcommittee Ranking Member Ms. Moore, for 5 minutes.
        Ms. Moore. And thank you so much, Mr. Chairman.
        And I do want to thank our witness, Director Watt, for
    appearing and really enduring a lot of our heartfelt questions.
        Director Watt, I do recall your service on this committee,
    and I can tell you that the IQ of this committee has gone down
    dramatically since you left. I often told you nobody would be
    bothered with you if you weren't so brilliant, and we are
    seeing that here today.
        I do remember you being here and, really, when we were not
    in the majority trying to curb predatory lending. So that the
    case that Mrs. Love really raises, which is really important,
    when people didn't have skin in the game, the credit rating
    agencies, that you raised this before the crisis. And so when
    we finally got into the majority and did Dodd-Frank, you led
    this committee on the issue of putting skin in the game,
    improving mortgage writing standards. And the FHFA, which you
    weren't leading then, requiring increased counterparty capital
    requirements. So I just want to join in with my colleagues in
    thanking you for all your hard work on that.
        Speaking of increasing counterparty capital requirements, I
    think Mr. Royce indicated earlier that I was a cosponsor of his
    legislation, which would provide more front-end risk sharing to
    take the risks off the books of the GSEs. And I heard you very
    clearly in that exchange say that you are working on this, that
    if we give you some exact number, you may not be able to meet
    those requirements. But then I just want to share with you that
    I trust your judgment and, like you said, you are a very
    precise dude, and we appreciate that. So I look forward to
    diversifying the risk sharing, and I do want to look at that
    more front-end piece.
        I also want to thank you--and this is my time, so I don't
    have to let you talk, because I don't want my behind whipped up
    here with your brilliance. I want to thank you for supporting
    me and putting up with all the questions that I raised with you
    about grandfathering the captive insurance companies into the
    Federal Home Loan Banking system. I have a crisis in my
    district. We have the Chicago Federal Home Loan Bank and, of
    course, Milwaukee belongs to that. And we appreciate the fact
    that you are--this is a tiny nexus. It does have a housing
    nexus, and I appreciate you for recognizing that.
        In all of the discussions about winding down the GSEs and
    proposals that are being brought forward, Director Watt, I am
    concerned about multifamily. There doesn't seem to be a really
    vigorous effort to make sure that the supply of multifamily
    stays in the process. Can you talk about the different models
    that are for multifamily and the differences in how you ensure
    that both models are meeting FHFA's expectations of safety and
    soundness, as well as expanding the access to affordable
    housing?
        Mr. Watt. Happy to do that. Most people lead their
    discussions about the enterprises talking about single family
    and home ownership. Actually, Fannie and Freddie are agnostic
    in their statutory responsibilities about home ownership versus
    rental. Our objective is to provide liquidity for the market,
    to provide housing, both ownership and rental.
        And so we pay a lot of attention to the multifamily side.
    And since the meltdown, more and more people have moved to the
    multifamily side, which has increased the demand. And the
    supply is not there to meet that demand, so rental prices have
    gone up immensely, and that is especially true in metropolitan
    areas.
        So we have done a lot of work to try to figure out how to
    ensure that affordable multifamily rental is there, and we will
    continue to do that, and I will be happy to explore that with
    you more outside the hearing.
        Ms. Moore. Thank you. Thank you.
        Chairman Hensarling [presiding]. The time of the gentlelady
    has expired.
        The chair now recognizes the gentleman from North Carolina,
    Mr. Pittenger.
        Mr. Pittenger. Thank you, Mr. Chairman, for putting on this
    important hearing. And reforming our housing finance system is
    a major priority for all of us. I look forward to helping our
    committee achieve this goal, and I would like to thank my
    fellow North Carolinian, Director Watt, as he testifies today.
        Mr. Watt. You can really welcome me home.
        Mr. Pittenger. Yes, sir. Director Watt, the time for
    housing reform truly is now. All together, the GSEs own or
    guarantee more than half of the $10 trillion U.S. mortgage
    market. These conservatorships continue to put U.S. taxpayers
    at risk. It is important that Congress develop a plan for
    shrinking the GSEs' oversize role in the housing market at this
    time. Without a reduction in the role of the GSEs, private
    enterprise will continue to have difficulty competing to fill
    the needs of the market, and the threat of future crisis and
    taxpayer-funded bailouts will remain.
        Director Watt, what can you tell me today of the committee
    and this Agency's--and tell the committee of the Agency's
    progress on scaling back the GSEs' role in the marketplace, as
    well as what actions do you recommend that Congress could take
    to encourage more private investment back in the flow of our
    market?
        Mr. Watt. Well, I can tell you that, as I have said before,
    there is nothing in our statute that gives us the authority or
    responsibility to do anything other than provide liquidity in
    the market. So I am hopeful that housing reform will provide
    more opportunities for that to be done in the private sector. I
    support that fully.
        But in the meantime, I have to operate Fannie and Freddie
    in the here and now, in compliance with their existing
    statutory requirements. And there is nothing there that says
    that I am supposed to go and wind them down. In fact, it says I
    am supposed to provide liquidity and ensure liquidity, and I
    don't know how you could do that by winding them down unless
    the private sector stepped into that space.
        Mr. Pittenger. But you would agree, Director Watt, that the
    private sector is being crowded out of the GSE market today?
        Mr. Watt. I am not sure that I would characterize it as
    crowding out. There are reasons that the private sector has not
    been involved, but I am not sure that--
        Mr. Pittenger. Then how would you generate a greater
    engagement by the private sector?
        Mr. Watt. Well, I think that is--
        Mr. Pittenger. If you are--
        Mr. Watt --what housing finance reform should be all about.
    And I keep waiting on--
        Mr. Pittenger. What are the impediments then? It seems to
    me that we have established impediments with the GSEs that
    don't allow the private market to enter there or else they
    would be there today.
        Mr. Watt. Some of the things that have served important
    positive purposes also reduced the involvement of the private
    sector in housing. Capital standards that are associated with
    keeping mortgages on lenders' books. Skin in the game. And all
    of those things are good, but they were put in place to solve a
    problem, and they are having some unintended consequences.
        Mr. Pittenger. Let me go to the home front, if I could,
    please. In Fayetteville, North Carolina, that is in my
    district, the percentage of our families--
        Mr. Watt. Is it?
        Mr. Pittenger. Yes, it is. The percentage of our families
    earning enough income to qualify for a mortgage loan has been
    decreasing annually, most recently down now to 5.5 percent in
    2016. This means that an increasing number of hardworking North
    Carolina families are not able to afford these mortgages.
        In your opinion, what could be done at this time to
    accomplish building a better housing finance model so that more
    Americans, including North Carolinians in my district, could
    fulfill their dream of owning a home?
