[Senate Hearing 115-56]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 115-56


                   THE STATUS OF THE HOUSING FINANCE
               SYSTEM AFTER NINE YEARS OF CONSERVATORSHIP

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

                                HEARING

                              BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE CURRENT FINANCIAL AND OPERATIONAL PERFORMANCE OF FANNIE 
MAE AND FREDDIE MAC, AND EXPLORING OPPORTUNITIES FOR LEGISLATIVE REFORM

                               __________

                              MAY 11, 2017

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Travis Hill, Senior Counsel

                Graham Steele, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

            Erin Barry, Democratic Professional Staff Member

             Megan Cheney, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                     Cameron Ricker, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         THURSDAY, MAY 11, 2017

                                                                   Page

Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                                WITNESS

Melvin L. Watt, Director, Federal Housing Finance Agency.........     4
    Prepared statement...........................................    34
    Responses to written questions of:
        Senator Brown............................................    39
        Senator Tillis...........................................    41
        Senator Menendez.........................................    48
        Senator Heitkamp.........................................    52
        Senator Warren...........................................    54
        Senator Cortez Masto.....................................    58

              Additional Material Supplied for the Record

Memorandum dated May 24, 2017, to Melvin L.Watt from Alfred M. 
  Pollard, General Counsel, regarding dividends..................    65
FHFA's Enterprise Non-Performing Loan Sales Report, December 
  2016, submitted by Melvin L. Watt..............................    67
Letter submitted by the National Associaton of Federally-Insured 
  Credit Unions..................................................   101
Letter submitted by the Credit Union National Association........   104

                                 (iii)

 
                   THE STATUS OF THE HOUSING FINANCE
               SYSTEM AFTER NINE YEARS OF CONSERVATORSHIP

                              ----------                              


                         THURSDAY, MAY 11, 2017

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. The Committee will come to order.
    Today we will receive testimony from Federal Housing 
Finance Agency Director Mel Watt on the status of the housing 
finance system.
    Fannie Mae and Freddie Mac have now been in conservatorship 
for close to 9 years. In September 2008, then-Treasury 
Secretary Hank Paulson famously described the conservatorships 
as a ``time-out.''
    Today Fannie and Freddie, along with the FHA, continue to 
dominate the mortgage market. Approximately 70 percent of the 
mortgages are backed by the Federal Government.
    While Fannie and Freddie are currently earning profits, if 
the housing market experiences a downturn, taxpayers could 
again be on the hook for billions of dollars. The status quo is 
not a viable option.
    A housing finance system dependent on two Government-
sponsored enterprises in perpetual conservatorship is not a 
sustainable solution. Taxpayers today bear too much risk, and 
the Government plays too big a role in the mortgage market.
    A number of groups have released proposals for reform in 
recent months, including the MBA, the ICBA, the Milken 
Institute, several co-authors writing jointly for the Urban 
Institute, and many others. The Committee is considering all of 
these proposals, as well as other ideas about what the future 
system should look like.
    In the meantime, FHFA continues to serve as both 
conservator and regulator of the enterprises and as regulator 
of the Federal home loan banks. As conservator of the GSEs, 
FHFA is obligated to conserve and preserve the assets of Fannie 
Mae and Freddie Mac.
    FHFA has undertaken a number of initiatives in recent 
years, including some that began prior to Director Watt's 
tenure. One
significant undertaking is the creation of the Common 
Securitization Platform. The Platform was originally intended 
to function like a market utility--independent from the 
enterprises--that would be used to issue both agency securities 
and private label securities. The Platform has instead been 
developed specifically for securities issued by Fannie Mae and 
Freddie Mac. One important question as we embark on housing 
finance reform is whether we should utilize the CSP or consider 
other alternatives, such as expanding the Ginnie Mae platform.
    Another important development in housing finance is the 
increased transfer of credit risk from the enterprises to the 
private sector. I encourage FHFA and the enterprises to 
continue to experiment with different forms of risk transfer, 
including both front-end and back-end structures. Transferring 
credit risk away from the Government and into the private 
sector is essential to protect taxpayers and to build a more 
robust and sustainable market.
    Increasing the amount of credit risk borne by the private 
sector will be a critical component of housing finance reform, 
regardless of which direction the Committee ultimately decides 
to take. I encourage Director Watt to consider other policies 
and options to incentivize further private sector participation 
and to help facilitate the transfer to a new system.
    Housing finance reform remains the most significant piece 
of unfinished business following the financial crisis, and it 
is important to build bipartisan support for a path forward.
    Three years ago, seven Republicans and six Democrats on 
this Committee voted in support of a comprehensive housing 
finance reform bill. A key priority of this Congress is to 
build on that bipartisan legacy and pass legislation that will 
create a sustainable housing finance system for future 
generations.
    I look forward to working with you, Director Watt, and your 
staff at the FHFA throughout this process.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Director Watt, 
welcome back. Nice to see you again. Thanks for your public 
service for so many years.
    I appreciate the Chairman's calling this hearing and 
establishing a bipartisan Committee process by which we can 
consider the conservatorship of the Government-backed mortgage 
companies. Since the beginning of the year, there have been 
several articles claiming that housing finance reform is easy, 
some calling it an ``easy win'' for the Trump administration.
    As the Chairman and as any of us who were on the Committee 
in 2013 and 2014 know, restructuring a fifth of the economy is 
far from easy. That does not mean we should avoid considering 
how the housing market could operate better and how we could 
prevent emergency Government and emergency taxpayer 
intervention in financial markets in the future.
    Currently, an agreement between Treasury and the Federal 
Housing Finance Agency requires the Government-sponsored 
enterprises to reduce their capital cushions each year until 
the reserves reach zero in January 2018. At that point GSEs 
will be prohibited from retaining any capital at the end of 
each following quarter, despite the fact that the companies 
back more than $5 trillion in the mortgage market.
    Director Watt has been raising his concerns about dangers 
of the capital levels at the GSEs for some time. We should 
remember he was one of the first members of the House of 
Representatives to warn about predatory lending prior to the 
housing crisis.
    Unlike those warnings about predatory lending, which the 
administration largely ignored at the time, I am hopeful we can 
protect taxpayers from what is an avoidable situation created 
by an agreement entirely within the Executive Branch. Some 
argue any adjustment to the retained capital levels is 
equivalent of supporting a return to the old structure of the 
GSEs. As arguments go, this is surely a straw man. There is no 
reason we cannot protect taxpayers and homeowners. Protecting 
taxpayers in the near term should be a shared and a bipartisan 
goal.
    The Committee should continue its work examining the gaps 
in the housing market that the housing crisis exposed: the 
original-to-distribute model of certain lenders, exotic 
products that put even prime borrowers at risk, private label 
securities that were not backed by GSEs and lax standardized 
terms and responsibilities for trustees, and a near complete 
breakdown in mortgage servicing and the ability of monoline 
mortgage insurers to fulfill their commitments.
    GSEs certainly made mistakes, too: chasing the market to 
purchase PLS, providing pricing discounts to lenders based on 
volume, using price advantages to achieve shareholder gains 
rather than passing those benefits on to borrowers, and/or 
lenders that served underserved communities.
    The GSEs' mission is to provide a stable, liquid national 
mortgage market, including in rural, underserved, and low-
income communities--something we should all want in any housing 
finance system.
    The affordable housing goals for single-family and multi-
family housing, along with the duty-to-serve rule that was 
finalized in December, are key tools to continue prioritizing 
affordable access and prudent experimentation to safely reach 
underserved borrowers. Ultimately, the changes Congress makes 
will impact how expensive or affordable the 30-year fixed-rate 
mortgage will be in the future and who has access to it.
    Our decisions will impact how easily and quickly a growing 
family could sell their current home and buy a more expensive 
one. Our decisions will impact which lenders have access to the 
system and whether a home buyer can get a mortgage from a small 
community lender in her town. These decisions are not just 
about back-office operations or faraway capital markets. They 
will have a substantial impact on households across the 
country, whether renters or homeowners.
    Director Watt, thanks for joining us as the Committee seeks 
to understand the current status of the GSEs and how we move 
forward without harming homeowners and buyers or putting 
taxpayers at greater risk.
    Chairman Crapo. Thank you very much, Senator Brown.
    And I, too, welcome you, Director Watt. We appreciate the 
service you have given and are continuing to give as we move 
forward to deal with the housing finance policy of our Nation.
    I want to remind all the Senators as we go into the 
question period to honor the 5-minute rule with regard to the 
question periods so that Senators who are in line can get their 
opportunities.
    Director Watt, I would ask you to feel free to give your 
full statement, and so would you please proceed at this time?

