[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
                           
                           
 
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                          

                 
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
30-240 PDF                  WASHINGTON : 2018                     
          
-----------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, 
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].                  
                 
                 
                 
                 
                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
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
                           
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]