        Mr. Watt. Again, that is about housing finance reform. And,
    despite the various ways that members of this committee and
    members of the Senate Banking Committee have asked me what my
    ideas on housing finance reform, my response has always been I
    left that responsibility behind when I left this body.
        Mr. Pittenger. But, sir, you are in an important
    responsibility. You can't abdicate the job and say that you
    don't have a response to that. Each of us in a position that
    you are in needs to be accountable to that.
        Mr. Watt. I have a responsibility as FHFA, and my personal
    views about how to do that I had to leave behind when I took on
    a--
        Mr. Pittenger. My time has expired.
        Mr. Watt --different responsibility is the point I am
    making.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Washington, Mr.
    Heck.
        Mr. Heck. Thank you, Mr. Chairman.
        Director, thank you for being here. As you well know, there
    is an ongoing debate about who should be allowed to join the
    Federal Home Loan Banks. My view is that we ought to be
    agnostic on that point. As long as the new members are required
    to have a strong, demonstrably strong housing mission and as
    long as the Home Loan Banks can take the appropriate steps to
    secure their safety and soundness, we should allow any
    institution that contributes to housing finance liquidity to
    join the FHLB system. What is your perspective?
        Mr. Watt. Unfortunately, Congressman, that is not the
    statutory requirement.
        Mr. Heck. Right. I was asking your perspective on the
    question I asserted.
        Mr. Watt. Well, I think the point you make is a good point.
    And if the statute were revised to make that the nexus that was
    required, we obviously would enforce it that way, but that is
    not the way--
        Mr. Heck. Is that the same thing as you would support
    legislation that would do that, especially in light of the fact
    that in your opening testimony you indicated that your purpose
    was to ensure that the Federal Home Loan Banks operate in a
    safe and sound manner and that they support liquidity in the
    housing finance market? Would you support that legislation, of
    course, depending on its wording?
        Mr. Watt. Well, I have tried to stay out of supporting or
    not supporting legislation.
        Mr. Heck. OK.
        Mr. Watt. I support the concept of expanding access to
    affordable housing for both rental and ownership for the
    American people.
        Mr. Heck. OK. Moving on.
        Mr. Watt. All right.
        Mr. Heck. You also indicate in your opening testimony that,
    and I quote: ``Conservatorships are not sustainable and they
    need to end as soon as Congress can chart the way forward.''
    Why?
        Mr. Watt. Yes.
        Mr. Heck. Why?
        Mr. Watt. Why?
        Mr. Heck. Why aren't they sustainable? The definition of
    that is they cannot continue. What do we see that will cause
    them to implode or stop? It is not my preference that they
    continue, but what you assert here is they are not sustainable.
    Why aren't they sustainable?
        Mr. Watt. They are not sustainable, and I can probably give
    you a million reasons, but I can tell you that the biggest
    frustration I have is that everything we do as conservator is
    subject to second-guessing from multiple sources. You know, I
    got the IG telling me how to build staircases or not build
    staircases. I got Congress telling me what to do and not to do.
        So from an operational perspective, this gets more and more
    complicated every single day for the conservator to be
    operating in this space. Regular corporations that are not in
    conservatorship don't get nitpicked to death. Now you call them
    up here when they do something that is egregious, but they
    don't have the kind of scrutiny that is associated with what we
    do as conservator. They don't get--
        Mr. Heck. So we have been at this--as you acknowledge, we
    have been at this 10 years. And I am still trying to sort out,
    even based on your answers, sir, what is not sustainable. Why
    is it that we can't be sitting here 10 years from now, and I
    would acknowledge, unfortunately, having this same
    conversation? But that is not what unsustainable means. What I
    hear you saying, what I am interpreting is it is not desirable.
        Mr. Watt. It is not desirable. Maybe unsustainable is the
    wrong word. I don't know. But I don't think you would want
    either Republicans or Democrats, I don't think either one would
    want 15, 20 percent of their economy in conservatorship for
    years and years. I just don't think that is a sustainable or
    desirable place to be in a capitalistic democratic society.
    And, now, you have made me come out with some other views
    there, but I am just telling you I don't think you want to keep
    this much of the economy in conservatorship for a prolonged,
    extended period of time.
        Mr. Heck. So I agree with that. I think there are a lot of
    reasons to end conservatorship, including creating a system
    that perhaps has more potential for innovation.
        I will point out, however, that I find it inconsistent that
    you have implied a policy, desirable goal in the latter
    instance, but when I ask you about the Federal Home Loan Bank,
    you have refused to say whether or not it would be desirable to
    having additional institutions who contribute to--
        Mr. Watt. No, I didn't equivocate about the desirability of
    providing more liquidity in the market. That I have no
    equivocation about, but it has to be responsible liquidity, and
    I am committed to that.
        Mr. Heck. Thank you, sir.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Arkansas, Mr.
    Hill.
        Mr. Hill. I thank the chairman.
        I thank the director for being here today. I appreciate
    your forbearance and patience.
        I am concerned, and I think a lot of people in the real
    estate industry are concerned, about anything that would delay
    this issue of reforming our secondary market operation and
    reforming the GSEs. And yet you say you have had some
    constructive conversations about rebuilding capital. Wouldn't
    that slow down our effort to have wholesale reform and fix this
    broken problem that Mr. Heck just talked about?
        Mr. Watt. You have misstated what I said. I said I had
    constructive conversations about a capital buffer. That is all
    I have ever talked about. I have never talked about rebuilding
    capital, recap and release, all of the things--
        Mr. Hill. What is the difference between those two things,
    rebuilding capital or a capital buffer?
        Mr. Watt. If you have been in business, you will have--
        Mr. Hill. I have for 35 years, so that is why I am curious.
        Mr. Watt. Well, then you know that you cannot operate on a
    day-to-day basis without--
        Mr. Hill. We have been operating that way for 10 years,
    because we have the full faith and credit of the United States
    and over $200 billion standing behind Fannie Mae and Freddie
    Mac right now. Isn't that correct?
        Mr. Watt. I do not deem that as operating capital, and I
    never want to draw on it again.
        Mr. Hill. But under the conservatorship, that is the state
    of affairs, right?
        Mr. Watt. It is. We do have the Federal Government backing,
    to the extent that they have contractually agreed to do that.
        Mr. Hill. And so because of that--
        Mr. Watt. But it is my responsibility not to draw on that
    if I can avoid it. And if I had a capital buffer, I could avoid
    it, I think. That is all I have said.
        Mr. Hill. Right.
        Mr. Watt. It is not about building capital, be clear on
    that.
        Mr. Hill. In 2011, the Obama Administration put forth a
    plan to reform the GSEs. I know you weren't in your position;
    you were in Congress then. Do you know of any attempt after
    2011 by the Obama Administration to propose a reform plan to
    create a new secondary market utility and essentially deal
    with, resolve permanently our current GSE losses? Were you
    involved in any conversations on that?