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

    Mr. Watt. Chairman Crapo, Ranking Member Brown, and Members 
of the Committee, thank you for inviting me to testify. Your 
hearing topic confirms that you are well aware that the 
conservatorships of Fannie Mae and Freddie Mac have been 
unprecedented, especially considering that these enterprises 
support over $5 trillion in mortgages.
    Of additional importance is that taxpayer backing under the 
Preferred Stock Purchase Agreement is now limited to $118 
billion for Fannie Mae and $141 billion for Freddie Mac, and 
additional draws will reduce these commitments further.
    I will focus on three points in my opening statement.
    My first point is that FHFA has made numerous important 
reforms to the enterprises during conservatorship that are 
beneficial to the housing finance system and reduce risks to 
taxpayers. My written statement discusses a number of these 
reforms and provides links to detailed reports about them. 
Despite these reforms, I regularly hear assertions that Fannie 
Mae and Freddie Mac are the same today as they were when they 
were placed into conservatorship. It is essential for this 
Committee to be aware that these assertions are simply false 
and to ensure that the reforms already made are not 
disregarded.
    Despite the reforms already made, FHFA is fully aware that 
housing finance reform will involve many crucial decisions that 
go far beyond these reforms. So the second point I want to make 
unequivocally is that it is the role of Congress, not FHFA, to 
make the decisions that chart the path out of conservatorship 
and to the future housing finance system.
    Among the important decisions for Congress are the 
following:
    One, how much backing, if any, should the Federal 
Government provide and in what form?
    Two, what transition process should be followed to avoid 
disruption to the housing finance market and who should 
implement that process?
    Three, what roles, if any, should the enterprises play in 
the reformed housing finance system? And what statutory changes 
will be required to ensure that they play those roles 
effectively?
    And, four, what regulatory framework and authorities are 
needed in a reform system? And who will have that 
responsibility?
    I reiterate that it is the role of Congress to do housing 
finance reform, and I encourage you to do so expeditiously.
    My final point is to identify and discuss the most 
significant challenge FHFA faces while Congress moves ahead on 
reform. The challenge is that additional draws under the PSPAs 
would reduce the amount of taxpayer backing and the foreseeable 
risk that resulting uncertainty could adversely impact the 
housing finance market.
    Unfortunately, this challenge is significantly greater 
today than it has been, and it will continue to increase if not 
addressed. When I first discussed this in 2016, each enterprise 
had $1.2 billion under the PSPAs as a buffer to shield against 
having to make additional draws of taxpayer support in the 
event of an operating loss in any quarter. On January 1, 2017, 
the PSPA buffer reduced to $600 million, and on January 1, 
2018, it will reduce to zero. At that point, neither enterprise 
will be able to weather any quarterly loss without drawing 
further taxpayer support.
    GAAP accounting for any number of noncredit-related factors 
in the ordinary course of business regularly results in large 
fluctuations in enterprise gains or losses. We also know that 
lower corporate tax rates under tax reform would reduce the 
value of the enterprises' deferred tax assets and result in 
short-term losses.
    Like any business, the enterprises need some buffer to 
shield against short-term operating losses. In fact, it is 
especially irresponsible for the enterprises not to have a 
limited buffer because a loss in any quarter would result in an 
additional draw of taxpayer support and reduce Treasury's 
fixed-dollar commitments under the PSPAs.
    As conservator, we reasonably foresee that this could erode 
investor confidence and stifle liquidity in ways that could 
increase the cost of mortgage credit to borrowers. As 
conservator, FHFA cannot risk these consequences and meet our 
statutory obligation to ensure that each enterprise fosters 
``liquid, efficient, competitive, and resilient national 
housing finance markets.''
    Consequently, in our conservatorship role, FHFA will take 
actions as necessary to prevent additional draws of taxpayer 
support. Neither this Committee nor anyone else should view 
such actions either as interference with the prerogatives of 
Congress, as efforts to influence the outcome of housing 
finance reform, or as any step toward recap and release. We 
will take only such actions as necessary to avoid normal 
operating losses that would trigger a draw during 
conservatorship.
    Thank you again for the opportunity to testify, and as 
always, we stand ready to assist the Committee in any ways we 
are requested to do so.
    Chairman Crapo. Thank you very much, Director Watt. I 
appreciate that commitment.
    My first question I would like to focus on private capital. 
Among the reforms that you listed in your written testimony 
more fully, you discuss some of the efforts that the agency has 
undertaken to increase the participation of private capital in 
the markets. Since FHA first started publishing its scorecard 
in 2012, an important component of the scorecard has been 
reducing taxpayer risk by attracting private capital and 
shrinking the footprint of the enterprises. Under your 
leadership, FHFA has overseen a significant increase in the 
amount of credit risk transferred to the private sector, which 
I applaud and encourage you to work to continue to
increase.
    In addition to the existing risk transfer deals that you 
have already engaged, what can FHFA and the enterprises do to 
reduce taxpayer risk and to attract more private capital to the 
mortgage markets?
    Mr. Watt. Well, of course, the first thing we do regularly 
is to not take loans that people cannot afford to pay. We have 
a defined credit box, and we try to encourage lenders to use 
that credit box. But we will not take a loan outside that 
credit box.
    The second thing we have aggressively done is had the 
enterprises innovate in the risk transfer space, moving first 
to second-loss positions or intermediary positions, but then 
moving to first-loss positions when it is financially feasible 
to do so.
    So I think the objective here is to make the whole system 
responsible and not obviously move back to the kinds of 
practices that were taking place prior to the crisis.
    Chairman Crapo. I thank you very much for that, and as you 
know, achieving this objective will be one of the important 
things that we seek to do here as we work on legislation to 
resolve housing finance policy.
    I would like to go, as my final question to you in this 
round, to capital at the enterprises, your final topic that you 
discussed with us. On January 1, 2018, the capital buffers at 
the enterprises will draw down to zero, requiring Fannie Mae 
and Freddie Mac to draw on their lines of credit at the 
Treasury in the event of a quarterly loss. This reinforces to 
me why conservatorship is unsustainable--no capital, taxpayers 
on the hook for losses, and the Government effectively taking 
all the risk.
    While I understand that you have concerns with the GSEs 
operating with zero capital buffers and want to work to help 
address this issue, adding a small capital buffer does not 
change the need for a long-term solution to our housing finance 
reform.
    Unfortunately, suspending dividend payments will lead some 
to incorrectly believe that reform is not urgent and that 
maintaining the status quo is sustainable.
    I would encourage you to work with this Committee so that 
that does not occur. Could you please respond to that?
    Mr. Watt. First of all, let me just say I absolutely agree 
with you. We are going to try to avoid a draw at all costs 
because we think there are risks associated with it, and as 
conservator, our position is a little bit different than 
everybody else. I kind of liken it to the situation I faced 
several weeks ago when I went home and had a letter in my 
mailbox that said my car was subject to recall because of the 
airbag. Well, there were a number of people who were saying the 
risk of you driving that car is minimal, and I absolutely 
agreed with them. But I was the responsible party, and my 
family was going to have to ride in that car. And so in this 
situation, the cars that you all have given us are Fannie Mae 
and Freddie Mac. It is our responsibility to keep them safe and 
sound, to make them efficient while they are in 
conservatorship. And it is your responsibility to change cars 
if you want to after that, or whatever you decide to do.
    Chairman Crapo. Well, let me ask a question this way: Do 
you believe that the FHFA has the authority to withhold 
dividend payments----
    Mr. Watt. I do, yes.
    Chairman Crapo.----without the consent of Treasury and 
without----
    Mr. Watt. I do, yes.
    Chairman Crapo.----the Third Amendment?
    Mr. Watt. Yes. But I also want to assure you that my first 
option, obviously, would be to work with the Secretary of 
Treasury. These are contractual agreements. They are not 
legislative agreements. The PSPA is a contractual agreement 
between us and the Secretary of Treasury. So modest changes to 
the PSPA would be the first and most prudent way to address 
this issue.
    Chairman Crapo. Understood.
    Mr. Watt. But if that fails, the responsibility for that 
risk falls back on me as the conservator of these enterprises, 
and we cannot afford to run that risk.
    Chairman Crapo. Well, thank you. My time has expired, and 
so I would just like to ask if you and your staff, Could 
provide us with your legal analysis as to why you believe that 
you have the authority without getting agreement from the 
Secretary of Treasury and dealing with the Third Amendment?
    Mr. Watt. I would be happy to do that.
    Chairman Crapo. Thank you very much.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman, and, Director Watt, 
again thank you.
    In your testimony, you talked about the potential and who 
knows what impending concerns you have about tax reform and 
short-term losses. Let me start with that. The President's 
proposed tax reform plan that would cut the corporate tax rate 
from 35 to 15 percent, if the Finance Committee and others 
would come to that--we do not know yet, obviously. Moody's 
estimates that would cost Fannie $15.6 billion and Freddie $5.7 
billion.
    Since the Stock Purchase Agreement between Treasury and 
FHFA limits the GSEs' retained capital this year, as you spoke 
about, and prohibits retained capital next year, talk to us 
about the impact the writedown would have on the GSEs in their 
financial ability, especially what it would do to impact access 
to mortgages in the broader housing market. You spoke about it 
sort of generally, if you would dig down a little deeper on tax 
reform and where that goes.
    Mr. Watt. So one of the things we obviously are monitoring 
on a regular basis are these discussions about tax reform 
because they would have, if they are adopted and depending on 
what is adopted, differential impacts. They could range in our 
analysis from a low of $5 billion up to $25, $26 billion. And, 
obviously, the extent of those tax reforms will have--and that 
is a short-term impact. This is not a commentary on the value 
of the reduction in the corporate tax rate. We are talking 
about the short-term impact of that corporate tax rate cut on 
deferred tax assets, which then has a short-term impact on the 
enterprises' losses.
    So one of the things we are regularly doing is talking to 
Treasury and monitoring what is happening in that tax cut 
space, because if we wait until that happens, it may be too 
late. Or it is possible that they could phase in the tax cuts 
over a period of time. Or it is possible that something could 
be written in to protect enterprises in conservatorship. So all 
of those are possibilities, but they are possibilities at this 
point, and we have to be realistic about them and evaluate 
them, so we are constantly making that kind of evaluation.
    The other regular kind of fluctuations that lead to 
quarterly losses is just GAAP accounting principles, how you 
account for hedging against risk, and those are things that 
have nothing to do with whether you have extended good or bad 
credit. They are noncredit-related factors, but they bounce the 
enterprises' losses around regularly. So going to zero in a 
buffer could in any quarter put us into a situation where we 
could end up having to make a draw.
    Senator Brown. Thank you. Let me switch to sort of an Ohio-
specific question, but one that could have impact moving 
forward in other places. In Ohio, investors in the GSE bulk 
sales use land contracts, as you know, known as ``contract for 
deed,'' to generate income off these properties. These 
contracts offer none of the protections of a mortgage because 
they are obviously not a mortgage. They often leave borrowers 
with properties that are uninhabitable. That happened in 
Cincinnati. It has happened in Cleveland.
    You have, my understanding, the authority to be able to do 
something, and my question is pretty simple. You will prohibit 
bidders on NPL sales from using contract for deed and prohibit 
it in any single-family rental deals going forward?
    Mr. Watt. We certainly will look at that, Ranking Member 
Brown. We have changed the requirements a couple of times, but 
we never change them retroactively. We always change them 
prospectively because people who have bought these 
nonperforming loans have bought them on a set of fixed 
assumptions and criteria and requirements that we have imposed 
on them. So it would have to be on a go-forward basis that we 
would do it. But we are actively looking at that issue right 
now.
    Senator Brown. Thank you.
    Chairman Crapo. Thank you.
    Senator Corker.
    Senator Corker. Thank you. Mr. Watt, thanks for being here 
today, Congressman. What do we call you now?
    Mr. Watt. ``Mel.''
    Senator Corker. ``Mel,'' OK.
    [Laughter.]
    Senator Corker. That is what I have always called you, but 
I did not want to do so in front of people without your 
permission. Thank you for coming today, and thanks for the job 
you are doing.
    I know we have had some conversations recently, and I just 
want to reiterate it is your belief, as we have had in multiple 
conversations, that the future of housing finance reform is 
totally Congress' job to do, and you are relying upon us to 
make that happen. And I think you know there is sort of a lefty 
think tank and a righty think tank and some in-the-middle folks 
that appear to be coming together around some conclusions. And 
it is my sense that the Chairman and Ranking Member wish to 
take that up in the near future. And from your perspective, 
that is our job to do, and that is how we determine the future 
of these entities.
    Mr. Watt. I absolutely agree, and I hope you heard me loud 
and clear, unequivocally, it is that role of Congress. Now, we 
have made some reforms to the enterprises, and I do not want 
those disregarded because they are important reforms that we 
have made during the conservatorship process. And I have 
outlined a number of them in my longer-form testimony. I did 
not have a chance to do it in the short period I had in giving 
an opening statement. But they are outlined specifically in my 
longer-form written testimony with links to the details about 
them. So, in a sense, you could think of that as GSE reform and 
think of the Committee's responsibility and Congress' 
responsibility as housing finance reform. I do not want to get 
into semantics here, but I just want----
    Senator Corker. I got it. We do not have any issues with 
the steps you have been taking, and we appreciate you informing 
us of those.
    We obviously had a recent conversation at the end of last 
quarter regarding the building up of capital within the 
entities, and the reason we did that was that was a pretty big 
change from where we have been. The two entities have $258 
billion worth of capital available to them, so this whole 
notion of them running out of resources is just a baseless 
issue. And I do not know why that even at this time is being 
discussed because what it does, Mel, is it changes the dynamic 
of what has been happening. It makes it appear as if there is a 
different approach that is being taken by the Administration. 
The Administration is working with us, working with others to 
move ahead with reform. But all of a sudden, a unilateral step 
by you when they have got $258 billion in capital available--
you know, I ran a pretty large company that I started, and, you 
know, our money went into overnight repos, and we kept no 
cash--none. Each day when we needed it, we drew it out. And, in 
essence, you have exactly that same type of thing available to 
Fannie and Freddie, $258 billion worth right now. And so to act 
as if drawing on this made-available credit when the U.S. 
taxpayers already are 100 percent the backing of these 
entities, it just creates a different direction, which sends a 
signal to the world that something different is occurring when 
it is not. So I hope we have established today that you have 
got $258 billion available. If you draw upon it--that is what 
it is for, by the way--it in no way affects the credit or 
anybody's perception of the securities that are being put out.
    Mr. Watt. Senator, I hope you--I tried to address that as 
forthrightly as I could in my opening statement. I have 
addressed it repeatedly. But I hope you heard the analogy I 
used. You all gave me these cars to drive for 5 years. You 
said, ``Keep them safe and sound.'' You said, ``Make them 
efficient.'' If there is a risk that a draw or a reduction in 
the commitment that backs these enterprises would interrupt the 
market--it is small. I acknowledge that. I am not trying to 
overstate it. But if it happens, and what we say is it is 
reasonably foreseeable it could happen, it will not be you that 
they come to and talk to about it. It will be the conservator 
because we are the responsible parties for this during 
conservatorship. You are the responsible parties for it going 
forward.
    Senator Corker. Well, why don't you go ahead and draw $10 
billion on it right now and see? I am telling you, it is going 
to have no effect.
    Mr. Watt. Well, I do not need to draw $10 billion on it 
if----
    Senator Corker. Do it anyway. Do it anyway.
    Mr. Watt. Well, I would not do that and run that risk 
because that would expose me to the same risk that I am trying 
to avoid. I just do not understand why--well, we have had this 
conversation before. But believe me, I cannot afford to take 
that risk any more than I could afford to drive a car that has 
a recall on it with an airbag with my family in it. And I have 
tried to make that analogy for you. That is my responsibility, 
and I have to live up to that responsibility as conservator. 
That is what you all--that is why you all approved me in this 
Committee to do this job, and that is why the Senate confirmed 
me to do this job.
    So I do not know what else I can say about that. I cannot 
afford to assume that risk. You can afford to say it is 
theoretical. I cannot afford to say that I will assume it.
    Senator Corker. Well, it is one of the most baseless 
arguments I have ever heard. Any company in America that had 
access to a $258 billion line of credit from the U.S. 
Government, backed by the U.S. Government, I do not think would 
be concerned about market fluctuations. But something has 
happened recently, and I do not know what it is, but----
    Mr. Watt. It could get into a discussion about whether that 
is adequate or not adequate. I do not know for a $5 trillion 
portfolio. You know, you do not know what--you know, and I am 
not saying this is a large risk. I am just saying I cannot 
afford to take it as conservator because I have responsibility 
for it. That is the point I keep trying to make to you.
    Chairman Crapo. Thank you.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman.
    A number of things. You talked about in your opening 
comments that you have been moving toward risk sharing with the 
private sector, and you have. Do you have a figure that would 
be appropriate as to how much of the portfolio should be put 
into private versus taxpayers?
    Mr. Watt. We have a goal of risk sharing on at least 90 
percent of the single-family new loans that fit our criteria, 
and that is a substantial part of our portfolio. The goal, 
obviously, would be to transfer as much of it as you can.
    Senator Tester. Do you think 90 percent is attainable?
    Mr. Watt. In normal times. Actually, we have exceeded that 
goal since we set that goal. But the problem is if you require 
it and there is a downturn and investors walk away, then you 
have made us have to adjust the price down so we are 
subsidizing the transfer, and we do not want to do that. That 
is why I say we always do it based on rational economic 
decisions. So I do not have any problem with the goal. The 
problem we have is when you write that and say you must do it, 
it really is an imposition into the market that is neither 
justified nor is it, in our opinion, reasonable to do that.
    Senator Tester. OK. So I think--I do not want to speak for 
everybody, but I think a fair number of folks around here want 
to see private capital go in to take the risk off the 
taxpayers.
    Mr. Watt. And we do, too, yes.
    Senator Tester. So the question is--we want to make sure 
that you or whoever is in your position is as active as 
possible to get private equity into the entities. The question 
is: How should it be written so as not to tie your hands, but 
yet make sure that you maintain aggressiveness?
    Mr. Watt. I think it would be appropriate to set a goal and 
to give us flexibility based on the criteria that we have 
talked about. I mean, we share the goal of doing that, but you 
could easily get into a situation where you are requiring us to 
make non-economic decisions if you say you must do it 
regardless of the economic circumstances.
    Senator Tester. OK. Do you think it is possible to have the 
30-year note without an explicit Government guarantee?
    Mr. Watt. Senator, I think that is probably more into the 
housing finance reform area than it is for me to say, because I 
could just give you my personal opinion, which is not worth 
much.
    Senator Tester. It is worth a lot. I value it.
    Mr. Watt. I really try to keep from doing personal opinions 
as opposed to expressing an opinion of our agency, and we have 
not developed an opinion on that.
    Senator Tester. OK. Well, I mean, I think your opinion does 
mean a lot, quite frankly, because you are in the business a 
lot more than we are. We are depending on you in that regard.
    Mr. Watt. Let me put it like this: I have read a number of 
experts in this area who do not believe it would be possible to 
do.
    Senator Tester. OK.
    Mr. Watt. And I----
    Senator Tester. OK. That is fine.
    Mr. Watt. I presume there are credible arguments on the 
opposite side, but I do not know.
    Senator Tester. I want to talk about the buffer a little 
bit. The buffer I believe is an agreement through Treasury.
    Mr. Watt. It is, yes.
    Senator Tester. OK. And you said it will be down to zero by 
2018, which is coming right up. And by your opening statement, 
you indicated that you think you need to have a buffer.
    Mr. Watt. Yes, sir.
    Senator Tester. How much?
    Mr. Watt. Well, it could vary, because the objective is not 
to make a draw.
    Senator Tester. OK.
    Mr. Watt. So we want to cover first the normal fluctuations 
in operations. We want to monitor what is happening on tax 
reform because that could have a major impact short term on our 
loss situation.
    Senator Tester. So give me a ballpark figure on how much.
    Mr. Watt. It is just hard for me to do that, Senator, 
because----
    Senator Tester. So let me ask you this: Has Secretary 
Mnuchin or anybody from the Trump administration--have you 
approached them or have they approached you about a buffer 
amount?
    Mr. Watt. We have had discussions with the Secretary of 
Treasury. You have him before you next week, and I think it 
would be more appropriate for him to talk about it.
    Senator Tester. I will. Did he give you a number?
    Mr. Watt. Not a specific number, no.
    Senator Tester. Would he be opposed to a buffer at all? 
Were they going to stay at the zero, or did they talk about it 
at all? OK. My 5 minutes is up. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Tester.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Thank you for 
holding this very important meeting.
    Director Watt, thanks for coming out this morning and 
sharing your thoughts and your views at the agency.
    Mr. Watt. Good to see you again.
    Senator Scott. You, too, sir. Not on an airplane, so this 
is good.
    Director Watt, you may know that South Carolina is a State 
where about 1.4 million people live in distressed communities, 
which is one of the reasons why I have spent a lot of time on 
what I call my ``opportunity agenda,'' looking for ways to help 
folks leave those distressed communities and really experience 
their economic potential. And much of climbing the economic 
ladder in this country, most of us actually would even suggest 
that living the American dream means owning your own home. And 
I think the reality of it is getting there is critically 
important, and I think there are ways for us to help folks get 
there and do it in a way that is logical and responsible.
    I know that there has been a lot of conversation around the 
fact that today we are seeing the lowest first-time home buyers 
since the 1970s. Multiple years in a row we saw a decline in 
first-time homeowners, and we know that those folks living in 
distressed communities are the folks who are disproportionately 
representing those folks who are not able to climb out and 
experience home ownership for the first time.
    We also know that the difference between the net worth of 
Americans can oftentimes be seen in the equity in that home, 
and renters' net worth is somewhere around under $10,000, 
according to the Consumer Finance Report, and for those who own 
their home it is near $200,000, so at least 20 times more.
    And so the question is: How do we help those folks who are 
paying their rent on time, paying their utilities on time, use 
that data in evaluating their desire to own a home? There are, 
according to the statistics, about 26 million people who are 
credit invisible because the models that some use have not been 
updated to the latest model. I know that you have, I 
understand, been considering updating the credit scoring model 
that GSEs accept. Can you tell me how much progress you have 
made in that direction and what your thoughts are on going from 
what is for the most part an antiquated system that leaves so 
many millions of Americans without the creditworthiness to 
start the process of buying a home and what you think about 
heading toward that newer model sooner than later?
    Mr. Watt. Senator, we have set as an objective to try to 
get through this process by the end of this year.
    Senator Scott. Good.
    Mr. Watt. But I will also tell you that we thought it was 
going to be a lot simpler than it has turned out to be. And the 
primary reason for that is anytime you start talking about 
changing the credit scoring models, you set off a whole 
sequence of events that are very costly for people to change. 
And changing back and forth between competing models is very 
difficult for the industry to do.
    So we have spent a lot of time trying to figure out what 
impact there would be to going to a new model. We know that new 
models will take into account different considerations.
    The enterprises themselves and their automated underwriting 
systems are trying to take some of those factors into account 
because, unlike what most people assume, the enterprises do not 
always rely on credit scores to make these decisions. They are 
factors in making these decisions, but they have independent 
evaluation tools called ``automated underwriting systems'' that 
can make these judgments.
    So we have been aggressively asking them to do the 
innovation that is necessary, but not be irresponsible because 
part of the reason that a lot of people are having this problem 
is that their credit was so damaged by bad loans that they got 
involved in before that they could not--they just have not been 
able to dig out. So it is a multifaceted problem.
    Senator Scott. The Chairman has just helped me realize that 
even on the Banking Committee 5 minutes is still 5 minutes. I 
am going to try to stretch that a little bit here. I will say 
two things.
    Number one, the fact of the matter is if you are paying 
your rent on time, your utilities on time, your cable on time, 
your cell phone on time, look, that is necessary information 
for making a credit decision. The primary, predominant way that 
someone buys a home is their credit score. About 76 percent of 
South Carolinians can be scored. If we were to go to the new 
model, we would see another 16 percent of South Carolinians 
being able to be scored.
    Said differently, since the GSEs have such a large 
footprint in the market space, if you are not using the most 
current model, it is very difficult for 16 percent, nearly 
900,000 South Carolinians, to be scored.
    Thank you.
    Mr. Watt. Thank you.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you.
    Director Watt, I am going to shift gears a little and talk 
about servicing standards to start. How are you? I am the new 
Senator from Nevada.
    Mr. Watt. Good morning.
    Senator Cortez Masto. Great to have you here.
    So servicing standards, FHFA has done quite a bit to 
improve servicing standards, but I remain concerned that we 
have not yet gotten to the core of the problem driving servicer 
misconduct. In 2011, FHFA released a white paper looking to 
overhaul the way the GSEs pay servicers but did not complete 
work in this space. The legal settlements and GSE rules have 
raised servicing standards. Servicers still stand to profit 
from default and foreclosure, while modifications are costly. 
Servicers also still have an incentive to extract fees from 
both homeowners and investors, and homeowners are powerless to 
fire their servicer if they are not satisfied.
    Do you agree that we still need to address the way 
servicers are paid so that they do not profit more from 
foreclosures than from keeping families in their homes? And 
then let me follow up with a second question. Is FHFA going to 
do further work in this space, or is this up to Congress if we 
are undertaking housing finance reform?
    Mr. Watt. The answer to your first question is yes, I agree 
that something needs to be done in this space. It is a serious 
concern. We cannot do it alone as the enterprises because 
lenders have servicers, and they are the bulk of the people who 
compensate servicers. So if we try to do it alone, we just 
would not be able to get there without their consultation.
    Now, I do not know that there is a legislative solution to 
it, but we are working aggressively with the industry to try to 
get through this problem. Servicing used to be just collecting 
mortgage payments. During the crisis, it became a much, much 
more difficult exercise, and the compensation did not 
necessarily follow the complexity of it. So the industry has 
got to catch up on that.
    Of course, now we are moving back to a more normalized time 
where it might not be as work-intensive as it was during the 
crisis.
    So all of those factors go into evaluating how much you are 
going to pay a servicer for servicing a loan. That is the 
collection of the money, which is easy if people pay it on 
time. It is just an accounting thing. But----
    Senator Cortez Masto. Right. Director, I do not mean to cut 
you off----
    Mr. Watt.----if they default----
    Senator Cortez Masto. I get it because Nevada was ground 
zero for the foreclosure crisis, and I will tell you servicers 
are more interested in the fees and costs that they could get 
from the foreclosure than they were actually making sure that 
the loan was performing. So I think we need to address that 
compensation structure for servicers, and I am hoping you are 
committed to helping us do that.
    Mr. Watt. Certainly. If you can find a legislative 
solution, I would certainly work aggressively with you to try 
to help because there is definitely movement needed in this 
area.
    Senator Cortez Masto. OK, great.
    Now, let me ask one other question because I know my time 
is running out. Community banks, some of the up-front credit 
risk-sharing deals undertaken by the GSEs in recent years have 
benefited large banks that use a vertical integration model. In 
other words, the big banks originate the loans, they securitize 
them, and then they sell the risk off to the market.
    One concern that has been raised about this structure is 
that if it is scaled up too much, you may end up choking off 
small lender access to the mortgage market. In other words, 
small lenders cannot compete because they do not have large-
scale operations or securitization affiliates.
    As Congress contemplates the next phase for GSE reform, do 
we need to be mindful that credit risk-sharing deals, 
particularly those involving up-front risk sharing, do not box 
out small and community-based lenders?
    Mr. Watt. We definitely need to be aware of that, and we 
are aggressively working on making sure that that does not 
happen, because one of the things we tried to do during 
conservatorship is make sure that large and small lenders are 
treated alike.
    Senator Cortez Masto. Right.
    Mr. Watt. And that should also be true in the credit-risk 
transfer space.
    Senator Cortez Masto. Thank you. And I know my time is up, 
but I will submit additional questions for your response as 
well. Thank you.
    Chairman Crapo. Thank you.
    Senator Cotton.
    Senator Cotton. Thank you, Mr. Chairman. And, Mr. Director, 
welcome. It is good to see you on this side of the Capitol. 
Thank you for your service and for being here this morning.
    You and I recently discussed the issue of residential 
Property-Assessed Clean Energy loans, commonly referred to as 
``PACE loans''--PACE liens, actually, since they get super lien 
status through local tax systems--and how they affect the 
housing market. Arkansas does not yet have these residential 
PACE loans, but many other States do. These loans are unusual 
not only because they are liens, but also because lenders are 
not following Truth in Lending Act requirements for disclosure.
    As a result, these loans are often high-interest, up to 12 
percent for 25 years. They include home liens that jump 
priority even though these loans come after the mortgage. They 
contain no Federal disclosure or underwriting, and we have seen 
several examples of severe consumer abuse. For example, I am 
aware of a case of an 86-year-old widow on Social Security 
dealing with severe dementia who was given a PACE loan without 
Federal disclosure or underwriting for more than $100,000, and 
she may now lose her home.
    To address this scandal, Brad Sherman in the House of 
Representatives and I have introduced legislation that would 
clarify that the Truth in Lending Act applies to PACE loans. I 
would like to discuss with you Fannie and Freddie's position on 
these types of PACE liens. Do Fannie and Freddie purchase or 
refinance mortgages with PACE liens attached?
    Mr. Watt. We have a policy against doing that. The problem 
is that these liens are put on after our loans are already 
made, and they jump ahead of Fannie and Freddie's lien 
position, which has been our primary concern. And, also, they 
show up in the tax office, not in the land registry office, so 
even after they are put on after we have bought the loans that 
were superior to them, they jump ahead. Then we do not get 
notice of that so that we can adjust for it.
    So there are multiple problems. Your bill would, I believe, 
address or start to address some of those problems, but our 
primary concern is that these so-called tax liens--you know, 
most people think of a tax as something that benefits a larger, 
wider group of people, not a single homeowner. And this runs 
counter to that theory because it treats them as a superior tax 
lien, which we have already taken into account anytime you make 
a loan. But then you come back, and you might put a $25,000, 
$30,000 renovation for efficiency. It may be worth that. It may 
not be worth that. But we do not have any control over that, 
and it has really created a serious problem for the mortgage 
finance industry. And so we prohibit it, but there are 
limitations to even how we can even find out about them.
    Senator Cotton. Well, thank you very much for that, 
Director Watt. So my legislation and Representative Sherman's 
legislation would address the consumer-facing problems that you 
have, oftentimes vulnerable consumers being exploited by 
predatory lenders by applying the Truth in Lending Act. But 
what I hear you saying is that even if that Act passed, you 
would still have these separate issues because, one, it is a 
super lien that takes over your first priority mortgage; two, 
it is retroactive, after those mortgages; and, three, as you 
say, it even occurs in oftentimes a separate record system, the 
tax system versus the land registry system.
    Mr. Watt. Right.
    Senator Cotton. But even if we address the consumer abuse, 
you would still have the problem of your financing system, 
which could create broader problems of liquidity in the 
mortgage market. Is that right?
    Mr. Watt. You are absolutely right. Now, I will give you 
another little piece of information. There is no rational 
reason, if you think about it, why a superior tax lien would be 
having an interest rate of 10, 11, 12 percent when a lien 
subordinate to it is going at 4 percent or 5 percent. That is 
the market rate. So there are preferences here that are 
really--it is just not something that is working in the 
marketplace.
    Senator Cotton. Well, thank you very much for protecting 
the taxpayers from what really is a scandalous program, 
Director Watt. We are trying to protect consumers, but as you 
say, there are real problems that the PACE loan system creates 
for taxpayers as well. I hope that you preserve that system. I 
have talked to your counterparts, Director Cordray and 
Secretary Carson as well, about this program to see what we can 
do to rein in these abuses.
    I thank you for your time.
    Senator Brown. [Presiding.] Thank you, Senator Cotton.
    Senator Menendez.
    Senator Menendez. Thank you. Director Watt, welcome.
    Mr. Watt. Thank you.
    Senator Menendez. It was a privilege to serve with you in 
the House before. Your service is exemplary.
    As the Ranking Democrat on the Housing Subcommittee, I 
wanted to take this first opportunity that the full Committee 
has had on the question of housing finance systems to lay out a 
few principles that I think are important.
    One is to have a system that ensures broad affordability 
and access, including for those homeowners in high-cost States 
like New Jersey, strong mortgage servicing standards that work 
to keep borrowers in their homes and foreclosure prevention 
options that
provide homeowners with sustainable modifications; of course, 
the protection of taxpayer dollars; equitable access for 
lenders of all sizes so we do not overly concentrate the market 
in the largest institutions; and clear obligations to serve 
low- and moderate-income borrowers and support the development 
and preservation of affordable housing. I am going to look 
forward to work toward those goals with those who have similar 
views.
    My home State of New Jersey continues to struggle with 
underwater foreclosures, and from 2007 to 2016, 85,000 New 
Jersey residents lost their homes to foreclosure; 3.2 million 
homes around the country still have underwater mortgages, 
including more than 9 percent in New Jersey.
    In 2014, FHFA announced that it, Freddie Mac, and later 
Fannie Mae would sell off delinquent loans in bulk in order to 
reduce risks to taxpayers and to help families stay in their 
homes. The enterprises have sold off more than 11,000 loans in 
New Jersey, and there are recent plans to do more.
    So I was extremely pleased in March to see New Jersey 
Community Capital win the bid on a community impact pool of 158 
loans in the New Jersey and New York area. In my mind, it is 
clear that community-oriented organizations like New Jersey 
Community Capital, with vested interests in the neighborhood 
improvements, can achieve outcomes that mutually benefit 
borrowers, distressed communities, and the enterprises 
themselves.
    So what I want to know from you is what FHFA and the 
enterprises can do to provide greater access to loan sales for 
community-oriented institutions like New Jersey Community 
Capital who are better positioned to help borrowers stay in 
their homes. And I understand that Fannie Mae is prohibited 
from entering into direct sales of assets, but it could offer 
pools for nonprofit bidders, for example. Given the proven 
track record of an entity like New Jersey Community Capital, 
such pools would ensure greater community benefits and outcomes 
for loans sold through the program.
    So I would like to hear what you think could be done 
better, and I would like to encourage FHFA to push Fannie Mae 
to pursue loan sales exclusively for nonprofits.
    Mr. Watt. So this is an area we have done a lot of work in, 
and to be clear, one purpose was to get risk off of the 
enterprises' books. But a more important purpose was to get 
these loans into the hands of people who had more ability than 
we had, Fannie and Freddie had, because of our statutory 
limitations to do the kind of innovative community preservation 
and stabilization work.
    So we have always had as an objective trying to get these 
loans to people who are responsible, which is why we have gone 
back and changed the criteria for bidders to write in certain 
requirements that they have to comply with, whether they are 
community-based or whether they are big purchasers.
    So what we did is we have reduced substantially the size of 
the pools because the biggest impediment to nonprofits is just 
that nonprofits generally are nonprofits, they do not have 
money. And so you need money to buy these nonperforming loans 
off of our books. We are statutorily obligated not to give them 
away. We cannot do that. So reducing the----
    Senator Menendez. And that is not what I am arguing for.
    Mr. Watt. Yeah, I understand. Reducing the size of the loan 
pool was very critical. In fact, I think eight or nine of the 
community loan pools have been won by the organization in your 
State.
    And I will tell you what else we have done. We have met 
with local governments who were writing to us or State 
governments who were writing to us saying you should quit 
selling these loans to big Wall Street firms. And our response 
to them is, OK, if you would buy them, you have a vested 
interest in community stabilization, you are closer to the 
community, we can identify the loans in your State, and you 
could help the nonprofits, or you as an entity, as a State or 
local government, could get into this space. And we are close 
to dealing with the State of New York because the bulk of these 
loans really are in Florida, New Jersey, New York--you know, 
five States are where the bulk of them are.
    So we are trying to be as aggressive and innovative in this 
space as we can be because we share the objective of getting 
them and having these decisions about stabilizing communities 
made as close to the neighborhoods as the decisions can be 
made.
    Senator Menendez. Well, we look forward to working with you 
and suggesting some other ideas to achieve that. It is also not 
only about community stabilization; in many cases, it is also 
about the reality of communities of color being able to have a 
place to continue to call home.
    Thank you, Mr. Chairman.
    Senator Brown. Thank you, Senator Menendez.
    We are going to work through the roll call, which just 
began, and Senator Crapo will return shortly. Senator Tillis?
    Senator Tillis. Thank you, Senator Brown. Mel, it is good 
to see you. You would not remember this or necessarily know it, 
but the first Congressman I ever met was you in 2004 when I was 
a Cornelius commissioner, and you were very gracious and 
attentive in our discussions we had in your office. I remember 
that well, and I appreciate your indulgence there, and your 
indulgence now.
    Mr. Watt. I am still one of your constituents.
    Senator Tillis. I know you are.
    [Laughter.]
    Senator Tillis. Born in Steele Creek. And, Mel, I think 
that you are right in the position that you took that we have 
got to come up with the solution. But I have to believe that 
the work that you have done--you mentioned in response to one 
question that you have implemented enterprise reforms--that the 
best way for us to get to a bipartisan something that 
ultimately comes out of Congress is to be very much instructed 
by the views of the White House and the views of your 
organization in terms of boundaries or priorities. Do you agree 
with that? And what would you envision as a good first step so 
that--we have seen proposals over the past couple of years. 
They have not moved forward--but to kind of get a universe of 
what the good ideas are and maybe some things that would not be 
based on your on-the-ground experience? Could you talk a little 
bit about that?
    Mr. Watt. Senator, I have gotten a lot of criticism because 
I took FHFA out of the housing finance discussion because it 
seemed to me that our role was to manage the enterprises in 
conservatorship in what I affectionately called ``the here and 
the now.'' And so we have never developed an agency position on 
these things. But I agree with you, if somebody asked us to do 
that, we have a lot of experience. It is just not in our 
statutory mandate. And I have not wanted to--you know, people 
get critical when I get out there and start advocating for 
certain principles in housing finance because I have not been 
asked to do that and it is not part of my statutory mandate.
    Senator Tillis. I admire the fact that you are staying 
within the lanes. That is not necessarily always the case in 
every agency, so I appreciate that. But in this case, you have 
expertise that I think would be very helpful, and rather than 
drilling down on the details in 2 minutes and 30 seconds left, 
the----
    Mr. Watt. If you all asked me to do it, I would try to be a 
lot more aggressive in that space, yes.
    Senator Tillis. I think it would be helpful, particularly 
as it relates to when you have discussions about where do we go 
forward with GSE reform, the end state of Fannie or Freddie or 
some newly combined institution, those sorts of things I think 
could be very, very helpful to get your insights on the role 
that you have played over the past few years.
    Mr. Watt. Yes.
    Senator Tillis. And we are going to need that help.
    I do have one question that really just relates to the 
delay, the recent delay in pushing back the--I think it is the 
underlying CSS system under CSP, but it is being pushed back 
into 2019. There are some who have expressed concern that there 
may not be a commitment to moving forward with that, but I 
think that even in your written testimony, you said ``when,'' 
you did not say ``if.'' So it is your intention; it is just a 
matter of your working through technical difficulties----
    Mr. Watt. Absolutely. This is a major, major undertaking to 
build that platform, and we have learned a lot, and we have 
tried to stay on a schedule. But nobody should read that we are 
not committed to the CSP.
    Senator Tillis. And with the delay, do you feel like the 
pushback to 2019 is an achievable--how would you rate the 
soundness of that implementation? Because, as you know, the 
industry--a lot of other stakeholders have to invest a lot of 
time in it, and planning, and I am just trying to get some idea 
of whether or not that needs to be relooked or if that is a 
relatively sound date moving forward for planning purposes.
    Mr. Watt. I think it is sound, and I think we actually 
built a little leeway into the timeline because we did not want 
to go back and re-extend again. So we built in some time. We 
just added actually 6 more months.
    Senator Tillis. The end of 2018 to mid-2019?
    Mr. Watt. Right. So I think we will be ready, and it is 
critically important and it is absolutely necessary to get to a 
single security which will save the taxpayers a lot of money, 
will help support the TBA market, and increase liquidity in the 
market. So there is no question about that. We are absolutely 
committed to it.
    Senator Tillis. Well, thank you. And with the Chair and the 
Ranking Member, we will be discussing how we can actually 
engage you to get you to a point where we are fully harvesting 
your knowledge and expertise and opinions on how we move 
forward, because it is going to be critically important if we 
are going to get a bipartisan solution that actually fulfills 
what I think is our obligation to move forward with reform.
    Thank you.
    Mr. Watt. Thank you.
    Chairman Crapo. [Presiding.] Thank you, Senator Tillis.
    Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. And I want to 
say to my dear friend, Congressman Watt and Director Watt, how 
pleased we are to have you here and what a fine job that you 
have done in this position. We are grateful for your service to 
our country.
    Mr. Watt. Thank you.
    Senator Donnelly. The first thing I want to ask you is on 
the quarterly dividends to Treasury--and I know you are going 
to start putting a buffer in as well that you had talked about 
a little bit earlier. Do you expect that that flow will be 
positive for the foreseeable future as you look at the markets?
    Mr. Watt. I expect it to, yes. But, you know, there are 
some factors that I outlined in my opening statement that could 
adversely impact that, and especially when it is done on a 
quarterly basis, those fluctuations can be exaggerated.
    Senator Donnelly. One of the areas for my State that is 
important is manufactured housing, and I have encouraged your 
agency to finish the duty-to-serve rule for many years because 
I believe it will increase affordable home ownership, 
particularly in rural areas. The pilot chattel program for 
manufactured housing is a good start, but I encourage you to 
expand those efforts, and I am encouraged that the duty-to-
serve is making progress.
    How do you see that rule impacting manufactured housing, 
particularly with chattel lending?
    Mr. Watt. I think having a duty-to-serve rule and 
approaching it in the way we are approaching it is the 
responsible way to do it, to do piloting in this area, because 
it is an area that Fannie and Freddie have not been involved 
in, certainly not in the last 8, 10 years during 
conservatorship. And so it is a specialized market, and we have 
to get involved in it in a responsible way. And I believe that 
if we do that, the standards for the industry will actually be 
raised. And so we are just pushing the two enterprises to look 
at ways to do this responsibly. Do not just wade in there as 
some people wanted us to do and try to do the same thing in the 
chattel space that we do in the fixed housing space, right? 
Because there are different challenges and different obstacles 
and there are different risks associated with it. And we have 
to responsibly assess those risks and be able to meet them and 
price them appropriately.
    Senator Donnelly. When you look at affordable home 
ownership, which I know has always been one of your 
cornerstones, various legislative proposals we have heard have 
been offered that would change the GSEs from the current 
status. One of my fears is that if the wrong changes are made, 
it could endanger the American dream for middle-class families 
who could be priced out of a mortgage loan.
    Do you share concerns around the 30-year fixed-rate 
mortgage that those changes could make that more difficult or 
could lead to higher interest rates or make it harder to 
borrow?
    Mr. Watt. Well, I think the 30-year fixed-rate mortgage has 
become a standard for American homeowners, and it is important 
to retain that. How it gets retained or what is necessary to 
retain it I think is a subject that this Committee and Congress 
will have to address. But I do think that it is an expectation 
that the American people have because it has always been there.
    Senator Donnelly. What are the changes to the current 
system that worry you the most in terms of maintaining 
accessibility and affordability that you have heard?
    Mr. Watt. Well, I mean, I think a lot of the plans that I 
have seen have some elements of trying to protect 
affordability, and I do believe that that is important to do, 
and I think the American people believe that it is important to 
do. So how that gets done and how it gets structured in housing 
finance reform I think is more in the housing finance reform 
space than it is in the conservatorship space.
    Senator Donnelly. I want to commend you for your 
leadership, for your steering this into a very stable, solid 
position, that you have done a strong job in trying to follow 
the mandates that are there, and you have taken a terrific 
leadership position. And, again, I want to just say how 
grateful I am for your friendship as well.
    Mr. Watt. Thank you so much.
    Senator Donnelly. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Donnelly.
    And, Director, you may have seen everyone disappear here. 
There is a vote going on.
    Mr. Watt. I was aware of that.
    [Laughter.]
    Chairman Crapo. I do expect some Senators to return, and 
while we are waiting for some of them, I will take another turn 
at questions.
    I want to return to the issue that Senator Corker discussed 
with you. As I understand it, according to the Preferred Stock 
Agreements, Treasury has committed to buying senior preferred 
stock to ensure that Freddie and Fannie maintain a positive net 
worth. And there is currently $258 billion of Treasury 
assistance under these agreements that can be accessed.
    Senator Corker--I do not want to speak for him, but as I 
understand his point, he is saying that the markets know that 
this agreement is in place and that this option for the 
conservatorship is available if there is a problem, as you have 
described potentially could come. I understand you to have 
concern about whether--well, I guess what are your concerns 
about using that option to deal with a problem if there is an 
issue that arises?
    Mr. Watt. I think, Senator, Mr. Chairman, when you say the 
markets know, I think if you ask most people out in the public, 
there is actually the opinion that there is an unlimited 
guarantee to this space, and that is not true. And if you 
continue to erode the amount of the backing, I think that 
becomes more apparent to investors, and it runs the risk that 