        Mr. Watt. Well, actually, that was not a plan. It was just
    an outline.
        Mr. Hill. Well, the beginning of a plan is an outline for a
    plan, right?
        Mr. Watt. I won't get into semantics.
        Mr. Hill. Well, you said you were waiting on Congress, but
    in Congress, we have had Johnson-Crapo in the Senate. We have
    had Mr. Himes, Mr. Delaney, former Member Carney all submit
    ideas. We have had our chairman outline a plan.
        So my question is, did you see a plan or a reaction from
    the Obama Administration, since you have been director, on how
    to deal with this decade-long no man's land, as the situation
    as it has been for a decade now, to permanently reform the
    GSEs?
        Mr. Watt. Congressman, I served over here a long time, and
    I have never known the White House to initiate legislation. It
    always--
        Mr. Hill. I don't think that it is correct. In 1992, the
    legislation to create the oversight of the GSEs came from the
    Treasury Department in 1992 as a bill sent to Congress.
        Mr. Watt. You all wrote it. Somebody over here dropped it.
    I am not trying to be obtuse with you, but for you to make it
    sound like I am trying to defend either the last administration
    or this administration, nobody has acted on this. We have been
    in conservatorship now approaching 10 years.
        Mr. Hill. Right.
        Mr. Watt. Nobody has acted on it.
        Mr. Hill. I find that unacceptable, but I also find it very
    unusual that the top government official overseeing the two
    institutions in question after question simply abdicates having
    a point of view about how to resolve the GSEs and just dealing
    with the facts as they are.
        We need leadership in your position and with either the
    Jack Lew Treasury or the Mnuchin Treasury to submit concrete
    views, react to proposals in Congress, and move on with this.
    And I would argue, in the 2-1/2 years I have been here, I have
    not seen that.
        Mr. Watt. We do regular consultation with all the committee
    staff. On Johnson-Crapo, on Corker-Warner, we were--
        Mr. Hill. Which preferred bill do you prefer then? Which of
    the Senate approach or the PATH Act or Mr. Delaney and Mr.
    Himes' proposal? Since you have studied them and consulted with
    the staff, do you have a preference of what we should talk to
    the Trump Administration's Treasury about?
        Mr. Watt. Congressman Hill, I am the director of FHFA. My
    personal views about what I prefer I left behind when I became
    the director of FHFA. FHFA has no view about which one of these
    bills is more desirable than the other, and it is not in our
    statutory mandate to develop a view about what is desirable or
    not desirable.
        Mr. Hill. My time has expired, but I find that distinctly
    disappointing.
        Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Missouri, Mr.
    Clay, Ranking Member of our Financial Institutions
    Subcommittee.
        Mr. Clay. Thank you, Mr. Chairman.
        And good to see you again, Mr. Director.
        Mr. Watt. Thank you.
        Mr. Clay. I want to go back and follow the line of
    questioning that my good friend and colleague from North
    Carolina was on about increasing home ownership. According to a
    recent study by Fannie Mae and the University of Southern
    California, home ownership rates are resting near 50-year lows,
    and home ownership among young adults experienced large
    declines over the past decade. Specifically, the home ownership
    rate of young adults age 25 to 44, the prime ages for first-
    time home buying, plummeted by 10 percent in the past decade.
    And I am concerned that one of the barriers to home ownership
    for millennials is the high levels of student debt that they
    hold. And you and I know that in the 2016 election, both sides,
    both sides of the aisle, all candidates talked about how do we
    attack the student loan debt?
        And that is the reason why I bring this issue up, because,
    along with Marcy Kaptur and I, we have cosponsored legislation
    which directs the secretary of HUD and the director of the
    FHFA, you, to jointly implement a pilot program or to look at
    the market and tell us what is possible to assist borrowers
    with federally insured student loans. The bill provides the HUD
    and FHFA with broad discretion in terms of the types of
    assistance, which may include the development of new market
    products or flexibility in underwriting standards.
        And tell me what you think about this approach, and what is
    the FHFA already doing to expand home ownership among
    millennials?
        Mr. Watt. We actually may be one step ahead of you, because
    we have a pilot with a lender, which is actually trying to take
    student loan debt, which is at a very high interest rate
    typically, and, where practicable, roll it into mortgages. And
    it is picking up some degree of steam.
        I can't comment on the legislation that you proposed
    because I am not familiar with it, but I think student debt is
    one of the impediments to home ownership. There is no question
    about that.
        Mr. Clay. And thank you for that response.
        Mr. Chairman, you know my colleague from Arkansas talked
    about winding down GSEs. And perhaps a program like that could
    be a repurpose or add to the responsibilities of Freddie and
    Fannie, while we also attack the real problem that millennials
    have about student loan debt. And it may be a venture that this
    committee could benefit from and the American people could
    benefit from. And I am just suggesting that we may want to look
    at that and would love to hear what your thoughts on it are.
        Chairman Hensarling. I would be happy to entertain the
    gentleman's suggestion at the appropriate time.
        Mr. Clay. And I will yield back the balance of my time, and
    thank the director for his response.
        Chairman Hensarling. The gentleman yields back.
        The chair now recognizes the gentleman from Florida, Mr.
    Ross.
        Mr. Ross. Thank you, Mr. Chairman.
        And Director Watt, thank you for being here. It has been
    over a month since Hurricane Harvey devastated the Gulf Coast
    of Texas and parts of Louisiana. Under current projections,
    Hurricane Harvey has caused between $70 and $90 billion in
    economic damages. It has also been reported that more than 60
    percent of the property damages caused by Harvey are uninsured,
    because a majority of these losses are related to flooding,
    which is not covered under a standard homeowner's policy. Data
    from FEMA suggests that only a little more than 10 percent of
    these flood losses will be covered by the National Flood
    Insurance Program, which has probably already expended its
    borrowing authority now.
        As you know, this committee has been working through a
    long-term reauthorization of the NFIP. And as we consider how
    we should manage this reauthorization and the flood risk in our
    Nation, I think it would be helpful if you could provide some
    insight into the risk taxpayers bear through the housing
    finance system as a result of the number of homes with
    federally backed mortgages that do not have flood insurance.
        Mr. Watt. We are in the process of making that assessment.
    What we do know is that a number of these homes were not in
    flood zones.
        Mr. Ross. Right.
        Mr. Watt. So we don't require--Fannie and Freddie do not
    require flood insurance for home mortgages--
        Mr. Ross. Correct, who aren't in the flood zone.
        Mr. Watt --that are not in flood zones.
        Mr. Ross. Is there any backstop that would say that if you
    are in a flood zone and you have purchased flood insurance, we
    are going to enforce every--
        Mr. Watt. Yes.