it could start to have an impact. And that is all I have said, 
and so I think it is important not to draw more because if you 
draw more, it will reduce that explicit dollar amount of 
backing. It is already out of whack because----
    Chairman Crapo. And create some unease in the market.
    Mr. Watt. Right. It is already out of whack because if you 
look at it, Freddie is substantially smaller than Fannie, but 
Freddie actually has more backing than Fannie does.
    Chairman Crapo. So let me ask you, in that context then, 
what is the solution? Is it to stop sweeping as much--would you 
recommend that the Treasury agreement for the sweep be adjusted 
so that the buffer could be created? Or what would you think 
would be the appropriate way to protect against this----
    Mr. Watt. Well, I think there are several options that we 
can look at that are--they are not legislative options because 
the PSPA is a contractual agreement. And I think the 
appropriate conversations about those options really need to 
take place between us and the Secretary of Treasury.
    The problem is that if the Committee sends to the Secretary 
of Treasury the message that this is a no-no to have those 
discussions or to try to resolve this in a coordinated way, 
then it leaves it to us to have to unilaterally deal with it, 
which is something that I would prefer not to do.
    Chairman Crapo. Which gets back to the dividend question in 
a sense.
    Mr. Watt. Right. But there are ways to address this by 
minor adjustments to the PSPA, and that is not a move toward 
recap and release. It is not an invasion of the prerogatives of 
this Committee. It is not an invasion into housing finance 
reform. But we have to have that leeway to do it, and if the 
two of us do not have it--it is a bilateral agreement. If the 
two parties cannot dance, then I have to--I may have to dance 
by myself.
    Chairman Crapo. So if I understand----
    Mr. Watt. And that is not a pleasant position to be in.
    [Laughter.]
    Mr. Watt. And it may not be pretty. But----
    Chairman Crapo. You have a good way of putting it.
    Mr. Watt. But I have the ultimate risk here, is the point 
that I keep trying to make, which is why I made the analogy to 
my automobile and the collision bag. Right? I mean, you know, 
somebody has to assume that ultimate risk, and right now, 
unless we can assume it together, it falls on----
    Chairman Crapo. When you say ``we,'' you are referring to 
you and Treasury?
    Mr. Watt. That is correct.
    Chairman Crapo. So, first of all, let me say I appreciate 
what you have reiterated several times in this hearing, and I 
want to restate it, that any of the moves that you ultimately 
make, whether it be agreements with Treasury, whether it be a 
unilateral move, which I do not believe you should make, that 
those are not moves toward recap and release.
    Mr. Watt. And I made one important point today.
    Chairman Crapo. That point is made, and I appreciate it 
being made.
    Mr. Watt. All right.
    Chairman Crapo. I also believe that this conversation puts 
a highlight or an exclamation point on the other point--one of 
the other points that you have made today, which is that we 
need to move expeditiously to resolve this issue here in 
Congress with
appropriate housing finance reform. I think this really 
highlights that concern.
    That being said, I just want to delve a little deeper and 
clarify. I am hearing you say that you feel--and tell me if I 
am understanding you wrongly--that you feel that a draw on--or 
an action under the current agreements to sell additional 
preferred stock to Treasury, to keep that buffer in place 
should we end up in a problem, is a less preferable option or 
it would be received less favorably in terms of its market 
impact than an adjustment to those agreements entered into 
mutually between you and the Secretary of Treasury. Is that 
right?
    I guess my question is this: It seems to me that we have 
some preferred stock purchase agreements in place. If accessing 
the terms of those agreements is going to create market unease, 
would adjusting those agreements not also create market unease?
    Mr. Watt. Not to deal with a short-term loss situation. 
This is just about dealing with a short-term possibility of a 
loss. And I do not think the market would react to that. I 
think, you know, from everything I have heard, Senator, this 
reducing buffer was designed to put pressure on Congress to do 
housing finance reform. It was a 3-year, $3 billion down to--
you know, it just went down. But if it gets to zero, there is 
no buffer there. There is no operating reserve that we can rely 
on. We would have to make the draw.
    Chairman Crapo. Well, I understand that.
    Mr. Watt. And that would be, I think--it could be, and I 
should not say it would be. It could be unsettling to the 
market, and we cannot as conservator afford to have that happen 
because then you start to adversely affect the pricing of 
mortgages; you run the risk of having liquidity issues in the 
market. I mean, you know, it is just----
    Chairman Crapo. I understand.
    Mr. Watt. Now, it may be far-fetched. It may be--and people 
can talk about it in theoretical terms. But----
    Chairman Crapo. But you are concerned about the actual----
    Mr. Watt. Right.
    Chairman Crapo. Well, let me just say I tend to agree with 
Senator Corker, and perhaps the conversations you have had with 
me and him today can help to allay that worry in the 
marketplace, that your utilization of the terms of the existing 
agreements should not create any undue concern.
    That being said, I understand your point, and I think it 
just highlights that both you and the Secretary of Treasury 
need to work at this, and we in Congress need to work on 
getting a permanent solution in place.
    Mr. Watt. You do need to understand, Mr. Chairman, though, 
that a term of the existing agreement gives us the authority to 
either declare or not declare a dividend. So I----
    Chairman Crapo. And you are going to send me some legal 
authority on----
    Mr. Watt. That is not what I am lobbying to do. I think a 
better solution to this would be a joint solution.
    Chairman Crapo. I agree with that, and that is what I was 
getting to in my earlier questions. Thank you for that.
    Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman.
    I am going to go back to the 30-year fixed-rate mortgage. 
Do not sigh so heavily. I think I just want yes-or-no 
questions, Mel.
    Do you believe that a Federal backstop is necessary to 
ensure a 30-year fixed-rate mortgage?
    Mr. Watt. I am sighing because our agency has not developed 
a position on that, and so any opinion I could give would be my 
personal opinion. And I have, since I took this position, just 
assiduously stuck to the notion that I should not be expressing 
my personal opinions as opposed to agency opinions.
    Senator Heitkamp. I will tell you one of the greatest 
challenges we have in my State is housing, whether it is rural 
housing, whether it is affordable housing across the board, I 
have done economic roundtables, economic development 
roundtables. Number one, housing, access to housing, affordable 
housing. We cannot have rural development without housing. We 
cannot have economic development without housing. We need a 
workforce, and the workforce that comes to North Dakota needs 
to make sure that they can afford their house and afford a 
place to live and live in good neighborhoods.
    So I understand the sigh, and I probably know what it 
means. But the next question is, in the absence of a Federal 
backstop, what options would the middle-class family have for 
getting access to a home loan?
    Mr. Watt. Again, I think this Committee would have to 
define those options. And I want to go back and re-emphasize my 
position again. My responsibility as conservator is to manage 
in the state that we have now, and that is what I try to 
stick--``stick to my knitting,'' as they say. I think when you 
get into defining what will be necessary in the future, that is 
housing finance reform, and I think it is the Congress' 
responsibility to do that.
    So I do not mean to sound like I am trying to avoid the 
questions that you are asking. I just do not want to be 
criticized, and once I left Congress, I did not think it was my 
prerogative anymore to express personal opinions about how 
legislative things needed to be done, and especially as long as 
I am the Director of an agency which has not developed an 
agency position on it.
    Senator Heitkamp. When will you develop an agency position 
on this?
    Mr. Watt. Well, we would not unless you all ask us to do--
if you ask us to do it, because it is not in our statutory 
mandate now to do future----
    Senator Heitkamp. So maybe we can get to this in a 
different way, and I would ask you whether your agency has 
conducted any analysis of what complete privatization would 
mean for access to mortgage credit and corresponding impact on 
middle-class families.
    Mr. Watt. I do not think our agency has conducted formal 
research on that. We are aware of literature, and we obviously 
have people in our agency who probably have great expertise and 
could develop such a position.
    Senator Heitkamp. Well, I think that is the point. The 
point is your agency does have great expertise. No one in 
Government knows what is happening in the mortgage market, 
knows what is happening in affordable housing--and I include 
HUD in this--knows what you know. You see it every day. You 
have the metrics. We need advice. We need information. And we 
are going to have a choice here. We are going to have a choice 
on whether we are going to take that all-important provision of 
the American dream, which is home ownership, and make it 
completely inaccessible for middle-class families. And that is 
a major initiative for us, and it is a major concern.
    And so at some point here, we do need to have some analysis 
using the data you have on what works and what would not work. 
We can listen to the mortgage bankers. We can listen to the 
lending community who express great concern about complete 
privatization. I think we had a proposal here, you know, 
starting out Corker-Warner, then it became Crapo-Johnson. But I 
think we have got to have your advice, and so you cannot play 
coy on this, and I know you----
    Mr. Watt. Well, we are not being coy.
    Senator Heitkamp. I am not saying that as a pejorative.
    Mr. Watt. Yeah.
    Senator Heitkamp. I am just saying you have got to engage 
and give us advice and data that is going to help us make 
decisions.
    Mr. Watt. We regularly give technical advice. Any proposal 
that comes out, we will say, look, if you do this, it will have 
this impact.
    Senator Heitkamp. So I just asked you if we completely 
privatized, what is the impact?
    Mr. Watt. Well, if that is a proposal that is out there----
    Senator Heitkamp. It is out there.
    Mr. Watt. Well, it is out there----
    Senator Heitkamp. It is called the ``CHOICE Act.''
    Mr. Watt. I am not sure it is out there on this side of the 
Capitol. It may be out there on the other side of the Capitol.
    [Laughter.]
    Senator Heitkamp. I am over my time, Mr. Watt. I am sure we 
will have more conversations about this in the future.
    Chairman Crapo. Thank you. And, Senator Schatz, I 
apologize. I skipped over you. I apologize for that. You got 
here earlier than some of the other Senators, so it is your 
turn now.
    Senator Schatz. Thank you, Mr. Chairman.
    Director Watt, I want to talk to you about the role of 
Fannie and Freddie in financing multi-family housing and the 
importance of this sector for providing affordable housing. 
Multi-family housing is often overlooked when we talk about 
housing finance reform.
    I am aware that FHFA has been making an effort over the 
past few years to realign Fannie and Freddie's activities with 
their core mission under the law of helping underserved 
communities such as low-income and rural communities. This 
includes their work on financing multi-family housing.
    Have you seen progress in motivating GSEs to finance more 
affordable multi-family housing for low-income families?
    Mr. Watt. Yes. When we capped the amount that they could do 
in the upper end and said you cannot do any more because then 
you would be taking business away from the private sector, they 
turned a substantial amount of attention to the affordable 
space. And so, yes, we have seen substantial progress in that 
area, and I think you will continue to see progress.
    I am glad you focused on this because a lot of the 
questions sometimes assume that our responsibility as FHFA and 
Fannie and Freddie's responsibility is only in home ownership. 
It is actually in access to affordable housing, and we are 
supposed to be agnostic really about whether it is home 
ownership or rental. Obviously, because most people think the 
American dream involves home ownership, there is more emphasis 
on that. But we are playing an active role in the affordable 
rental space, and the private sector is playing a very active 
role in the other part of the rental space. We control the 
amount that Fannie and Freddie play in that space.
    Senator Schatz. So there is a lot of talk on this Committee 
and elsewhere, when we talk about housing finance reform, about 
the sort of macro aspects of this, and I want to drill down on 
what we can do to build more multi-family units, apartment 
buildings, rentals, whatever it may be, because it strikes me 
that Heidi and I have the same problem, and yet our States are 
so different. And I see Chris Van Hollen from Maryland nodding 
as well. This is a problem in every State, rural and urban, and 
in every part of every State.
    And so the question I have is: Is there more that you can 
do administratively to push in this direction to sort of 
reorient your agency? And then the other question I have is: Is 
there any statutory impediment that we might be able to work on 
as we do reform?
    Mr. Watt. I do not think we have statutory impediments in 
this area. The one thing we have done to get more aggressive in 
this space, especially in rural communities, is the duty-to-
serve rule, which obligates the enterprises to take aggressive 
steps to serve underserved areas. And a lot of the problems in 
this space are in underserved rural areas because Fannie and 
Freddie have not been backing manufactured housing. They do not 
do chattel lending. So the duty-to-serve rule is forcing them 
to look at in a responsible way how they might be able to do 
more with manufactured housing, which is a major part of the 
housing stock, especially in rural areas.
    So if we do not do something in that space, then we are 
missing an opportunity to support housing for people in rural 
areas. So we finally got--you know, the legislation was out 
there since 2008. A run was made at putting a rule out there in 
2010, and then it was put on the back burner. We finally have 
finalized the duty-to-serve rule, and the first plans, proposed 
plans, for the GSEs have come forward in the last 2 weeks, in 
fact.
    Senator Schatz. Thank you.
    Chairman Crapo. Thank you.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. Director Watt, 
it is great to see you.
    Mr. Watt. Good to see you.
    Senator Van Hollen. Thank you for your service in the 
Congress and your good stewardship at FHFA. And I want to thank 
you for exercising good and prudent judgment on behalf of the 
mission that you have been entrusted with.
    We all know that families across the country were 
absolutely devastated by the financial meltdown. Five million 
Americans lost their homes, and the recovery has been uneven. 
And if you look at my State of Maryland, if you look at 
Baltimore City, Prince Georges County, and some of our rural 
areas, they are still not fully back on their feet. They are 
facing challenges of access to credit, foreclosure mitigation, 
neighborhood blight.
    Can you talk a little bit about the tools you have at your 
disposal to address these issues? And if you could also take a 
moment to discuss the progress we may be making with the 
Neighborhood Stabilization Initiative in Baltimore City.
    Mr. Watt. Well, we started Neighborhood Stabilization with 
Detroit, Chicago, and one other, and then we expanded it 
substantially, and one of the places we expanded it to was 
Baltimore because--and we just went down the list of the most 
vulnerable neighborhoods. We did not do this, you know, just 
off the top of our head. It was done very scientifically.
    So I think what that does is it gives Fannie and Freddie 
more latitude in how they dispose of properties in vulnerable 
neighborhoods. It gives them the opportunity to work with 
nonprofits who are in the community, and in some cases, where 
it is going to cost them more to go through a foreclosure 
process than the property is worth, it gives them even the 
opportunity to contribute housing. It has to be a financial 
decision, obviously.
    So I think we are making progress in all of the cities that 
we--and they are primarily cities because they were high-
concentration areas that got hit very, very hard in the crisis.
    Senator Van Hollen. Yes, thank you, and I look forward to 
working with you and your team on that, especially in Maryland.
    A question about the National Housing Trust, because one of 
the things the State of Maryland and some of our counties have 
used very effectively is the idea of housing trusts. And, of 
course, to be effective, housing trusts really require a source 
of dedicated revenue so that they can make decisions with their 
development partners and allow these projects to be capitalized 
in a timely manner.
    Last year, we saw, I believe, the first installment of 
funds from the National Housing Trust fund dollars. Can you 
talk about the importance of that fund and give us a sense of 
how you think it is going to be capitalized going forward?
    Mr. Watt. Well, it is on the statutes now, and it was 
suspended administratively, and I took a lot of heat for 
reinstating it. But it was a statutory mandate, and I did not 
see a reason not to follow the statute, as I told this 
Committee when I appeared before it in my confirmation process. 
And since that has occurred, in 2016 $382 billion--million, I 
am sorry, million dollars not billion--has been contributed to 
the trust fund in 2016, and $455 million has been contributed 
in--based on 2016 earnings because it is always a year behind. 
So we do not have any control at FHFA about what happens with 
the funds after they go over there. They go part to HUD and 
part to Treasury. So we do not have any control over the 
disposition that has been made of those funds, but we did have 
the authority to make the decision to fund, to reverse the 
decision that had been made not to fund the Housing Trust Fund. 
And we made it, and I think it hopefully has served a useful 
purpose.
    Senator Van Hollen. Well, I want to thank you for making 
that decision. As you pointed out, that was consistent with the 
statute. I appreciate your moving forward, and I just want you 
to know that Maryland is using its allocation of those funds 
effectively. So thank you. I appreciate it.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. Good to see you 
again, Director Watt.
    I am glad this Committee is tackling housing finance reform 
again. I will push the same point I have pushed since I joined 
the Senate in 2013. We need to end the Government 
conservatorship of Fannie Mae and Freddie Mac, and we need to 
do so in a way that protects taxpayers, establishes an explicit 
and paid-for Government guarantee, and provides more affordable 
housing options for people in Massachusetts and all across the 
country.
    Now, on that question of access, Director Watt, as you 
know, the CFPB's current mortgage rules define certain loans as 
qualified mortgages, or QM, and offer lenders legal immunity 
for loans that meet the QM standards. But the CFPB also grants 
QM status to any mortgage that is eligible for purchase by 
Fannie Mae or Freddie Mac, which means that the underwriting 
criteria at Fannie and Freddie help define the scope of the QM 
rule and, accordingly, have a huge impact on the kinds of 
families that can get access to mortgage credit.
    Despite all of this, Fannie and Freddie's underwriting 
algorithms and criteria are kept secret. So can you explain why 
it is reasonable to keep this information hidden given its 
importance both to the economy and to appropriate oversight of 
the mortgage market?
    Mr. Watt. I do not know that I can explain that to you, 
Senator, but I can have our agency explain it to you as we 
understand it. But I am not sure that I have focused on that as 
an issue.
    Senator Warren. Well, let me suggest it this way then: I 
think it is an issue, and instead of explaining it to me, what 
I would really like to do is get a commitment as soon as we can 
that we would make this information public.
    Mr. Watt. Well, I would not make that commitment without 
knowing why it is not public and so----
    Senator Warren. I am glad to pursue that----
    Mr. Watt.----that would be part of what we would be----
    Senator Warren. But I want to be clear. As long as these 
entities are in conservatorship and as long as their standards 
are setting the boundaries of our consumer Federal protection 
issues, I think it is important that they be public. We cannot 
exercise oversight without them.
    So let me ask another question, and that is about principal 
reduction. In the 2008 bank bailout, Congress required FHFA to 
adopt a plan, and I am going to read here, that ``seeks to 
maximize assistance for homeowners and minimize foreclosures.'' 
And Congress specifically required FHFA to consider principal 
reduction to achieve those goals. That was in 2008. And for 
years, FHFA did nothing, and people kept losing their homes.
    And when you were nominated to run the agency in 2013, you 
said you would tackle principal reduction. I asked you about it
repeatedly, but for 2 years after you were sworn in, you did 
not move an inch on this.
    Finally, in April of 2016, you announced a principal 
reduction program. That is 8 years and literally millions of 
foreclosures later. Even then, you used eligibility criteria 
that were so demanding that, by your own calculations, only 
33,000 borrowers in the entire Nation would qualify for 
principal reduction.
    And, worse, you did not actually require services to reduce 
the loan principal for those 33,000 eligible borrowers. You 
only required them to ``solicit borrowers eligible for a 
principal reduction modification'' no later than October 15th 
of 2016.
    All right. We are now nearly 7 months past that October 
deadline. I have looked at FHFA's quarterly foreclosure 
reports. I cannot find any information about how this program 
is working, so I just want to know: How many of those 33,000 
eligible borrowers as of today have actually gotten a principal 
reduction?
    Mr. Watt. I cannot give you the exact number, but I can 
tell you it is a small number. The 33,000 is a small number, 
and I have tried to explain why that is so. We----
    Senator Warren. I get that the 33,000 is a small number. 
What portion of the 33,000--can you give me a ballpark?
    Mr. Watt. I will provide it to you. I just do not have it 
at my fingertips.
    Senator Warren. Do you have a ballpark? Half?
    Mr. Watt. No, I do not think it is half. Actually, I 
think----
    Senator Warren. A quarter?
    Mr. Watt. I think our projections indicated that it would 
be more in the range of 15 to 20 percent would be who would 
likely be able to do this.
    Senator Warren. So after Congress mandated a plan to 
maximize----
    Mr. Watt. Well, you did not mandate that--wait a minute.
    Senator Warren. We did in 2008. It is written in the 
statute. It says maximize----
    Mr. Watt. But there is also a statute that--a 
countervailing provision in the statute that says we cannot do 
certain things that are not economically feasible. So the 
analysis I did----
    Senator Warren. I am sorry----
    Mr. Watt.----to get to----
    Senator Warren. I am sorry, Director Watt----
    Mr. Watt.----the 33,000 got to the people that we could do 
with justice to both statutes.
    Senator Warren. For years--for years--people lost their 
homes because FHFA would not enforce the part of the bill that 
says give some relief to homeowners. And study after study 
showed that it was economically feasible to do that, and 
instead millions of people lost their homes.
    Mr. Watt. Senator, that is just not true now. What we did 
not do was principal reduction, but there are millions and 
millions of people that we have provided relief for whose homes 
were in jeopardy. So to say that we have not done anything in 
that space, just because we did a modest principal reduction 
program, is just not true.
    Senator Warren. Well, but you did not do the principal 
reduction program----
    Mr. Watt. We did not do the principal reduction----
    Senator Warren.----for years and years and years----
    Mr. Watt.----and I have explained that to you multiple 
times in this Committee why.
    Senator Warren. You know, actually, it is interesting. You 
did not start out explaining it. You started out saying you 
would do it. I asked you in this hearing room over and over. I 
asked you originally at your confirmation hearing and at 
follow-up oversight, and you did not say we have already done 
something else. You said you would do principal reduction.
    Mr. Watt. Senator, I do not believe----
    Senator Warren. And now you----
    Mr. Watt.----if you go back and look at the record, either 
at my confirmation hearing or at any point in this hearing, in 
the hearing where we discussed this, that I made that 
commitment to you. I said I would look at it, I would do it in 
accordance with the statute, and that is exactly what I have 
done.
    Senator Warren. And now you are down to a few thousand 
people. You know, after the crisis, the money just flew out the 
door for the banks, billions and billions of dollars, as fast 
as people could sign the checks. But money for people, many of 
whom had been ripped off by those same banks, it was just one 
message of delay and no and we have to balance this other thing 
out, handwringing about moral hazard, excuses not to help 
people----
    Mr. Watt. I certainly hope you are not blaming me for that.
    Senator Warren. You were in charge for at least----
    Mr. Watt. I did not create that situation. I tried to stop 
it when I was a Member of the House by getting people to quit 
making loans to people who could not afford to repay them. I 
mean, I was the----
    Chairman Crapo. We need to move on.
    Mr. Watt.----original author of the bill. So I do not 
know--I agree that all of those things have taken place, but to 
make it sound like for some reason I am responsible for that I 
think is unfair and untrue and unjust----
    Senator Warren. So let me say, Mr. Watt----
    Mr. Watt.----and all of the ``un's'' that I can think of.
    Senator Warren. Mr. Watt, Mr. Watt, the people who preceded 
you certainly share the blame. They did nothing. But when you 
came in--you have been driving this bus since 2013, and on 
principal reduction, by your own numbers, at best a few 
thousand people have gotten help. And I think that is shameful.
    Chairman Crapo. We need to move on. I have let this go on a 
bit so the two of you could get it out, but it is----
    [Laughter.]
    Chairman Crapo. It is out. Now it is Senator Reed's turn. 
Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman.
    Director, in your testimony you state, and I quote:

        Like any business, the enterprises need some kind of buffer to 
        shield against short-term operating losses. In fact, it is 
        especially irresponsible for the enterprises not to have such a 
        limited buffer because a loss in any quarter would result in an 
        additional draw of taxpayer support and reduce the fixed dollar 
        commitment the Treasury Department has made to support the 
        enterprises.

    By ``additional draw of taxpayer support,'' what I hear you 
saying is that you want to prevent further taxpayer bailouts. 
Is that accurate?
    Mr. Watt. Well, there is that risk that additional draws 
could be misinterpreted by, and we have to guard against that 
risk, yes.
    Senator Reed. So, in effect, what you want to do is have a 
buffer in your organization so that you can respond to changing 
conditions in the market and avoid----
    Mr. Watt. That is correct. And not even changing conditions 
in the market, because we monitor closely changing conditions 
in the market. These are noncredit-related factors that are 
driving losses sometimes that have nothing to do with whether 
we are responsible or not. They are basically accounting the 
way you have to account for things and the timing of the 
accounting process. So it is really not even about losses. It 
is more about accounting things.
    Now, if tax reform were done, depending on the extent of 
the corporate tax reduction, there would be a dramatic impact, 
depending on--I mean on it, and we can calculate that. So that 
would be one of the factors that we would be monitoring 
regularly to see what is happening in that space. But this is a 
risk that--I do not want to make it sound like it is a likely 
thing to happen, because I think that could be misinterpreted. 
But as conservator, we do not have the luxury of assuming that 
risk. And you were not here earlier when I used the example of 
when I got the notice that the airbag on my car needed to be 
replaced, and everybody was telling me, ``Oh, no, that is not a 
problem. You are not going to have''--but I was the responsible 
party in my family, and now I am the responsible party. I am 
driving these cars. Until Congress changes the cars that I am 
driving, I have to drive these cars, and I have to make them 
safe and guard against those kind of even remote risks that we 
have.
    Senator Reed. Thank you. There was a discussion, obviously, 
of the principal reduction, but there are a number of loans--I 
am told 59,000 nonperforming loans--which Fannie and Freddie 
have sold to the private sector, and they are subject either to 
some type of remediation or other efforts. Could you tell us 
what you have done to improve the borrower and neighborhood 
outcomes? I know principal reduction is one, but are there 
other things you have done?
    Mr. Watt. I wish Senator Warren was still here to hear 
this. One of the reasons we did nonperforming loan sales was 
that the private sector who buys these loans has substantially 
more flexibility than Fannie and Freddie have statutorily to do 
principal reduction. And it is part of the waterfall in the 
nonperforming loan sales program. They are required to consider 
that as an option if it would improve the ability of borrowers 
to perform on their loans and get those loans reinstated at 
some reduced interest rate or longer term or reduced principal 
amount. All of those things are in the nonperforming loan 
requirements that we have adopted. We could not do any more 
than we did as Fannie and Freddie, but we could transfer the 
loans to the private sector, and they have substantially more 
flexibility, and that was one of the bases on which we did 
that.
    Senator Reed. Just a final point, Mr. Director, that there 
is--we get, all of us get feedback from borrowers that they 
have not been helped. Can you--and I presume you have sort of 
some metrics about the different types of measures that have 
been taken, and, again, as you described, a lot of it is within 
the purview of the banks or the holders of the notes because 
they have more flexibility. But if you can give us a complete 
picture, I think that would help us in terms of, if it is 
principal reduction or interest reduction--the ultimate number, 
I think, is how many people are still in their homes and can 
stay in their homes even though, you know, they have had 
difficulty.
    Mr. Watt. That is the objective.
    Senator Reed. Yes.
    Mr. Watt. We do keep metrics on all of those things because 
they are required to report--the buyers of these nonperforming 
loans are required to report to us on the outcomes, because 
there are requirements that they assume when they purchase the 
loans, and the only way we can monitor compliance is to know 
what the actual performance is. And their results are 
substantially better than the results that we would have gotten 
had we maintained those nonperforming loans on the books of 
Fannie and Freddie.
    Senator Reed. I think that could be helpful. I think one 
other--and you may not keep this metric, and I do not require a 
response, but if you have data that shows what happens when 
they foreclose and--you know, because if there is an incentive 
to foreclose because you can sell the exact same property at a 
much higher price----
    Mr. Watt. I think we have removed that incentive, but, yes, 
we can provide that.
    Senator Reed. Thank you, Director. Thank you very much. 
Thank you, Mr. Chairman.
    Chairman Crapo. Thank you very much, Senator Reed.
    And, Director Watt, that is the end of the questions. You 
have been here essentially 2 hours and given us your time and 
responded openly and honestly to these questions.
    Did you want to say anything else, Senator Brown?
    Senator Brown. Thank you, Director.
    Chairman Crapo. Before we wrap it up, let me just say to 
all Senators, we will have 7 days--and as you know, there will 
be some additional questions in writing that I ask you to 
respond to promptly, Director Watt, one of which is the one I 
have already asked about the legal justification for believing 
that you unilaterally can issue dividends.
    Mr. Watt. Yes.
    Chairman Crapo. With that, I again want to thank you. We 
are obviously heavily interested in and engaged in this issue, 
and we will continue to work with you as we move forward to 
develop the best housing policy we can develop for this 
country.
    Mr. Watt. Thank you very much.
    Chairman Crapo. Thank you, Director Watt.
    This hearing is adjourned.
    [Whereupon, at 11:58 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
                  PREPARED STATEMENT OF MELVIN L. WATT
                Director, Federal Housing Finance Agency
                              May 11, 2017
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for your invitation for me to discuss the critically 
important and timely hearing subject ``The Status of the Housing 
Finance System After Nine Years of Conservatorship'' and to answer any 
questions you may have about the work we are doing at the Federal 
Housing Finance Agency (FHFA).
    As the Members of this Committee are well aware, since September 6, 
2008, Fannie Mae and Freddie Mac (the Enterprises) have been operating 
in conservatorships under the direction and control of FHFA and with 
backing of the U.S. taxpayers with explicit dollar limits as set out in 
the Senior Preferred Stock Purchase Agreements (the PSPAs) with the 
U.S. Department of the Treasury. As a result of prior Enterprise draws 
totaling $187.5 billion against the PSPA commitments, the PSPA 
commitment still available to Fannie Mae is now limited to $117.6 
billion and the commitment still available to Freddie Mac is $140.5 
billion. Additional draws will reduce these commitments further; 
however, dividend payments do not replenish or increase the commitments 
under the terms of the PSPAs.
    September 6 of this year will mark the beginning of the tenth year 
that the Enterprises have been in conservatorships. These 
conservatorships have been unprecedented in scope, complexity, and 
duration, especially when you consider that the Enterprises support 
over $5 trillion in mortgage loans and guarantees. Since January 6, 
2014, when I was sworn in as Director of FHFA, the conservatorships of 
the Enterprises have been under my direction.
    I pledged to the Members of this Committee during my confirmation 
hearing that I would carry out my responsibilities as Director in 
accordance with the statutory mandates given to FHFA as regulator and 
conservator. I have consistently tried to do just that. I have found 
that FHFA and the Enterprises operate with responsibilities that make 
it impossible to satisfy everyone and sometimes make it impossible to 
satisfy anyone. However, I believe that most stakeholders would agree 
that we have responsibly balanced and met FHFA's multiple statutory 
mandates to manage the Enterprises' day to day operations in what I 
often refer to as ``in the here and now.'' These statutory mandates 
obligate us to:

    Conserve and preserve the assets of the Enterprises while 
        they are in conservatorship;

    Ensure that the Enterprises provided meaningful assistance 
        to the millions of borrowers who struggled to save their homes 
        in the midst of the economic and housing crisis, as required in 
        the Emergency Economic Stabilization Act; and

    Oversee the prudential operations of the Enterprises and 
        ensure that they continue to carry out their ongoing statutory 
        missions in a safe and sound manner; in a manner that fosters 
        liquid, efficient, competitive, and resilient national housing 
        finance markets; and in a manner that is consistent with the 
        public
        interest.
Many Reforms of the Enterprises Have Taken Place Through 
        Conservatorship
    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. However, 
it is important for all of us to recognize that the conservatorships 
have led to numerous reforms of the Enterprises and their operations, 
practices, and protocols that have been extremely beneficial to the 
housing finance markets and have reduced exposure and risks to 
taxpayers.
    It is critically important for the Members of this Committee to be 
well aware of these reforms because you will have the responsibility to 
ensure that the reforms are not disregarded or discarded because of 
assertions some will make that the Enterprises now are the same or 
mirror images of the Enterprises that FHFA placed into conservatorship 
almost 9 years ago. I can assure you that such assertions would be 
unfounded.
    We have reported extensively on some of the important reforms we 
have made and on our conservatorship priorities in our 2014 
Conservatorship Strategic Plan; in our annual scorecards, including the 
2017 Scorecard; and in our regular status updates, including three 
reports released earlier this year--2016 Scorecard Progress Report, 
Credit Risk Transfer Progress Report, and An Update on the 
Implementation of the Single Security and the Common Securitization 
Platform.
    Let me highlight some of the most important changes and reforms 
that have taken place during the conservatorships.

   1.  Board leadership and management: When the Enterprises were 
        placed into conservatorship, FHFA replaced most members of 
        their boards of directors and many senior managers. Both 
        through conservatorship and through our onsite regulatory 
        oversight of the Enterprises, FHFA has required Fannie Mae and 
        Freddie Mac to make a number of changes to improve risk 
        management, update many of their legacy systems, prioritize 
        information security and data management, and better address 
        other areas of operational risk. FHFA has also taken steps to 
        prohibit certain activities, such as lobbying, by either 
        Enterprise. The Enterprises' board of directors and senior 
        management have taken great strides to implement these 
        improvements in coordination with FHFA.

   2.  Alignment of certain Enterprise activities: While some aspects 
        of their pre-conservatorship competition resulted in negative 
        consequences or in a race to the bottom, FHFA has aligned many 
        practices and policies on which the Enterprises are no longer 
        allowed to compete, such as loss mitigation standards and 
        counterparty eligibility standards. However, based on 
        expectations established in conservatorship and regularly 
        emphasized by FHFA to the Enterprises' boards and managements, 
        we expect them to compete vigorously to find and implement 
        innovative ways to make the housing finance markets more 
        efficient and liquid, on customer service provided to 
        Enterprise seller/servicers, and on the quality of their 
        business practices.

   3.  Sound underwriting practices: The Enterprises are required to 
        emphasize sound underwriting practices in their purchase 
        guidelines, and these practices facilitate responsible access 
        to credit and sustainable home ownership for creditworthy 
        borrowers. The Enterprises' serious delinquency rate on single-
        family loans is at its lowest level since May 2008.

   4.  Appropriate guarantee fees: Guarantee fees have been increased 
        by two and a half times since 2009. The guarantee fees are set 
        to reflect the cost of covering credit losses in the event of 
        economic stress or a housing downturn and the administrative 
        expenses of running the companies. While the Enterprises cannot 
        retain capital under the PSPAs, we also set their guarantee 
        fees under the assumption that they are earning an appropriate 
        return on capital. FHFA regularly reviews the Enterprises' 
        guarantee fees to ensure that they remain at appropriate 
        levels.

   5.  Smaller portfolios for core business purposes: The retained 
        portfolios of the Enterprises have been reduced over 60 percent 
        since 2009 and both Enterprises are ahead of schedule to meet 
        the 2018 maximum portfolio limits established in the PSPAs. The 
        Enterprises' multiyear retained portfolio plans to achieve 
        these reductions have focused on selling less liquid assets and 
        investment assets, in addition to prepayments that have 
        occurred over time. Their retained portfolios are now focused 
        on supporting the core business operations of the Enterprises, 
        including aggregation of loans from small lenders to facilitate 
        securitizations and holding delinquent loans in portfolio so 
        investors can be made whole, servicers can facilitate loan 
        modifications, and borrowers can stay in their homes whenever 
        possible.

   6.  New single-family credit-risk transfer programs share credit 
        risk with private investors: The Enterprises have developed and 
        continue to refine credit-risk transfer programs that transfer 
        a meaningful amount of credit risk to private investors on at 
        least 90 percent of their targeted, fixed-rate, single-family 
        mortgage acquisitions. The Enterprises are also developing 
        their single-family CRT programs with the objective of 
        cultivating a mature and robust credit-risk transfer market, 
        including by building and expanding a diverse investor base 
        that will increase the likelihood of having a stable CRT market 
        through different housing and economic cycles.

   7.  New securitization infrastructure: Through a joint venture 
        formed by the Enterprises under FHFA's direction, the Common 
        Securitization Platform (CSP) is now operating and all of 
        Freddie Mac's existing single-family, fixed-rate 
        securitizations are being processed using the CSP. All parties 
        are now well down the multiyear path toward the CSP becoming 
        the infrastructure used by both Enterprises to issue a common 
        single mortgage backed security. When fully implemented, we 
        believe these changes will facilitate deeper liquidity in the 
        housing finance market, support the to-be-announced market, and 
        eliminate costly trading differences between the Enterprises' 
        securities. The Enterprises are developing the CSP with an open 
        architecture such that it will be usable by other market 
        participants.

   8.  Responsible access to credit supporting sustainable home 
        ownership: The Enterprises have worked closely with FHFA on a 
        number of initiatives designed to support responsible access to 
        credit and sustainable home ownership. For example, they 
        undertook a multiyear process to revamp their Representation 
        and Warranties Framework to reduce uncertainty and support 
        access to credit throughout the Enterprises' existing credit 
        boxes. We are also requiring the Enterprises to conduct 
        analyses about access to credit barriers and to develop pilots 
        and initiatives to improve access to credit in a safe and sound 
        manner. Another recent area of focus has been implementing the 
        Enterprises' statutory duty to serve three underserved 
        markets--manufactured housing, affordable housing preservation, 
        and rural housing. The Enterprises posted their first draft 
        Duty to Serve Plans for public input just this week.

   9.  Multifamily market liquidity and affordable rental housing: The 
        Enterprises' multifamily programs, which performed well during 
        the crisis while other parts of the housing market struggled, 
        continue to share a substantial amount of credit risk with 
        private investors and continue to provide needed liquidity for 
        the multifamily market with major emphasis on affordable rental 
        housing and underserved markets.

  10.  Loss mitigation, foreclosure prevention, and neighborhood 
        stabilization: The Enterprises have worked with FHFA to develop 
        effective loss mitigation programs that minimize losses to the 
        Enterprises and allow borrowers to avoid foreclosure whenever 
        possible. This has included aligning the Enterprises loss 
        mitigation standards and developing updated loan modification 
        and streamlined refinance products to follow the Home 
        Affordable Modification Program (HAMP) and the Home Affordable 
        Refinance Program (HARP). The Enterprises are also effectively 
        pursuing efforts to stabilize neighborhoods, including through 
        the Neighborhood Stabilization Initiative.

  11.  Level playing field for lenders of all sizes: The Enterprises 
        have eliminated volume-based discounts for larger lenders, 
        which has leveled the playing field for lenders of all sizes--
        small, medium, and large. This new approach, along with 
        supporting the ability of small lenders to purchase loans 
        through the cash window, has significantly increased the 
        percentage of Enterprise acquisitions from smaller lenders 
        during conservatorship.
Congress Urgently Needs To Act on Housing Finance Reform
    While many reforms of the Enterprises' business models and their 
operations have been accomplished through conservatorship, FHFA knows 
probably better than anyone that these conservatorships are not 
sustainable and we also know that housing finance reform will involve 
many tough decisions and steps that go well beyond the reforms made in 
conservatorship. So I want to reaffirm my strong 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.
    Among the important decisions Congress, not FHFA, will need to make 
as part of housing finance reform are the following:

    How much backing, if any, should the Federal Government 
        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, should the Enterprises 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?

    What regulatory and supervisory structure and authorities 
        will be needed in a reformed system and who will have 
        responsibility to exercise those authorities?

I reaffirm my belief that it is the role of Congress, not FHFA, to make 
those housing reform decisions and I encourage Congress to do so 
expeditiously.
FHFA Must Continue To Meet Its Obligations While Housing Finance
        Reform Takes Place
    The final thing I want to discuss is the most significant challenge 
FHFA faces as conservator while Congress continues to move ahead on 
housing finance reform. I first discussed this challenge publicly in a 
speech I delivered at the Bipartisan Policy Center on February 18, 
2016. The challenge is that additional draws of taxpayer support would 
reduce the amount of taxpayer backing available to the Enterprises 
under the PSPAs and the foreseeable risk that the uncertainty 
associated with such draws or from the reduction in committed taxpayer 
backing could adversely impact the housing finance market. 
Unfortunately, the challenge is significantly greater today than it was 
last year and will continue to increase unless it is addressed. Let me 
explain why that is so.
    At the time I delivered my speech at the Bipartisan Policy Center 
in 2016, each Enterprise had a $1.2 billion buffer under the terms of 
the PSPAs to protect the Enterprise against having to make additional 
draws of taxpayer support in the event of an operating loss in any 
quarter. Under the provisions of the PSPAs, on January 1, 2017, the 
amount of that buffer reduced to $600 million and on January 1, 2018, 
the buffer will reduce to zero. At that point, neither Enterprise will 
have the ability to weather any loss it experiences in any quarter 
without drawing further on taxpayer support.
    This is not a theoretical concern. GAAP accounting for any number 
of noncredit related factors in the ordinary course of business 
regularly results in large fluctuations in Enterprise gains or losses. 
Some of these noncredit related factors include interest rate 
volatility; the accounting treatment of derivatives used to hedge 
risks; reduced income from the Enterprises' declining retained 
portfolios; and the increasing volume of credit-risk transfers which, 
while supporting our objective of transferring risk and opportunity to 
the private sector, also transfers current revenues away from the 
Enterprises. We also know that a short-term consequence of corporate 
tax reform would be a reduction in the value of the Enterprises' 
deferred tax assets, which would result in short-term, noncredit 
related losses to the Enterprises. The greater the reduction in the 
corporate tax rate, the greater the short-term losses to the 
Enterprises would be. In addition to the regular and ongoing prospect 
of noncredit related losses, even minor housing market disruptions or 
short periods of
distress in the economy could also cause credit-related losses to the 
Enterprises in a given quarter.
    Like any business, the Enterprises need some kind of buffer to 
shield against short-term operating losses. In fact, it is especially 
irresponsible for the Enterprises not to have such a limited buffer 
because a loss in any quarter would result in an additional draw of 
taxpayer support and reduce the fixed dollar commitment the Treasury 
Department has made to support the Enterprises. We reasonably foresee 
that this could erode investor confidence. This could stifle liquidity 
in the mortgage-backed securities market and could increase the cost of 
mortgage credit for
borrowers.
    FHFA has explicit statutory obligations to ensure that each 
Enterprise ``operates in a safe and sound manner'' and fosters 
``liquid, efficient, competitive, and resilient national housing 
finance markets.'' To ensure that we meet these obligations, we cannot 
risk the loss of investor confidence. It would, therefore, be a serious 
misconception for Members of this Committee, or for anyone else, to 
consider any actions FHFA may take as conservator to avoid additional 
draws of taxpayer support either as interference with the prerogatives 
of Congress, as an effort to influence the outcome of housing finance 
reform, or as a step toward recap and release. FHFA's actions would be 
taken solely to avoid a draw during conservatorship.
    Thank you again for the opportunity to address this Committee. 
Please be assured that FHFA and the Enterprises stand ready to assist 
the Committee in any ways we are asked to do so. I look forward to 
answering your questions.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MELVIN L. 
                              WATT

Flex Mod Program that replaces HAMP for the GSEs
Q.1. Director Watt, Ohio was one of the hardest hit States 
during the Great Recession and servicing problems were one of 
the many challenges facing homeowners as they struggled to keep 
their homes with reduced work hours and lost jobs. FHFA and the 
GSEs are rolling out the flex mod--a new streamlined 
modification program that limits the paperwork required of 
borrowers.
    How will FHFA track the performance of servicers in 
implementing this program?

A.1. FHFA requires Fannie Mae and Freddie Mac (``the 
Enterprises'') to monitor the performance of each of their 
servicers. Both Enterprises have scorecards they use to monitor 
servicer performance on multiple metrics, including efficiency 
rates for home retention and liquidation, various roll and 
transition rates from one stage of delinquency to another, and 
performance of loans receiving permanent modifications. FHFA 
receives quarterly reports on aggregate modification 
performance that includes information on the number of serious 
delinquencies for each of the top servicers and their 
performance on reducing those delinquencies through loss 
mitigation options, including Home Affordable Modification 
Program (HAMP) and other foreclosure alternatives. FHFA also 
publishes a quarterly foreclosure prevention report that 
illustrates the performance of their modification programs in 
the aggregate. The report can be found on FHFA's website at: 
https://www.fhfa.gov/AboutUs/Reports/Pages/Foreclosure-
Prevention-Report-February-2017.aspx and is transmitted to 
Congress as part of the monthly Federal Property Manager's 
Report. Further, servicers will have to report their FlexMod 
activities to the Enterprises. FHFA plans to publish 
information on FlexMod in the future. Most modifications in the 
future will be through FlexMod.

Q.2. How will FHFA monitor the performance of the program 
within and across various borrower characteristics?

A.2. FHFA receives quarterly reports on modification 
performance from the Enterprises that include loan modification 
characteristics, such as the payment reduction amount, re-
default rates, and delinquency at the time of modification, and 
publishes a monthly and quarterly foreclosure prevention report 
that illustrates the performance of their modification programs 
in the aggregate. The report also includes information 
associated with borrower characteristics such as credit scores 
at loan origination and the top five reasons for borrower 
delinquency. The report can be found on FHFA's website at: 
https://www.fhfa.gov/AboutUs/Reports/Pages/Foreclosure-
Prevention-Report-February-2017.aspx.
OIG Report
Q.3. An article in Bloomberg on May 11, 2017, highlighted the
inspector general's findings regarding the disclosure of a 
personal relationship of Fannie Mae's CEO. How is FHFA 
addressing the inspector general's concerns and what actions 
have you taken?

A.3. We completed our review of the FHFA Inspector General's 
report and other relevant information, and reported the 
disposition that FHFA as conservator made of this personnel 
matter to the Inspector General on June 21, 2017, within the 
timeframe committed FHFA and the board of directors are 
continuing to evaluate changes that may be desirable to the 
conflict of interest policies and procedures of Fannie Mae to 
clarify roles and responsibilities and to improve 
accountability and performance of those responsibilities, 
taking into account industry best practices and lessons learned 
from this experience and other sources.
Credit Risk Transfers
Q.4. Director Watt, in a speech before the North Carolina 
Bankers Association, you stated that it is very expensive to 
transfer the first 50 basis points of expected credit losses 
and the GSEs retain the first 50 basis points. As the Committee 
considers reforms to the housing finance system, credit-risk 
transfers are cited as an opportunity to have private capital 
stand in front of a catastrophic Government guarantee.

   LCan private capital take the first loss position 
        regarding credit risk without significant increases in 
        cost?

   LDo you have an estimate of what the cost might be?

A.4. Prior to this year, the Enterprises experimented with 
selling the first 100 basis points of credit losses to 
investors. As a result of feedback we have received from market 
participants and from credit-risk transfer transactions to 
date, FHFA has learned that selling the first 50 basis points 
of credit loss is generally not economically sensible. This is 
the case because investors, like the Enterprises, know that 
there will be some degree of expected credit losses for any 
portfolio of mortgages no matter the economic conditions. The 
Enterprises set guarantee fees, in part, to cover these 
expected credit losses. Selling this first loss exposure is 
akin to the Enterprises purchasing an insurance policy that has 
no deductible, and as a result, investors charge more for 
providing credit-risk protection for expected credit losses.
    Based on this information, FHFA and the Enterprises have 
determined that, generally, it is preferable for Fannie Mae and 
Freddie Mac to retain the first 50 basis points of expected 
losses in most CRT transactions. This means that the 
Enterprises have begun selling credit losses between 50 to 100 
basis points. Early indicators have not only reflected better 
pricing for CRT deals, but greater competition for credit 
protection beginning at 50 basis points, rather than zero basis 
points. In the terminology used in the industry, this is using 
an attachment point of 50 basis points, rather than an 
attachment point of zero. The detachment point for CRT 
transactions, or the point at which investors stop bearing 
credit losses, is generally 3.75 or 4 percent of the unpaid 
principal balance of the mortgages included in the transaction. 
FHFA's most recent progress report on credit-risk transfer, 
which includes estimated credit costs for CRT transactions with 
first dollar loss, is available here: https://www.fhfa.gov/
AboutUs/Reports/Report
Documents/CRTProgressReport_Dec2016.pdf.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM MELVIN L. 
                              WATT

Q.1. What are you doing to bring additional pools of capital to 
bear in the U.S. mortgage markets, specifically on the expected 
or first-loss portion to further protect taxpayers and ensure 
greater market discipline that can temper bubble and bust 
cycles in the future?

   LObservers note that FHFA has been pushing to get 
        private capital into the mortgage space to protect the 
        taxpayers through credit-risk transfers, but why have 
        we not seen any indications that you are looking at 
        other forms of private capital like having the GSEs 
        sell new stock? Are there other ways that we can 
        attract private capital into the space?

A.1. The Credit Risk Transfer (CRT) programs have reduced the 
Enterprises' overall risk, and therefore, the risk they pose to 
the taxpayers by transferring to private investors a 
substantial amount of the credit risk the Enterprises assume in 
targeted loan acquisitions. From the inception of the CRT 
program through the first quarter of 2017 the Enterprises have 
transferred a portion of the credit risk on $1.6 trillion of 
unpaid principal balance with a combined amount of risk, or in 
industry terminology risk in force, of about $54 billion. 
Through CRT and primary mortgage insurance, the majority of the 
underlying mortgage credit risk on mortgages targeted for CRT 
has been transferred to private investors.
    A key principle of the CRT program is to create a broad and 
diversified investor base through different transaction 
structures. For example, both Enterprises developed very 
successful offerings to the reinsurance market in addition to 
their debt issuance transactions. In addition, each Enterprise 
is making strides through their front-end transactions at 
attracting capital from lenders and the private mortgage 
insurance industry. With respect to first loss, FHFA and the 
Enterprises have determined that, generally, it is preferable 
for Fannie Mae and Freddie Mac to retain the first 50 basis 
points of expected losses in most CRT transactions. This means 
that the Enterprises have begun selling credit losses between 
50 to 100 basis points. Early indicators have not only 
reflected better pricing for CRT deals, but greater competition 
for credit protection beginning at 50 basis points, rather than 
zero basis points. As a result of feedback we have received 
from market participants and from credit-risk transfer 
transactions to date, FHFA has learned that selling the first 
50 basis points of credit loss is generally not economically 
sensible. This is the case because investors, like the 
Enterprises, know that there will be some degree of expected 
credit losses for any portfolio of mortgages no matter the 
economic conditions. The Enterprises set guarantee fees, in 
part, to cover these expected credit losses. Selling this first 
loss exposure is akin to the Enterprises purchasing an 
insurance policy that has no deductible and, as a result, 
investors charge more for providing credit-risk protection for 
expected credit losses. Recent proposals by the Enterprises to 
make a REMIC tax election for certain CRTs is an example of 
innovation that may expand the private investor base to include 
real estate investment trusts (REITs) and international 
investors.
    Pursuant to the Senior Preferred Stock Purchase Agreements, 
the Enterprises are not permitted to issue equity without the 
permission of the Department of the Treasury, and FHFA is not 
actively considering equity issuance at this time.

Q.2. How can we expand the credit box, or can we expand the 
credit box--which will increase expected losses, without having 
capital there to absorb losses over the housing cycle?

   LIs it possible to, tabling the issue of subprime 
        lending, to serve prime borrowers if the GSEs do not 
        have capital? As we move forward in housing finance 
        reform, how do we put Fannie and Freddie in a position 
        to achieve success without alienating the sources of 
        capital that were in the marketplace pre and post 
        conservatorship?

A.2. A variety of stakeholders and observers have generally 
agreed that lenders are not taking full advantage of the 
existing credit box, so it is not clear that expanding the 
credit box is necessary to increase access to credit, or would 
be successful in doing so. As an example, the weighted average 
FICO credit score for loans delivered to the Enterprises last 
year was 748 for Fannie Mae and 743 for Freddie Mac, 
respectively, although borrowers could qualify for mortgages 
with much lower credit scores and these mortgages would be well 
within the Enterprises' current credit box.
    Since entering conservatorship, the Enterprises have 
continued to serve prime borrowers with a limited capital 
cushion. In addition to CRT protection, the Enterprises benefit 
from the $258 billion remaining funding commitment from the 
Treasury, as set forth by the Senior Preferred Stock Purchase 
Agreements. Our concern is that drawing further on this capital 
cushion could be destabilizing in the market and that the 
prospect of further draws is substantially increased without a 
capital buffer.

Q.3. During the debate of GSE reform, we hear a lot about 
protecting the taxpayer and ensuring that the taxpayer bears 
the lowest risk possible. Can we protect taxpayers by only 
having the GSEs cut back on business risk, and if that is the 
only way, will they be able to serve the market moving forward 
without capital/what is the right level of capital for them to 
be able to move out of conservatorship and re-engage in the 
marketplace?

A.3. FHFA supports the Enterprises in their efforts to strike a 
balance between maintaining reasonable access to credit while 
protecting the taxpayer and operating in a safe and sound 
manner. Credit risk remains the largest business risk the 
Enterprises face. Their CRT programs specifically target credit 
protection for losses in a stress scenario similar to the Great 
Recession. The CRT program complements but does not replace the 
need for permanent capital outside of the current 
conservatorships in a reformed housing finance system. FHFA 
looks to Congress to enact housing finance reform, which would 
inform determinations on appropriate capital standards.

Q.4. What powers does FHFA need, beyond those presented in HERA 
in order to protect taxpayers, and what additional powers does 
the FHFA need to execute on housing finance reform?

A.4. As supervisor of Fannie Mae, Freddie Mac, and the Federal 
Home Loan Banks, FHFA has comprehensive authority to regulate 
and examine its regulated entities. However, unlike other 
Federal supervisors of financial institutions, including banks 
and savings and loans, FHFA does not have authority to examine 
contractual providers of services to its regulated entities. 
This authority would support safety and soundness supervision 
by ensuring a better understanding of regulated entity exposure 
to counterparty risks. FHFA has previously proposed 
consideration of an amendment to its statute to provide FHFA 
the same examination authority over third-party service 
providers as is currently provided to the Federal Reserve 
Board, the Office of the Comptroller of the Currency, and the 
FDIC. That authority is set forth in section 7 of the Bank 
Service Company Act, at 12 U.S. C.  1867.
    Any additional powers necessary in the context of housing 
finance reform would be dependent upon specific legislative 
proposals that define the participants and activities within a 
reformed housing finance system.

Q.5. The Federal Home Loan Banks, during and since the crisis, 
have been an important part of the housing finance ecosystem. 
Can you give me your thoughts on the general condition of the 
FHLBs, and their housing finance role through their support of 
portfolio lending and with their mortgage purchase programs? Is 
it important to keep the FHLBs in mind as we approach broader 
housing finance reform?

A.5. The FHLBanks are currently in a safe and sound financial 
condition. All 11 FHLBanks have strong earnings while serving 
the primary mission they were created to serve--helping provide 
liquidity to mortgage loans. The FHLBanks, in aggregate at 
year-end 2016, had over a trillion dollars in assets, over 70 
percent of which were advances or whole mortgage loans. The 
FHLBanks have made annual contributions to their Affordable 
Housing Programs averaging over $300 million for the past 5 
years.
    Consistent profitability of the System has also allowed the 
FHLBanks to add $7.8 billion to their accumulated retained 
earnings over the last 5 years. Two thousand sixteen also saw 
advances grow by $71.2 billion to $705.2 billion at year-end 
The concentration of advances to large members does warrant 
attention. Though the large members tend to drive the volume of 
advances, the vast majority of the over 7,000 FHLBank members 
are smaller institutions and advances to smaller borrowers have 
increased System-wide.
    The FHLBanks' Acquired Member Asset Programs (AMA) provide 
members with an alternative means (alternative to Fannie Mae 
and Freddie Mac) of moving mortgage loans they originate off 
their balance sheets. The FHLBanks purchased $12.5 billion of 
AMA mortgage loans in 2016 and held a total of $47.6 billion in 
total unpaid principal balance (UPB) on their balance sheets at 
year-end They expect the volume of purchases through the AMA 
programs to rise in the coming years.
    It is important to keep the FHLBs in mind as Congress 
approaches broader housing finance reform. The FHLBanks provide 
a range of important services and products that add value to 
their members through helping them liquefy their mortgage 
assets. They are particularly important to small members, most 
of which have limited capacity to access capital markets and, 
therefore, rely on FHLBank advances to help fund their housing 
finance operations.

Q.6. Less often discussed is the role of Fannie Mae and Freddie 
Mac in providing liquidity to the multifamily market in 
addition to the single-family financing market. With the home 
ownership rate in America dropping from 68 percent prior to the 
Financial Crisis down to 62 percent today, affordable rental 
housing is an extremely important topic for many Americans. Can 
you comment on the GSE's multifamily programs and how 
successfully they are working to insure a supply of affordable 
rental housing in America?

A.6. The Enterprises' multifamily programs continue to support 
affordable rental housing through various initiatives and with 
strong performance. As part of the FHFA Conservatorship 
Scorecard, FHFA has established a cap on multifamily 
origination to protect against crowding out private capital, 
and the Enterprises are encouraged to focus on certain 
underserved markets, through exclusions from the cap. These 
exclusions include targeted affordable housing with use 
restrictions on affordability, green, manufactured housing 
communities, rural developments affordable to those making 80 
percent or less in area median income (AMI), seniors, housing 
for those making 80 percent AMI or less, and small multifamily 
properties of 5-50 units affordable to 80 percent AMI or less. 
Both Fannie Mae and Freddie Mac did well over a third of total 
multifamily business in underserved markets in 2016 and are on 
track to do even more business in these markets in 2017.

Q.7. One of the major differences between the GSE 's single-
family and multifamily businesses is that in the single-family 
business, after a loan is originated by a private mortgage 
banker or commercial bank, it gets sold to the GSEs, and then 
the taxpayers assume 100 percent of the risk for that loan; 
whereas in the multifamily businesses, after the loan is 
originated by a private mortgage banker or commercial bank and 
sold to the GSEs, private capital remains in the first-loss 
position on the loans, and absorbs the first 15 percent of any 
future credit losses. Can you expand on the loss sharing models 
in the single-family and multifamily businesses of the GSEs, 
and explain why U.S. tax payers assume 100 percent of the risk 
in the single-family businesses, while private capital absorbs 
the first 15 percent of losses in the multifamily businesses 
and shares credit risk with the GSEs?