        Mr. Ross. And how is that working? Because one of the
    problems we have found is, is that once a policy is issued, in
    order to effectuate a closing, the mortgage is secured,
    everybody goes on. Its renewal is next year. There is no
    enforcement mechanism to make sure that they are there.
        Mr. Watt. We do have an enforcement mechanism. We have
    contractual arrangements between Fannie and Freddie and the
    servicers of the loans that obligate them to make sure that
    borrowers in flood zones have flood insurance, just like they
    have insurance--regular homeowner's insurance. And if the
    servicers do not do that, then they become responsible to
    Fannie and Freddie--
        Mr. Ross. And that is what I want to hit on.
        Mr. Watt --so there is a built-in incentive for them to be
    aggressive in that.
        Mr. Ross. And I don't expect you to be able to answer this
    question now, but I would like to find out how that enforcement
    mechanism is working. In other words, whatever was written this
    year under federally backed mortgages, how many have not
    renewed? That is something I am very interested in.
        Mr. Watt. We are gathering that information. Be happy to
    provide it to you. But from anecdotal information, up to this
    point, it appears that few of the Fannie and Freddie loans in
    flood zones that required flood insurance, few of them did not.
    The overwhelming majority of them did.
        Mr. Ross. And I guess that is my next point. If we are
    going to have 78 percent of the market mortgages backed by
    GSEs, we need to take into consideration this flood risk. And
    if there is any actuarial assessment of this flood risk, no
    matter how low it is, would it not be in everybody's best
    interests to have a flood policy?
        Have you been able to quantify the 1 in 100 risk, 1 in 100
    year risk of those homes that are backed by the Federal
    Government in a flood plain?
        Mr. Watt. In a flood plain, yes. But outside the flood
    plain, I mean, is where--
        Mr. Ross. Which is a moving--which, to me, is a moving
    target, and I think we have seen that because of this storm
    season, as you have seen areas flood that were not expected to
    flood.
        Mr. Watt. I hope you are not suggesting that we should go
    out in front of the legislative process--
        Mr. Ross. No.
        Mr. Watt --and require flood insurance outside the flood
    plain.
        Mr. Ross. No, I think that is something--I am not
    suggesting that at all. I am just suggesting to you, though, is
    would it not make it a little bit easier to assess the risk if
    everybody, based on their actuarial risk, carried a flood
    insurance policy? If you are 10,000 feet, your risk is probably
    nothing, so you are paying a dollar. But we have seen--like I
    said, FEMA says 10 percent is all that is covered under the
    National Flood Insurance Program.
        My next question to you is, and I don't have enough time,
    but I appreciate your earlier comments that you strongly
    support a private market, both in terms of being able to ease
    the burden of the GSEs, but also would you not support a
    private market for flood insurance so that you are able to take
    that risk, which right now I think is going to be assessed at a
    very, very expensive risk because of these three storms that
    came through? Why centralize it all on the taxpayers? Would it
    not be better to pool that risk and encourage a private market
    to come in for flood insurance?
        Mr. Watt. Fannie and Freddie don't distinguish between the
    Federal Flood Insurance Program and private insurers, as long
    as they meet the same standards that--
        Mr. Ross. Right. But there is only one game in town right
    now, and that is NFIP.
        Thank you. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from California, Mr.
    Sherman.
        Mr. Sherman. Mr. Chairman, I want to commend you for having
    the debt clock up behind the witnesses. I know that is only up
    there when you have Republican time, but I would like it up
    there. I do point out that there are proposals to have that
    clock go $150 billion a year to $200 billion a year faster
    through massive tax cuts.
        What is much less known is that sitting where our friend
    Mel Watt is sitting, we have had the chair of the Federal
    Reserve Board, and she has heard tremendous pressure and
    appears to have been responding to that and other things in
    shrinking the balance sheet of the Fed. That will cause that
    clock to turn another $100 billion a year faster. So we are
    taking actions here in Congress that are $250 to $300 billion a
    year faster on that clock. It seems to be moving faster now as
    I speak.
        As to the GSEs, we had a terrible system up until the
    conservatorship. We had what is basically called crony
    capitalism. That is to say we privatized the profits and
    socialized or put on the shoulders of the taxpayer the risk. We
    cannot go back to that situation.
        It is absurd that there are any listed private
    shareholders. They were wiped out. The government should not be
    sharing any future profits with them. And the ownership should
    increase from 79.9 to 80 percent, at least, so that we totally
    wipe out any net operating loss carry-forwards. The idea that
    the government would structure a deal designed to reduce taxes
    strikes me as absurd. I guess there are other reasons to stay
    right below 80 percent.
        The system is working now. Mr. Watt, you do point out that
    you are subject to tremendous second-guessing and perhaps that
    can be adjusted, but as to it being unsustainable, I remember
    when you were sitting here and you had 700,000 people second-
    guessing everything you did every day. So you may forget that,
    but we up here still remember it.
        Mr. Watt. I have exponentially more now, I can tell you.
        Mr. Sherman. In any case, there could very well be an
    adjustment in the number of agencies second-guessing you. But
    the fact is you produced $270 billion in profits for the
    Federal Government. We have got 30-year fixed rate, low-
    interest rate mortgages.
        When else in the history of the world, where else in the
    world can ordinary working people borrow hundreds of thousands
    of dollars at low interest rates and at fixed terms for 30
    years? So obviously, it is not broke, we have got to fix it.
        I want to talk a little bit about conforming loan limit. It
    is my understanding that on the mortgages between what, 417 and
    625, you actually make a bit better profit for the Federal
    Government, but, more importantly for me, working families in
    Los Angeles, the average home sells for more than $633,000, and
    that is if you can get the Zillow price. So I hope that you
    will not lower the conforming loan limit, except perhaps in
    those districts of Members of Congress who are urging you to
    lower the conforming loan limit.
        I want to talk a little bit about the FICO score. We have
    got millions of people with modest incomes or who have avoided
    debt, which is commendable in their life. They may not have
    much of a credit history. Minorities, immigrants are going to
    be the drivers of a big part of our economic growth in the
    future. With new credit scoring models that incorporate
    additional predictive metrics and payment history helps you
    rate those with a thin file. Those models seem to have support
    in the industry.
        But what are your thoughts about using alternative credit
    scoring models for those who cannot be adequately rated? And I
    would also point out that FICO has at least modified their
    scoring with regard to medical bill collection accounts. And I
    wonder what is your thinking for how we rate home buyers?
        Mr. Watt. Well, I think the notion that there would be
    substantially more people credit scored and that would increase
    access if we had competition is probably exaggerated, but we
    continue to study it and study the pros and cons of competition
    in this area. So--
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Minnesota, Mr.
    Emmer.
        Mr. Emmer. Thank you, Mr. Chair. And thanks to Director
    Watt for all his time today.
        A couple questioners ago, Representative Heck quoted your
    testimony about--and I am not going to read the whole thing--
    these conservatorships are not sustainable. But the important
    thing for me is, you said, and they need to end as soon as
    Congress can chart the way forward on housing finance reform.
        My question, Director, is: You have said this repeatedly
    and people have been playing games with the word
    ``sustainable'' or have been questioning why you use that term.
    I would like to go a different direction. When you left
    Congress to take this job--and by the way, thank you for your
    years of service--you said you left things behind and you went
    to run this agency.
        Knowing that it has got to change, what have you done under
    your leadership to prepare the FHFA, and specifically to
    prepare Fannie and Freddie for that day when they come out of
    conservatorship, and how do we build on what you have done?
        Mr. Watt. If you would take a look at pages 3 through 5 of
    my written testimony, we have made a laundry list of things
    that we have done that, in my mind, I think of as GSE reform,
    reforming the enterprises. And then in my oral testimony, I
    made the distinction between GSE reform and housing finance
    reform and the questions that Congress needs to answer in the
    housing finance reform space.
        So, I mean--
        Mr. Emmer. I see them, 1 through 10.
        Mr. Watt. Yes, 1 through 10. Those things are things that
    we have done to reform Fannie and Freddie during the period
    that they have been in conservatorship. They are not the same
    Fannie and Freddie that went into conservatorship, I can assure
    you of that.
        Mr. Emmer. So contrary to all the questions and answers
    before now, you have taken a position on what should happen
    with the GSEs. You are sensitive about saying you folks should
    draft your bill to look like this. These are the steps that you
    have taken, and you expect Congress to build on this?
        Mr. Watt. Right. I think it would be a serious mistake for
    Congress to disregard all these 10 things and other things that
    are not listed here that we have done to--if they are going to
    retain Fannie and Freddie as part of the housing finance system
    of the future, it would not be a good idea to throw those
    things out the window.
        Mr. Emmer. OK. But you aren't going to take a position on
    whether the GSEs should remain?
        Mr. Watt. I think that is a decision that is for Congress
    to make.
        Mr. Emmer. In its June 2017 report on banks and credit
    unions, the Treasury Department found that when reviewing
    residential mortgage lending, quote: ``The revised regulatory
    regime disproportionately discourages private capital from
    taking mortgage credit risk, instead encouraging lenders to
    channel loans through Federal insurance or guarantee programs
    or Fannie Mae or Freddie Mac.''
        Do you agree with this assessment by the Treasury?
        Mr. Watt. I think in response to, I think it was
    Representative Royce's questions, I said that there are some
    things that were done statutorily and through regulation that
    provide some disincentives. Even though those things may serve
    important positive purposes, they provide some disincentives
    for the private sector to do mortgage financing.
        Mr. Emmer. Can you give us an example of how this is taking
    place?
        Mr. Watt. Well, to keep a mortgage on a bank's books, there
    are high capital requirements associated with that. Now, are
    high capital requirements important? Yes. But does it have an
    adverse impact on mortgage lending for a lender? If we were not
    there and able to take those mortgages off the books, if Fannie
    and Freddie were not there to take them off the books, there
    would be a tremendous disincentive for them to do it.
        Mr. Emmer. But I think this gets back to the chairman's
    opening questions when he was asking you, it is not
    intellectually consistent to say if it is not OK for private
    banks, private lenders, how could it be OK for the Fannie and
    Freddie.
        Mr. Watt. I am not sure I hear a question there.
        Mr. Emmer. Exactly. The capital requirements for the
    private lenders, you are taking--because of the policy--I see
    my time has run out. I will address it in writing to you. Thank
    you.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Ohio, Mr.
    Davidson.
        Mr. Davidson. Thank you, Mr. Chairman.
        Thank you, Mr. Watt. Nice to talk with you. And I have
    enjoyed your testimony. I am particularly interested in credit
    risk transfers. And if I have got it right, of the more than $5
    trillion of securities, $1.6 trillion has been put into credit
    risk transfer programs.
        Mr. Watt. Those are the new loans, yes. Primarily, we are
    doing 90 percent of the new loans, running them over into
    risk--
        Mr. Davidson. On the back end.
        Mr. Watt. Yes.
        Mr. Davidson. Primarily.
        Mr. Watt. So you have got a dichotomy between the legacy
    book and the new book, yes.
        Mr. Davidson. OK. So is it a priority of yours to grow that
    percentage?
        Mr. Watt. Yes.
        Mr. Davidson. So what needs to happen in order for you to
    grow the amount of risk that the market is taking and decrease
    the amount of risk that the taxpayers are taking?
        Mr. Watt. To make sure that we do it in a thoughtful,
    methodical way that meets the criteria that I outlined in my
    opening statement.
        Mr. Davidson. OK. And so when you look at those securities,
    when they are traded, are they traded by geography or are they
    bundled based on risk or categories of risk, or is it diluted
    and distributed so you got some like sausage, some bad stuff in
    there with some good stuff?
        Mr. Watt. We have tried various iterations, but generally,
    we try to stay away from geographical allocations, because if
    something goes wrong, for example, if we did all of Florida and
    you had a hurricane in Florida, then that would--there is some
    kind of protection by--
        Mr. Davidson. Right.
        Mr. Watt --by the geographic--
        Mr. Davidson. What works in the market? Because this is
    subject to market forces.
        Mr. Watt. Yes.
        Mr. Davidson. What works in the market? What is driving the
    most demand in the market?
        Mr. Watt. Well, I think the demand has been there, and we
    are trying to methodically increase the level of demand. There
    are some constraints on some things, credit linked notes, for
    example. We are working through to try to get to a point where
    those can be done consistent with the tax law and consistent
    with existing legislation.
        But we have been very aggressive on this front. Remember,
    the $1.6 trillion is between 2013 and now. This is a new--risk
    transfer is a new concept, so you can't gear it up and do it
    all at one time. I think that would be very impossible, really.
        Mr. Davidson. OK. So when you look at growing that market,
    how are the Fed's actions, if the Fed unwinds their balance
    sheet of mortgage-backed securities, granted these are
    different types of securities, how does that look to affect the
    market for the securities you are trying to sell, which are
    very similar securities in that--
        Mr. Watt. You know, I haven't really tried to analyze that.
    If you say that there is--if you start with the notion that
    there is a limit on the amount that the private sector can take
    up, which some people don't believe--if there is no limit, then
    it would have no impact. If there is a limit on what the
    private sector can take up and do, it might have some marginal
    impact when the Fed starts to--
        Mr. Davidson. I guess my question is, based on the demand
    for the products you already have, do you see that the market
    is bigger and that the private sector is anxious for you to
    make more of these securities available?
        Mr. Watt. Yes, we think it is bigger. Whether it will be
    bigger in adverse times, in adverse economic times, we are not
    as confident about. But it is certainly big now because the
    market has been going very well.