A.7. Both the single-family and multifamily business models at 
Enterprises leverage credit-risk sharing, but in different 
ways. You are correct that the multifamily programs at both 
Fannie Mae and Freddie Mac have successfully shared credit risk 
with private investors for a number of years. In recent years, 
their single-family programs have followed suit.
Multifamily
    At Fannie Mae, lenders typically share in the risk of loss 
on loans that default through standard Delegated Underwriting 
and Servicing (DUS) or pari passu loss sharing. In the standard 
DUS approach, the lender is responsible for the first loss up 
to 5 percent of the existing unpaid principal balance (UPB); on 
the next 20 percent of UPB, the lender is responsible for 25 
percent and Fannie Mae 75 percent; for any remaining loss, the 
lender is responsible for 10 percent and Fannie Mae 90 percent. 
Standard DUS risk sharing limits lender loss to 20 percent of 
the original UPB. Under pari passu, the lender shares all 
losses with Fannie Mae \1/3\-\2/3\; lender losses are not 
capped. In contrast, Freddie Mac leverages a senior-subordinate 
securitization structure (K-Deal) to transfer risk to private 
investors. Freddie Mac guarantees senior bond investors, and 
mezzanine and subordinate bonds are unguaranteed Senior bonds 
are publicly offered to investors through placement agents, and 
mezzanine and subordinate bonds are privately offered The K-
Deal structure has broad market acceptance. In 2016, around 89 
percent of Freddie Mac's multifamily mortgage purchases were 
designated for securitization. We believe that the market 
benefits from the presence of both Fannie Mae and Freddie Mac's 
proven credit-risk sharing models for multifamily loans.
Single-Family
    Since the conservatorships of Fannie Mae and Freddie Mac, 
taxpayers assumed the majority of the risk associated with the 
Enterprises' single-family businesses. However, there are 
mitigants in place to minimize this risk. First, on loans with 
loan-to-value ratios greater than 80 percent credit support is 
required, which is usually in the form of private mortgage 
insurance with the mortgage insurers bearing the first loss. 
Second, for nonperforming loans the Enterprises offer 
foreclosure prevention options. Third, when foreclosure becomes 
the only option, the Enterprises leverage their real estate-
owned sales functions to minimize losses.
    Since 2012 FHFA has also initiated development of a credit-
risk transfer program intended to reduce the Enterprises' 
overall risk and, therefore, the risk they pose to taxpayers 
while in conservatorship. From the beginning of the 
Enterprises' single family CRT programs in 2013 through 
December 2016, Fannie Mae and Freddie Mac have transferred a 
portion of credit risk on $1.4 trillion of unpaid principal 
balance (UPB), with a combined Risk in Force (RIF) of about $49 
billion, or 3.4 percent of UPB. In addition, from 2013 through 
2016, the Enterprises have purchased single-family loans with 
primary mortgage insurance. These loans have a total UPB of 
$731 billion and RIF of $186 billion. Through CRT and mortgage 
insurance, the majority of the underlying mortgage credit risk 
on mortgages targeted for CRT has been transferred to private 
investors or shared with private mortgage insurers.

Q.8. One of the initiatives that FHFA has been working on with 
the GSEs is the Single Security Securitization platform. It is 
my understanding that due to pricing differences between Fannie 
Mae and Freddie Mac securities (with Fannie's pricing 
``tighter'' or better), that the single securitization platform 
is simply an initiative to enhance liquidity in the 
securitization markets and lower the cost of borrowing for all 
GSE customers. First, is that correct? And second, am I correct 
to think that the single securitization platform is simply an 
initiative to gain scale and enhance pricing for Freddie Mac 
securities, and NOT an effort by FHFA to merge Fannie Mae and 
Freddie Mac into one enterprise? Could you expand on that 
question, and give us your thinking of the advantages (or 
disadvantages) of having two GSEs?

A.8. FHFA's 2014 Strategic Plan/or the Conservatorships of 
Fannie Mae and Freddie Mac includes the strategic goal of 
developing a new securitization infrastructure for the 
Enterprises for single family mortgage loans. To achieve that 
strategic goal, the Enterprises, under FHFA's direction and 
guidance, have formed a joint venture, Common Securitization 
Solutions (CSS). CSS's mandate is to develop and operate a 
Common Securitization Platform (CSP) that will support the 
Enterprises' single-family mortgage securitization activities, 
including the issuance by both Enterprises of a common single 
mortgage-backed security (to be called the Uniform Mortgage-
Backed Security or UMBS). These securities will finance the 
same types of fixed-rate mortgages that currently back 
Enterprise-guaranteed securities eligible for delivery into the 
``To-Be Announced'' (TBA) market.
    The development of and transition to the new UMBS 
constitute the Single Security Initiative. The first objective 
of the Single Security Initiative is to establish a single, 
liquid market for the mortgage-backed securities issued by both 
Enterprises that are backed by fixed-rate loans. The second 
objective is to maintain the liquidity of this market over 
time. The Single Security Initiative should also reduce the 
cost to Freddie Mac and taxpayers that has resulted from the 
historical difference in the liquidity of Fannie Mae's 
Mortgage-Backed Securities (MBS) and Freddie Mac's 
Participation Certificates (PCs).
    The CSP and the Single Security Initiative are not efforts 
by FHFA to merge Fannie Mae and Freddie Mac into one 
enterprise. Having two enterprises allows for competition in 
services and products offered to lenders and servicers, which 
helps to promote innovation in the mortgage market. These 
initiatives are consistent with FHFA's statutory obligation and 
the Enterprises' charter obligations to ensure the liquidity of 
the Nation's housing finance markets.

Q.9. After the financial crisis, Fannie Mae and Freddie Mac 
lost billions of dollars due to credit losses. Can you break-
out the total credit losses between the single-family and 
multifamily businesses of the GSEs, and give us your opinion 
whether the loss sharing model that Fannie and Freddie have in 
their multifamily businesses, where private capital sits in 
front of tax payer capital, had anything to do with the 
dramatically lower loss levels in the GSE's multifamily 
businesses?

A.9. From 2008-2012, Fannie Mae incurred single-family credit 
losses of $75.7 billion, which represented approximately 2.8 
percent of Fannie Mae's single-family mortgage credit book of 
business of $2.7 trillion at the beginning of 2008. During the 
same period, Fannie Mae also incurred multifamily credit losses 
of $1.4 billion, which represented approximately 0.8 percent of 
Fannie Mae's multifamily mortgage credit book of business of 
$184 billion at the beginning of 2008.
    Similarly, from 2008-2012, Freddie Mac incurred single-
family credit losses of $50.3 billion, which represented 
approximately 3.8 percent of Freddie Mac's single-family credit 
guaranty portfolio of $1.7 trillion at the beginning of 2008. 
During the same period, Freddie Mac also incurred multifamily 
credit losses of $0.3 billion, which represented approximately 
0.4 percent of Freddie Mac's multifamily guaranty and loans 
portfolios of $69 billion at the beginning of 2008.
    The loss-sharing model at Fannie Mae and Freddie Mac may 
have had an impact on the lower level of multifamily credit 
losses; however, additional factors also had an impact. For 
instance, the deterioration in national multifamily 
fundamentals was less severe than that experienced in the 
single-family market, in part because borrowers who were unable 
to maintain their mortgage payments became renters, increasing 
demand for multifamily units, and the multifamily deterioration 
did not last as long. Also, the credit quality of the 
Enterprises' multifamily portfolios, as reflected in 
significantly lower delinquencies, was better than that of 
their respective single-family books of business.

Q.10. It is my understanding that in Fannie Mae and Freddie 
Mac's single-family businesses, as long as a mortgage is 
``conforming'', or meets their lending criteria, that any 
mortgage originator in America can sell them a loan. Yet in the 
multifamily businesses, Fannie Mae and Freddie Mac have only 25 
approved ``vendors'' who can sell them mortgages. These are 
well capitalized mortgage finance companies and banks that are 
leaders in their industry, get audited by the GSEs on a regular 
basis, and are well capitalized companies to be able to absorb 
any credit losses should the loans they originate go bad. Why 
wouldn't the ``approved vendor'' model that Fannie and Freddie 
have in their multifamily businesses be a good idea for their 
single-family businesses?

A.10. The Enterprises have established counterparty 
requirements for both their Single-Family and Multifamily 
Businesses. The counterparty requirements are used as minimum 
standards to approve new seller-servicers, but also as 
requirements that existing seller-servicers must maintain to 
remain in good standing. Minimum single-family seller-servicer 
requirements include the following:

   LPrincipal business purpose is origination, selling, 
        and/or servicing of mortgages

   LDemonstrated ability to originate, sell, and/or 
        service mortgages

   LAdequate facilities and staff experienced to 
        originate, sell, and/or service mortgages

   LProper licensure (in good standing) or other 
        authorization to conduct business

   LNet worth of at least $2.5 million + 0.25 percent 
        of the unpaid principal balance (UPB) of the seller/
        servicer's total one- to four-unit residential mortgage 
        portfolio. Additional minimum capital and liquidity 
        requirements apply to maintain eligibility

   LInternal audit and management control systems to 
        evaluate and monitor the overall quality of its loan 
        production and servicing

   LWritten procedures for the approval and management 
        of vendors and other third-party service providers

   LFidelity bond and an errors and omissions policy

Additional criteria may be imposed based on the individual 
circumstances of seller-servicer's financial condition, 
organization, staffing, servicing experience, and other 
relevant factors.

Q.11. What percentage of the Credit Risk Transfer transactions 
are done with off-shore re-insurers? Are you concerned that two 
entities in conservatorship are doing an excessive amount of 
business with tax avoiding off-shore reinsurers? Could you 
please report back to this Committee the amount of CRT business 
that Fannie and Freddie are doing with reinsurers who enjoy tax 
advantages over United States domiciled entities?

   LHow does FHFA rationalize the GSEs' heavy reliance 
        on ratings from credit rating agencies for reinsurance 
        transactions when ratings were proven completely 
        ineffective in predicting counterparty strength in the 
        most recent downturn?

A.11. About 20 percent of the credit risk transferred through 
the CRT program has been taken in by approximately 50 
reinsurers, some of whom operate through off-shore entities. 
The reinsurers who are domiciled off-shore bring international 
capital sources to support the U.S. housing market. It should 
be noted that some risk has also transferred to private 
mortgage insurers' affiliates that also utilize off-shore 
entities in CRT transactions with the Enterprises. The 
Enterprises use ratings as one of several inputs into a 
comprehensive process to evaluate institutional risk. The 
Enterprises require all reinsurance entities, regardless of 
credit standing, to put up capital as collateral for the risk 
exposure they have accepted.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM MELVIN 
                            L. WATT

Q.1. Ensuring access to affordable, sustainable home ownership 
and mortgage credit has been a priority for me as I know it has 
been for you. To help address this issue, one important step 
the enterprises have taken to help address this issue is the 97 
percent LTV loan that helps creditworthy borrowers who can 
afford a mortgage but don't have the resources for a 
substantial down payment purchase a home. How have these 
mortgage loans, in their first 2 years, performed relative to 
conventional down payment loans?

A.1. The Enterprises' 97 percent loan-to-value (LTV) programs, 
announced in December 2014, represent a very small proportion 
of the overall single-family book. Since program inception, 
Fannie Mae has acquired approximately $15 billion in unpaid 
principal balance (UPB) or 82,000 loans; Freddie Mac has 
acquired approximately $4 billion in UPB or 24,000 loans. By 
comparison, at March 31, 2017, the Enterprises' Single-Family 
Books of Business total $2.822 trillion for Fannie Mae, and 
$1.779 trillion for Freddie Mac.
    The Enterprises' high-LTV programs were developed with 
compensating factors to mitigate the increased risk associated 
with higher LTV loans. The table below compares 60- and 90-day 
delinquencies for the Enterprises' 97 percent LTV programs and 
total single-family acquisitions since the launch of the higher 
LTV programs (i.e., 97 percent LTV) in December 2014. For both 
60- and 90-day delinquencies, the Enterprises' 97 percent LTV 
programs perform behind aggregate portfolio levels but are 
still at very low
levels.


Q.2. With the expiration of the Home Affordable Modification 
Program at the end of last year, FHFA has introduced the Flex 
Mod as a replacement. While Flex Mod streamlines the 
modification application process, I am concerned that by not 
considering the current income, some families who should 
qualify for a modification will not be able to receive relief 
under this program. For homeowners who are at risk of not 
getting an affordable modification under the new program, can 
FHFA explore referring them to housing counseling programs and 
giving the programs access to the Enterprises' exceptions 
process so that families who should qualify have access to an 
affordable modification?

A.2. Lessons learned from the crisis demonstrate the importance 
of early intervention in creating an affordable, sustainable 
modification and avoiding foreclosure. All eligible borrowers 
who choose to engage with their servicer prior to 90-days 
delinquency on their mortgage and complete a loan modification 
application will be considered for a modification that may 
include an income-based component. After 90-days delinquency 
the servicer will proactively solicit the borrower with a 
streamlined modification offer regardless of whether the 
servicer has received a loss mitigation application from the 
borrower. To accept this offer, all the borrower needs to do is 
to make three timely payments, regardless of income. Since the 
borrower is not required to provide information on income in a 
streamlined modification, it would not be possible for the 
Enterprises to add an income-based component. A borrower can 
submit a loan modification application at any time, and the 
servicer is permitted to evaluate their current income in 
determining eligibility for a loan modification.
    To encourage borrowers to work with housing counselors, the 
Enterprises share information on how to contact a HUD-approved 
housing counselor, including on the Enterprises' websites, on 
the uniform borrower application form for loan modifications, 
and on other model forms and letters they make available to 
servicers. Additionally, both Enterprises have Borrower Contact 
Units (BCUs) that serve as a direct escalation channel within 
each Enterprise to assist borrowers on a wide range of 
mortgage-related issues. Counselors working with borrowers are 
also able to access BCUs to escalate issues. The exceptions 
process is the mortgage servicers' channel for escalating 
requests for exceptions to eligibility rules for loan 
modifications within each Enterprise. FHFA has been working 
closely with borrower advocacy groups on the role of housing 
counseling in the post-crisis loss mitigation framework and has 
found housing counseling to have a strong correlation with 
borrower
success.

Q.3. I am concerned that after the 2008 financial crisis and 
ensuing Great Recession, home ownership is at 41 percent for 
African American households and 47 percent for Latino 
households, while the home ownership rate for white households 
is 71 percent. One way in which to expand home ownership among 
these underserved communities would be to expand access to pre-
purchase housing counseling, which prepares potential home 
buyers for safe and sustainable home ownership. Can FHFA and 
the enterprises leverage the deep presence of housing 
counseling agencies in these communities to develop public 
education programs to build awareness of housing counseling and 
its benefits, create incentives for people to go to housing 
counseling, and create underwriting standards that acknowledge 
the improved performance of people who have been counseled?

A.3. The 2017 Conservatorship Scorecard directs the Enterprises 
to continue to improve the effectiveness of pre-purchase 
counseling and home ownership education through technology and 
data analysis. The Enterprises also offer pricing incentives to 
borrowers to attend housing education as part of the 97 percent 
LTV program. The Enterprises have also included a Home 
Ownership Education and Housing Counseling Section in the 
redesigned Uniform Residential Loan Application (URLA). This 
section asks whether the applicant received home ownership 
education or housing counseling, the format by which the home 
ownership education or housing counseling was conducted, and by 
whom. Additionally, the Enterprises are in discussions with 
housing counselor groups on the broader use of updated case 
management software and exploring the ability to access 
preliminary underwriting results on borrowers.
    Expanding the use of technology will enable counselors to 
educate more future borrowers and potentially reduce the 
operational costs involved in counseling.
    The Enterprises have also been working with FHFA to add 
questions to the National Mortgage Database surveys, the 
American Survey of Mortgage Borrowers and the National Survey 
of Mortgage Originations to gain more information on consumers 
who utilize housing counseling services and its effectiveness. 
Gathering data through the surveys and the URLA will provide 
more opportunities to measure the effectiveness of housing 
counseling and potentially garner future support.

Q.4.a. Can you provide details on how Fannie Mae reached the 
decision to guarantee $1 billion in debt from Blackstone's 
single-family rental arm, Invitation Homes? As I understand it, 
many of the rental homes owned by Invitation Homes were 
purchased during the height of the foreclosure crisis.

A.4.a. Single-family rental units are a growing segment of the 
rental market and can provide affordable housing alternatives 
to families in need of more space than a traditional 
multifamily apartment can provide. The transaction between 
Fannie Mae and Invitation Homes was structured with the goal of 
mitigating potential risks, with generally low leverage, strong 
debt service coverage, geographic diversity requirements to 
offset potential market risk, and robust market-standard 
ongoing reporting.
    FHFA will consider the impact of single-family rentals on 
home ownership, as well as other policy implications, in the 
approval of any future Enterprise transactions or single-family 
rental initiatives. The securitization has Invitation Homes in 
the first-loss position for up to 5 percent. Wells Fargo, the 
lender, shares losses with Fannie Mae. The transaction will not 
result in any counterparty exposure that is inconsistent with 
Fannie Mae and FHFA 's current guidelines. FHFA and Fannie Mae 
will be carefully monitoring the performance and results of 
this transaction.
    On average, Invitation Homes has put in approximately 
$24,000 in rehabilitation costs across its portfolio to improve 
the asset quality and increase stability in markets across the 
country. In the overall single-family rental market, the 
institutional investors own less than 2 percent of the assets.

Q.4.b. Does FHFA plan to continue financing institutional 
investor purchases of single-family homes?

A.4.b. The Enterprises are exploring single-family rentals 
transactions on a very limited basis, which must be approved in 
advance by FHFA. FHFA has permitted Freddie Mac to explore one 
or more limited transactions in the detached, single-family 
rental market and expects them to announce small transactions 
soon. These efforts will help FHFA study alternative options 
for serving families who choose to live in single-family rental 
properties and inform our thinking on what role, if any, the 
Enterprises should play in the single-family rental market.

Q.4.c. Could this same type of financing from Fannie Mae also 
be applied to programs run by community-oriented nonprofits 
like New Jersey Community Capital that use their resources to 
purchase pools of underwater mortgages and provide homeowners 
the opportunity to become current on their loans?

A.4.c. The Enterprises have the ability to increase quality 
rental affordability through lowering financing costs in the 
single-family rental space for operators, such as nonprofits. 
However, at this time, the Enterprises are still exploring 
single-family rentals transactions to test and learn, on a 
limited basis, which must be approved in advance by FHFA. Such 
initial transactions could include purchases of loans owned by 
nonprofits. Some nonprofits are also active in the single-
family rental market through purchases of NPLs and through the 
NSL.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM MELVIN 
                            L. WATT

Q.1.a. Duty to Serve Rural Areas: Recently the GSEs submitted 
their draft ``underserved market plans'' to the FHFA. In part, 
these plans attempt to address affordable housing in rural and 
underserved areas, including Indian Country, which would impact 
many areas in my home State of North Dakota.