        Mr. Davidson. Well, it may be much bigger in adverse times
    because the market going well, they can find better returns
    quite easily. And right now the returns on the mortgage-backed
    securities are lower. So in adverse times it may be a safe
    haven if they aren't loaded with too many bad mortgages.
        So I guess the quality of those mortgages goes to the heart
    of the quality of what you are putting on the front end is
    ultimately what will be available on the back end.
        My time has expired.
        Mr. Watt. Understand we are transferring risk now, we are
    not just transferring loans. We are transferring risk.
        Mr. Davidson. Mr. Chairman, my time has expired. I yield.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Tennessee, Mr.
    Kustoff.
        Mr. Kustoff. Thank you, Mr. Chairman.
        Thank you, Director Watt, for being here this afternoon.
        If I could followup a little bit on the avenue that Mr.
    Emmer was going as it relates to the ratios, prior to the
    financial crisis we know Fannie Mae's core capital ratio was
    around 1.5 percent and that Freddie Mac's was around 1.7, 1.8
    percent, which made them, I think we can all agree, extremely
    vulnerable to the real estate and financial crises.
        Now, here we are almost 9 years later following the crisis.
    The largest U.S. banks, or some of the largest U.S. banks, now
    have a core capital ratio of around 10 percent, some a little
    bit less, some a little bit greater, but around 10 percent,
    while these GSEs continue to operate at seemingly low levels,
    the same pre-crash ratios.
        Two questions. First of all, wouldn't you agree that the
    ratios with the GSEs are low? And if the answer is yes, what do
    you think that those ratios should be or what is the
    appropriate level of capital that Fannie and Freddie should
    have to protect the taxpayers from another bailout?
        Mr. Watt. You mean outside of conservatorship what do I
    think? I have already indicated somewhere between 3 and 5
    percent would be sufficient, but that assumes we are doing risk
    transfer. I don't think you would apply the same capital
    requirements to these entities that you would to banks
    necessarily.
        Mr. Kustoff. Director Watt, is the FHFA currently studying
    at any level or capacity the appropriate level of core capital
    for any entity engaged in the business of purchasing,
    securitizing, and ensuring residential mortgages?
        Mr. Watt. You mean on the parties to which we transfer
    risk?
        Mr. Kustoff. Yes.
        Mr. Watt. Yes. I think we want to ensure that they are
    adequately capitalized to take the risk that is being
    transferred to them, yes.
        Mr. Kustoff. Is anybody studying that issue or what those
    ratios should be?
        Mr. Watt. We are constantly studying it, yes.
        Mr. Kustoff. Your Agency is?
        Mr. Watt. Yes.
        Mr. Kustoff. Earlier today we heard in your testimony, I
    think in relation to questions that Mr. Pearce asked, regarding
    the rural housing market. A lot of my district in west
    Tennessee, which is where I am from, is similar in that regard.
    As we continue to explore further options for housing reform,
    it appears that much of the work needs to be done as to who is
    considered a qualified mortgage buyer and who is not.
        In my district, we have a strong community financial
    institution. We have strong community banks. More often than
    not, the determination being made as to who is qualified to
    obtain a mortgage remains at the Federal level through the
    FHFA.
        Many times these determinations could preclude good, hard-
    working people from achieving their American dream of owning a
    home. And I wonder whether these decisions are best left to the
    financial institutions who serve their communities.
        Let me ask you if you believe that there is a strong
    benefit to having a robust private industry, as I do, and if
    you believe that those people deserving a home are not deprived
    from doing so. So what can the FHFA do to ensure that our
    community financial institutions play a role in the Federal
    home loan approval process?
        Mr. Watt. Well, lenders are the primary gateway to the
    mortgage market. Fannie and Freddie don't make loans. We buy
    loans, take them off of lenders' books. So if lenders are not
    robustly engaged or are constrained, it is going to adversely
    impact. So private small lenders are absolutely critical.
        I neglected to say in response to questions earlier that
    many small lenders--and I don't know about the specific bank
    that you are referring to--but many of them are exempt from QM,
    the qualified mortgage standards. So you and I seem to be in
    the same position on this.
        Mr. Kustoff. Thank you.
        My time has expired. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Indiana, Mr.
    Hollingsworth.
        Mr. Hollingsworth. Good afternoon. Thank you so much for
    being here.
        My colleague, French Hill, had gone into this a little bit
    and skirted around the edges, but I really wanted to dig much
    deeper into better understanding the reason for the limited
    buffer. I have seen in your testimony you talked about some
    concern around erosion of investor confidence. But I want to
    come back to what Representative Hill said and better
    understand it.
        So the full faith and credit, up to $258 billion the U.S.
    Treasury stands behind Fannie and Freddie right now, what is
    the reason why you would need a limited buffer in addition to
    that?
        Mr. Watt. The same reason--do you have children?
        Mr. Hollingsworth. I just had my first 63 days ago.
        Mr. Watt. Well, this may not apply to you yet, but you will
    get it soon. Your son or daughter has the full faith and credit
    of you standing behind them. But at some point your son or
    daughter will want to have some money in their pocket to deal
    with emergencies that come up. And that is the way I think of a
    capital buffer. It is different than having the full faith and
    credit of a parent or the government standing behind.
        What you want them to not have to do is in the middle of
    the night call you and draw on that full faith and credit. And
    that is what I have assiduously tried to avoid in this space.
        Mr. Hollingsworth. And I can certainly appreciate the lack
    of desire to do that and doing it through lowering the risk
    profile of Fannie and Freddie. But retaining and not paying out
    to the Treasury is effectively like bailing out earlier rather
    than bailing out later. Because there is no difference, right?
    The capital inside the firm is still technically the Treasury's
    capital, it is just not at Treasury.
        I feel like the difference you are telling me is you just
    don't want everybody to know and it to be a widely publicized
    event that you had asked the Treasury for dollars. You would
    rather just draw down this limited capital buffer within the
    firm.
        And I feel like if the U.S. taxpayer--and it is the
    U.S.taxpayer's money--that they should have a say and they
    should be made aware when their dollars are being mobilized to
    cover losses that are being incurred at Fannie and Freddie.
        Isn't that true? Don't we owe it to them to ensure that
    they are aware of the fact that their dollars are being used,
    their hard-earned tax dollars?
        Mr. Watt. I think you might be right if I were continuously
    building up capital and desiring to do that. All I am trying to
    do is have a modest daily reserve so I don't have to run to my
    parent every day to ask for--
        Mr. Hollingsworth. And I want to come back to what the
    modest amount is, but a couple of more things. Would you
    propose then that if somebody said, yes, buildup this modest
    capital buffer, that it would be subtracted from the Treasury's
    obligation of $258 billion?
        Mr. Watt. Well, it actually would be added.
        Mr. Hollingsworth. No, I understand that if you don't pay
    it out. If we said to you, buildup $10 billion inside the firm,
    but the Federal Government is only going to come now to the
    tune of $248 billion rather than $258 billion, is that
    something that you would be supportive of?
        Mr. Watt. I think that is the way the thing is set up right
    now, the PSPA set up that way, because if I don't pay it, then
    I owe it later. So you get to the same--
        Mr. Hollingsworth. Do you believe you have to unilateral
    right to do that?
        Mr. Watt. Yes.
        Mr. Hollingsworth. You do. And do you believe that the
    Treasury--that if you are going to make a unilateral decision
    and you are concerned about erosion of investor confidence,
    that that wouldn't serve to erode investor confidence that
    other actors can make unilateral decisions and change this
    agreement?
        Mr. Watt. Well, I am not making a unilateral decision. I am
    making a decision that is based on the contract that was
    written. I am not reneging on the contract, I am just enforcing
    the contract as it is written. It gives me that authority.
        Mr. Hollingsworth. But I thought the concern was investor
    confidence. You don't think investors are going to--some of
    their confidence is going to be eroded at the fact that you are
    suddenly changing the way the game is played?
        Mr. Watt. The point is, I don't know what will impact
    investor confidence.
        Mr. Hollingsworth. OK. So we don't know--
        Mr. Watt. We don't know that. And one of the things that I
    think could--and could very well impact investor confidence
    would be an additional draw, and I don't want to run that risk.
        Mr. Hollingsworth. OK. But failing to pay taxpayer dollars
    to a taxpayer institution--
        Mr. Watt. I have been talking about this for 2 years, it
    hadn't had any impact on investors so far.
        Mr. Hollingsworth. OK. So we are unclear what an erosion of
    investor confidence looks like, but you are absolutely certain
    you have the unilateral right to make a decision that could
    impact investor confidence without consulting the American
    people or their Representatives.
        Mr. Watt. Unfortunately, I make those decisions every
    single day.
        Mr. Hollingsworth. This is a quarter of a trillion dollars
    of U.S. taxpayer money that we are talking about here. I think
    they are owed some public service and announcement when their
    dollars are being utilized, whether inside the firm or outside
    the firm.
        And with that, Mr. Chairman, I will yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair now recognizes the gentleman from Michigan, Mr.
    Trott.
        Mr. Trott. Thank you, Mr. Chairman.
        Thank you, Director Watt, for your time and service.
        And I want to just pause and caution my good friend, Mr.
    Hollingsworth, even if your son has a few dollars in his pocket
    down the road, he may still call you in the middle of the
    night.
        Mr. Watt. That is true. That is true.
        Mr. Trott. So, Director Watt, I think you and I would
    probably agree that the Federal Government should be involved
    in helping some Americans realize the dream of home ownership.
    My question to you is, do you believe the Federal Government
    has a role in helping people realize the dream of owning a
    second home?
        Mr. Watt. You know, I don't know that I have an opinion on
    that, and certainly FHFA does not have an opinion on that.
        Mr. Trott. Fannie and Freddie are involved in that, right?
        Mr. Watt. Well, they are doing what they are statutorily
    allowed to do, yes.
        Mr. Trott. Do you think they should be involved in
    providing liquidity for people to obtain mortgages for second
    homes?
        Mr. Watt. I don't know that I can answer that question.
        Mr. Trott. Let's talk about, along the same lines, do you
    think Fannie and Freddie should be involved in helping people
    realize the dream of refi'ing their loans so they can get a
    better interest rate? Is that a proper role of the Federal
    Government in terms of the dream of home ownership?
        Mr. Watt. Well, it is certainly something that is possible
    now, and it is sanctioned statutorily. If you wish to change
    that, I don't think FHFA ought to change it. I think the
    legislative branch--
        Mr. Trott. OK. You have said that a few times today, that
    you are waiting for Congress to do something. And as you know,
    it is sometimes difficult for things to get done here in
    Congress.
        So let's assume that we struggle with GSE reform. One
    simple approach would be just to change the sandbox that Fannie
    and Freddie can play in and take them out of the refi business,
    which is about two-thirds of their portfolio.
        What would you think of that solution in terms of the
    housing market, both in terms of the impact it would have and
    also limiting the role of the Federal Government? How about we
    get Fannie and Freddie out of the refi business as our GSE
    reform solution?
        Mr. Watt. If you decided to do that legislatively, I
    wouldn't do it through FHFA.
        Mr. Trott. You have no opinion on that solution, though, as
    one option?
        Mr. Watt. I don't have any opinions. I keep telling you. I
    left my opinions behind and FHFA--unless FHFA has a position on
    something.
        Mr. Trott. I understand. Reclaiming my time. Let's go to
    some opinions you expressed here today.
        You said earlier today that there are untold stories about
    people that paid their mortgage even though they had negative
    equity during the mortgage crisis.
        So would you agree with the proposition that if property
    values stop appreciating as they have been over the last
    several years and suddenly dip, as they inevitably will, that
    there will be an increase in defaults?
        Mr. Watt. Probably to some extent, yes.
        Mr. Trott. So the $24 billion worth of loans that Fannie
    and Freddie bought over the past couple of years with 3 percent
    downpayment, some of those folks are going to go into a
    negative equity situation. Do you agree with that?
        Mr. Watt. And some of the ones where there was a 20 percent
    downpayment, and some of the loans where there was a 50 percent
    downpayment.
        Mr. Trott. Would you agree that a 3 percent downpayment is
    a lot riskier than a 20 percent?
        Mr. Watt. No, I don't necessarily agree with that.
        Mr. Trott. So let's go to the QM rule. There are a lot
    questions today about why Fannie and Freddie don't have to deal
    with the QM rule. So I want to followup on a line of
    questioning that Chairman Barr started.
        Just generally as a proposition, who is better to decide
    when to loan outside of the QM box, a community bank in rural
    Kentucky who has known the mortgagor for 30 years or Fannie and
    Freddie? Who is going to make a better decision about the
    ability about that mortgagor to repay, in your opinion?
        Mr. Watt. I don't know who would make a better decision,
    but most community banks, a number of them are exempt from the
    QM standards, and they would be able to make that determination
    without worrying about the QM standards.
        Mr. Trott. So one of the reasons why you have defended not
    subjecting Fannie and Freddie to QM is that to put the QM Rule
    into place would deny people who deserve a home the opportunity
    to own a home. You fundamentally believe the Federal Government
    should be deciding who deserves to be able to own a home?
        Mr. Watt. I don't think that is my decision to make. That
    is a legislative decision.
        Mr. Trott. It is one of your reasons for saying the QM rule
    shouldn't apply. That was your reasoning. So do you think that
    is a sound reason, we should decide who deserves a home? Maybe
    we should decide who deserves a car and who has the money to
    take a family vacation.
        Mr. Watt. I apply the law as it is written now, and if you
    all want to change it--
        Mr. Trott. I am out of time. But Mr. Huizenga raised a
    question about your building. I never heard of any entity that
    is in conservatorship buying or renovating a building. That is
    ludicrous.
        Chairman Hensarling. The time of the gentleman has expired.
        The chair wishes to inform members there is currently a
    vote taking place on the floor, approximately 12 minutes to go.
    The gentleman from Maine will be the last member recognized.
        Mr. Poliquin is now recognized for 5 minutes.
        Mr. Poliquin. Thank you, Mr. Chairman.
        Mr. Watt, thank you very much for being here, since I am
    the last and you have been sitting here, along with myself, for
    3-1/2 hours. The chairman did promise me that after votes we
    are coming back and do this all over again with everybody else
    in the committee. So you better tell your wife you won't be
    home.
        Mr. Watt. I was tempted to ask for a recess, but I know you
    are the last one.
        Mr. Poliquin. Mr. Director, we are very proud of our home
    ownership in Maine. About 70 percent of my fellow Mainers own a
    home. It is one of their largest assets and they are very proud
    of that. And so access to a mortgage is absolutely critical,
    including 30-year fixed.
        Now, you folks are the regulators for Fannie and Freddie,
    and in 2016, or it might have been this year, I can't recall,
    but in any event, 52 percent, roughly, of the mortgages that
    were originated this year are held by Fannie and Freddie. That
    is a very big number. You folks regulate that part of our
    economy. And so your role in the housing finance system and
    therefore the people that I represent, very important.
        Fannie and Freddie, as we all know, operate with a taxpayer
    guarantee for the mortgages that they are responsible for. That
    backstop by the taxpayers, sir, is about $5.3 trillion.
        Now, you and I agree, because you have said it several
    times already today, that it is to the benefit of the U.S.
    taxpayer. You want to take care of the folks that want to buy a
    home. I understand that, access to a mortgage. We now have to
    look at the U.S. taxpayer, they are on the hook for $5.3
    trillion in liabilities, dealing with the folks that you
    regulate.
        I think we both agree that it is a good idea to try to
    transfer some of that credit risk to the private market. And as
    a result you have the credit risk transfer program. And I am
    sure that if you are able to do that--and thank you for doing
    that, sir--that it gives us a more stable housing finance
    market and therefore helps our families in Maine and throughout
    the country.
        Now, my question to you, Mr. Watt, is what percent of the
    total credit risk assumed by the GSEs is now in the hands of
    the private market? Not new loans on the books. I know you are
    doing a better job in the last 3 or 4 years, about 90 percent,
    I think is what you said, of that credit risk is transferred or
    being transferred to the private sector. Your total book of
    business, including your legacy book.
        Mr. Watt. It is small.
        Mr. Poliquin. Yes, it is very small, about 1 percent.
        Mr. Watt. I don't have a specific number.
        Mr. Poliquin. It is about 1 percent.
        Mr. Watt. Yes.
        Mr. Poliquin. About 1 percent.
        OK. So here we have the taxpayers on the hook for $5.3
    trillion--
        Mr. Watt. Well, let me correct you there. You are not
    really on the hook for all of that. There is a specific
    contract amount that the Federal Government--
        Mr. Poliquin. So you think if you folks got in trouble
    beyond that specific amount--yes, come on. I was the State
    treasurer in Maine, we know how this works when you have a
    moral obligation.
        But in any event, my point is the following. What is your
    goal and when can you get there? You must have an idea, and all
    of these wonderful staffers sitting behind you must have an
    idea, what is the optimal level, Mr. Director, that you want
    to--I am not done yet--that you transfer not only from your new
    book of business, but from your legacy book of business, onto
    the private sector to make it a more stable market, help our
    families? What is that number, sir?
        Mr. Watt. I can't give you a number, but I can tell you it
    is the absolute maximum that we could get to applying the
    criteria that I outlined in my opening statement.
        Mr. Poliquin. So you don't have an idea what that number
    is?
        Mr. Watt. I don't know.
        Mr. Poliquin. OK. So you have been over 5 years, about 1
    percent of the total risk on the taxpayer has been transferred
    to the private sector over a 5-year period of time--
        Mr. Watt. We started the risk transfer program in 2013.
        Mr. Poliquin. Oh, I am sorry, 4 years.
        Mr. Watt. All of this has been done in--
        Mr. Poliquin. Can you address your legacy book of business,
    Mr. Watt? Are you able to do that?
        Mr. Watt. Yes.
        Mr. Poliquin. Oh, you can. OK, so it is not just the new
    loans, but it is the folks, the loans that you have on the
    books. But you haven't made much of a dent if you have 1
    percent of the risk, the credit risk transferred to the private
    sector, the rest is on the backs of the taxpayers to the tune
    of roughly $5.3 trillion, and it has taken you 4 years to do
    this. So how would you rate your performance?
        Mr. Watt. I don't lay awake at night trying to rate my
    performance. I try to go to work every day, do what I am
    supposed to do. I think the market--
        Mr. Poliquin. OK, I get it.
        Mr. Watt. If you ask people in the market to rate it, they
    would probably say that I far exceeded any expectations that
    they had, including the chairman and the people who, you know--
    so I don't--but I don't--I'm not in the rating--
        Mr. Poliquin. You transfer about 1 percent of your credit
    risk that the taxpayers assume on the private sector, you have
    done a good job. OK. That is what you feel. I happen to feel a
    little bit differently, Mr. Watt. But I am not picking on you,
    I just want to understand this.
        Mr. Watt. I understand.
        Mr. Poliquin. How do you evaluate the effectiveness of your
    program? For example, when you talk about--explain to us how
    using the reinsurance strategy transfers risk from the
    taxpayers to the private sector. Explain that us to.
        Mr. Watt. Well, reinsurers are privately backed. They have
    capital. So that is in the private sector.
        Mr. Poliquin. And what happens if something goes wrong? How
    can you assure the taxpayer that that risk that has been
    transferred from their backs to the private sector will in fact
    be paid?
        Mr. Watt. There is collateral to back it.
        Chairman Hensarling. The time of the gentleman has expired.
        Mr. Poliquin. Thank you, Mr. Chairman. I yield back my
    time.
        Chairman Hensarling. I thank our witness for his testimony
    today.
        The Chair notes that some Members may have additional
    questions for this panel, 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 these witnesses and to place their 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.
        I would ask Director Watt that you would please respond as
    promptly as you are able.
        This hearing stands adjourned.
        [Whereupon, at 1:40 p.m., the committee was adjourned.]

                                A P P E N D I X

                               October 3, 2017

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