   LOne simple step that I'd like to get your feedback 
        on, is whether it makes sense to have a dedicated rural 
        lending office within the GSEs--or their future 
        replacement--that is purely
        focused on lending in rural America and Indian country, 
        given the distinct differences between these areas and 
        the urban mortgage market?

A.1.a. FHFA appreciates the differences between rural and urban 
mortgage markets, as well as the differences among or between 
rural markets. In fact, Fannie Mae has proposed assigning staff 
in one or more of the high-needs regions within the broader 
rural market. Earlier this year, Freddie Mac sponsored its 
first Borrower Help Center in southwest Mississippi in an 
effort to support rural homeowners. This suggests that having 
to meet the requirements of the Duty to Serve Rule is already 
leading the Enterprises to increase specialization and 
recommend other ways and business strategies to ensure 
compliance. FHFA believes that it should evaluate business 
strategies that the Enterprises propose, rather than mandate 
particular business strategies as a governmental function. This 
approach will nonetheless maintain FHFA's prerogative to 
address concerns in rural and underserved areas.

Q.1.b. In October 2016, I sent you a letter requesting that you 
allow the GSEs to get back into the Low Income Housing Tax 
Credit market for high-needs rural areas including Indian 
Country. I was pleased that the FHFA moved forward with this 
recommendation and included it in their instructions to the 
GSEs. Aside from improving access to LIHTCs, what other steps 
can the GSEs take to help improve housing options in Indian 
Country?

A.1.b. Both Enterprises include proposals to use Low-Income 
Housing Tax Credit (LIHTC) equity investments to serve Indian 
Country in their proposed Duty to Serve Plans, which were 
released for public comment on May 8, 2017. However, allowing 
the Enterprises to invest in LIHTC equity more generally 
remains an open question that FHFA is considering as 
Conservator for the Enterprises.
    As you suggested in your comment letter, the Duty to Serve 
final regulation indicates that should FHFA as Conservator 
allow the Enterprises to re-enter the LIHTC equity investment 
market, then those LIHTC equity investments in rural areas 
would be eligible for Duty to Serve credit. The Proposed 
Evaluation Guidance further indicates that such investments 
specifically serving high-needs rural regions or high-needs 
rural populations, including Indian Country, may be eligible 
for greater Duty to Serve credit.
    Other steps the Enterprises could pursue to improve housing
options in Indian country may include targeted outreach, loan 
product changes, and loan purchase activities. For instance, 
the
Enterprises could provide technical/assistance to local lenders 
and originators to help them better understand the requirements 
for an Enterprise to purchase a mortgage loan in Indian 
Country. The special challenges for lending in Indian Country 
are among the issues that make it more difficult for an 
Enterprise to purchase Indian Country mortgage loans, such as 
land titling issues, barriers to foreclosure and valuation 
concerns. The Enterprises could also help facilitate culturally 
and linguistically appropriate home buyer education for people 
living in Indian Country. Under the Duty to Serve Rule, the 
public is encouraged to look through the Enterprises' proposed 
Plans and provide input on whether they would likely improve 
housing options in Indian Country in a meaningful way, or 
whether other or additional strategies are appropriate.

Q.1.c. A recent Fannie Mae white paper on lending in rural 
America pointed out some interesting statistics about rural 
borrowers. On average, rural borrowers have lower incomes, are 
more likely to be self-employed workers, and tend to have 
higher debt-to-income ratios than urban borrowers. Yet in 
States like North Dakota--where there is a high share of loans 
originated in rural areas--rural borrowers tend to have strong 
credit scores, averaging around a 750 FICO score.

   LIn light of these facts, do you believe that the 
        qualified mortgage rule has limited lending in rural 
        America by excluding otherwise well-qualified borrowers 
        who reliably pay their debts yet may be self-employed 
        or otherwise have slightly higher debt-to-income 
        ratios?

A.1.c. The ability to repay (ATR) rules require lenders to 
consider and verify a number of different underwriting factors, 
such as a mortgage applicant's assets or income, debt load, and 
credit history, and make a reasonable determination that a 
borrower will be able to pay back the loan. Lenders are 
presumed to comply with the ATR requirement when they make a 
Qualified Mortgage (QM) loan, which must meet further 
underwriting and pricing standards. These requirements 
generally include a limit on points and fees to 3 percent of 
the loan amount, along with various restrictions on loan terms 
and features (for example, no negative amortization or 
interest-only payments and a loan term of 30 years or less). QM 
loans also generally require that the borrower's total or 
``back-end'' debt-to-income (DTI) ratio does not exceed 43 
percent. However, the 43 percent DTI cap does not currently 
apply to loans with Government-backed insurance or guarantees 
(e.g., Federal Housing Administration (FHA) and Veterans 
Administration (VA) loans), loans that are eligible for 
purchase by Fannie Mae and Freddie Mac (through the so-called 
``GSE patch''), and portfolio loans made by ``small 
creditors.'' The Enterprises' debt-to-income ratio eligibility 
maximums exceed the standard QM DTI threshold of 43 percent, 
and the Enterprises' automated underwriting systems will 
evaluate borrower applications with DTI ratios up to 50 
percent. In addition, the Enterprises have standards in their 
selling guides to underwrite self-employed borrowers. As a 
result, we believe that the GSE patch permits the Enterprises 
to purchase creditworthy rural loans to borrowers with DTIs 
over 43 percent and to self-employed borrowers.

Q.2. Appraisals: As you know, one hurdle for rural lending is 
the challenge lenders face in attaining appraisals. In a rural 
setting, there are fewer comparable properties nearby. That 
makes it more difficult to measure the home value. And there 
are more variations in land. What can the FHFA do to help the 
GSEs better address this challenge? Do you think that it's 
time, as part of GSE reform, to take a look at structural 
reforms to our appraisal system? What areas could be addressed 
to provide better outcomes for rural areas that struggle with 
access to qualified appraisers?

A.2. Fannie Mae and Freddie are leveraging technology to 
provide new tools and certainty to lenders on key aspects of 
the origination process including on appraised values to make 
the process more
efficient. FHFA continues to work closely with the Enterprises 
to address challenges to appraising in rural markets. In 2014, 
FHFA
directed Fannie Mae and Freddie Mac to provide guidance and 
clarifications to lenders and appraisers on acceptable 
appraisal practices in rural markets. The guidance allows for 
the use of distant, dated, and/or dissimilar comparable sales, 
with appropriate explanation in the appraisal report, in 
recognition of challenges appraisers encounter in performing 
appraisals in rural markets. FHFA continues to work with the 
Enterprises, the Appraisal Subcommittee, and the Appraisal 
Foundation to address issues that contribute to challenges to 
obtaining appraisal for properties in rural markets.

Q.3. Access to the secondary market for small lenders. The 
ability of small community-based institutions to provide 
consumers with competitive pricing and product offerings 
depends significantly on their ability to access the secondary 
mortgage market.

   LOne option we explored as part of Corker-Warner was 
        expanding the role of the Federal Home Loan Banks to 
        serve as an aggregator for small lenders. What are your 
        views on allowing the FHLBs to expand in this area?

A.3. The FHLBanks, through the FHLBank of Chicago as a Mortgage 
Partnership Finance (MPF) program provider, already provide 
member institutions with an aggregation service. The MPF Xtra 
product serves to aggregate loans originated by small members 
for sale to Fannie Mae. The MPF Direct is a jumbo loan product 
that allows member institutions to sell these loans to the MPF 
provider who concurrently sells the loans to Redwood Trust, 
Inc., for securitization, and MPF Government MBS, a program 
intended for small and midsized institutions, allows these 
institutions to sell Government guaranteed loans to their local 
FHLB, which sells them to FHLB Chicago to be pooled into Ginnie 
Mae securities.
    In 2016, FHLBank members delivered $3.7 billion of 
mortgages under the MPF Xtra program, $158 million under MPF 
Direct, and $438 million under MPF Government MBS. These 
programs have worked well and are continuing to be expanded.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN FROM MELVIN L. 
                              WATT

Q.1. The CFPB's mortgage rules define certain loans as 
Qualified Mortgages, or QM, and offer lenders legal immunity 
for loans that meet the QM standards. But the CFPB rule also 
grants QM status to any mortgage that is eligible for purchase 
by Fannie Mae or Freddie Mac. That means the underwriting 
criteria at Fannie Mae and Freddie Mac help define the scope of 
the QM rule--and accordingly, have a huge impact on the kinds 
of families that can get access to mortgage credit.
    Despite all of this, Fannie and Freddie's underwriting 
algorithms and criteria are secret.

   LCan you explain why it's reasonable to keep this 
        information hidden given its importance to both the 
        economy and to appropriate oversight of the mortgage 
        market?

   LWill you work with my office to make this 
        information public?

A.1. The Enterprises use underwriting criteria to educate all 
their lender counterparties to ensure a mutual understanding of 
borrower qualification and sustainability. The Enterprises' 
underwriting criteria are public and published in their 
respective Selling Guides, which can be found on the following 
websites: https://www.fanniemae.com/singlefamily/originating-
underwriting and http://www.freddiemac.com/singlefamily/guide/.
    The Enterprises' respective automated underwriting systems 
are proprietary tools that take the information provided by 
lenders and, subject to the published underwriting criteria, 
assess borrower credit risk and reach a determination of 
whether the Enterprise would purchase a loan. While the 
proprietary models that perform the risk assessment are not 
shared with the public, the factors used to run the models are 
and can be found in the Selling Guides referenced above.
    The maximum threshold for the DTI ratio is probably the 
most noticeable difference between standard QM requirements and 
the Enterprises' requirements (the ``GSE Patch''). The standard 
QM maximum DTI threshold is 43 percent and the GSE Patch is 
higher and looks to the GSE guidelines, making it possible for 
more borrowers to qualify for a mortgage. When using the 
automated underwriting systems, the proprietary models can 
assess the probability of default based on the variety of 
factors used to underwrite a mortgage. For example, Fannie 
Mae's Desktop Underwriter will evaluate borrower applications 
with DTI ratios up to 50 percent, which was discussed in a 
guide announcement released in May.
    Also, FHFA regularly examines the automated underwriting
systems to ensure that the models are calibrated and governed 
consistent with risk management standards set forth in FHFA 
supervisory guidance (see Advisory Bulletin 2013-07, ``Model 
Risk
Management'' (November 20, 2013).
    FHFA will work with your office to review the public 
information available in the Enterprises' Selling Guides while 
respecting the proprietary nature of the Enterprises' automated 
underwriting systems.

Q.2. In April 2016, FHFA announced a principal reduction 
program. At the time, the agency stated that roughly 33,000 
borrowers qualified for principal reduction under the terms of 
the program. The agency also stated that, rather than requiring 
servicers to reduce the loan principal for those 33,000 
eligible borrowers, servicers were only required to ``solicit 
borrowers eligible for a Principal Reduction Modification no 
later than October 15, 2016.''

   LCan you tell me, as of today, how many of these 
        33,000 eligible borrowers have actually received a 
        principal reduction? Please provide State-by-State 
        data, if available.

   LDoes FHFA plan to take additional steps to 
        encourage more borrowers to take advantage of this 
        program and receive a principal reduction? If so, 
        please describe them.

A.2. Nationwide, the Enterprises estimate that 1,089 borrowers 
have received a Principal Reduction Modification (PRM). 
Additionally, the Enterprises estimate that another 
approximately 1,100 borrowers have received loan modifications 
with principal forbearance and are likely to be eligible to 
have this forbearance converted to principal reduction. Please 
note that this data is subject to change as it is updated 
regularly. Based on current information available from the 
Enterprises and servicers, State-by-State data is as follows:


    Under the Principal Reduction Modification program, 
eligible borrowers could receive a principal reduction one of 
two ways. First, an eligible borrower could accept and complete 
a Principal Reduction Modification offered by his or her 
servicer. Second, an eligible borrower could accept any trial 
loan modification with a first payment due date between May 1 
and December 1, 2016; following successful completion of the 
modification trial period, the principal forbearance component 
of the modification would be converted to principal 
forgiveness. The above estimates include borrowers in both of 
these circumstances.
    The Principal Reduction Modification program leveraged the 
Enterprises' existing streamlined modification, which 
simplified the implementation process for the Enterprises and 
servicers and eliminated the need for borrowers to submit 
complex documentation regarding their income or assets. 
Servicers were required to solicit all borrowers for a 
Principal Reduction Modification, informing them that they were 
eligible for principal forgiveness and of the modified payment 
amount on their mortgage. In their offer letters, borrowers 
were informed that in order to earn a Principal Reduction 
Modification they needed to make three on-time trial payments 
and fulfill the requirements of the Trial Period Plan. As 
described below, FHFA and the Enterprises took a number of 
other steps to encourage all eligible borrowers to take 
advantage of the program.
    Since the height of the crisis, a number of factors have 
resulted in a substantial decrease in the population of 
seriously delinquent, underwater Enterprise loans, including 
those borrowers eligible for the Principal Reduction 
Modification program. These factors include loan-to-value 
ratios caused by rising home prices, improving borrower 
performance, other successful modification and refinance 
programs provided by the Enterprises, properties entering REO/
short sales, third-party sales, and Enterprise sales of 
nonperforming loans (NPLs). The number of underwater homeowners 
with an Enterprise loan dropped by over 80 percent from 2012 to 
2016. The Enterprises owned or guaranteed about 800,000 loans 
with mark-to-market loan-to-value ratios over 100 percent 
without capitalizing arrearages as of January 2016. Of these 
loans, payments on approximately 720,000 were current or less 
than 90-days delinquent and approximately 76,000 of these loans 
were seriously delinquent (i.e., 90-days or more delinquent).
    At the time of program announcement, the Enterprises 
estimated that approximately 33,000 borrowers were eligible for 
a Principal Reduction Modification nationwide. A borrower's 
actual eligibility for principal reduction is determined by the 
borrower's servicer and the Enterprises can only estimate 
eligibility for this program. FHFA and the Enterprises were 
aware that the population of eligible borrowers would decrease 
in the period between program
announcement and servicer implementation of the program.
    FHFA does not have final estimates of the decline in the 
population eligible for the Principal Reduction Modification 
program, but the population of eligible loans did decrease 
substantially from the time of announcement through the end of 
last year. At the same time that FHFA announced the Principal 
Reduction Modification program, FHFA also required buyers of 
Enterprise NPLs to evaluate all deeply underwater borrowers for 
modifications that
include options for principal reduction and/or arrearage 
forgiveness, thus increasing the likelihood that these 
borrowers would receive principal reductions after an NPL sale.
    Servicers were able to solicit eligible borrowers for 
Principal Reduction Modifications through December 31, 2016, 
when the program eligibility expired In the period between 
program announcement and this date, FHFA and the Enterprises 
undertook an array of activities to reach eligible borrowers 
and encourage them to take advantage of the Principal Reduction 
Modification program. These included:

   LThe Enterprises, with FHFA's oversight, continually 
        monitored servicer solicitation of borrowers, 
        implementation of the program, and strategies to reach 
        eligible borrowers.

   LFHFA and the Enterprises created a number of 
        borrower-facing tools, which are available at https://
        www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/
        PrincipalReduction-Modification.aspx.

   LFHFA and the Enterprises offered PRM Program 
        training to servicers and to key housing organizations, 
        including HUD intermediaries, numerous State Housing 
        Finance Agencies, the National Urban League, and to 
        participants in the NeighborWorks National Training 
        Institute Workshop.

   LFannie Mae offered assistance through its Mortgage 
        Help Networks, as did Freddie Mac through their 
        Borrower Help Centers.

   LFHFA and the Enterprises participated in local 
        foreclosure prevention events that reached borrowers 
        directly, including by partnering with HOPE NOW.

   LThe Enterprises each conducted two direct mailings 
        to borrowers who did not respond to the initial PRM 
        solicitation.

   LFannie Mae's Mortgage Help Network conducted a 
        phone campaign to nonresponsive borrowers, while 
        Freddie Mac's Borrower Help Center conducted a phone 
        campaign to all eligible borrowers.

Because the eligibility deadline for the Principal Reduction 
Modification program has passed, FHFA and the Enterprises do 
not have further outreach plans. However, FHFA and the 
Enterprises will continue to oversee and monitor the program to 
ensure that eligible borrowers have their forbearance amounts 
converted to forgiveness under the terms of the program.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                         MELVIN L. WATT

Q.1. During your oral testimony, I asked you about mortgage 
servicing compensation and the need to alter compensation 
structures to better align incentives between Fannie Mae and 
Freddie Mac (the Enterprises) and servicing companies.

   LDoes FHFA intend to follow-up on the Agency's 2011 
        white paper on this topic?

   LIf so, what does FHFA intend to do and what is the 
        timeline for action?

A.1. FHFA's 2017 Conservatorship Scorecard directs the 
Enterprises to identify challenges with the current mortgage 
servicing business model as well as opportunities to support a 
deep, liquid, stable, and robust market. In 2017 the 
Enterprises have begun conducting a mortgage servicing market 
analysis, which will include several topics, including 
servicing costs and compensation; mortgage servicing business 
models and strategies; advances and reimbursement practices; 
financing of mortgage servicing rights; operational 
requirements; the role of third-party vendors in mortgage 
servicing, and servicing transfers.
    As part of this effort, FHFA and the Enterprises will 
engage industry stakeholders, including servicers, mortgage 
servicing rights investors, and consumer advocacy groups, 
through a market survey and robust stakeholder interviews 
beginning in the third quarter of 2017. The Enterprises will 
subsequently provide FHFA with recommendations in support of a 
deep, liquid, robust mortgage servicing market. FHFA recognizes 
that servicing compensation has broad implications for the 
housing finance system and that industry stakeholders have 
various viewpoints on this subject. FHFA is aware that any 
change to compensation, if FHFA concludes that one is called 
for, would require a multi-year approach that considers the 
timing of competing initiatives affecting the mortgage 
servicing industry.

Q.2. Last month, the Consumer Financial Protection Bureau 
(CFPB) sued the mortgage servicing firm Ocwen for allegedly 
failing borrowers at every stage of the mortgage servicing 
process.

   LWhat is the total number and unpaid principal 
        balance of Fannie Mae and Freddie Mac-guaranteed loans 
        serviced by Ocwen?

   LWhat steps had FHFA taken to mitigate the risks to 
        the Enterprises related to Ocwen prior to the CFPB's 
        lawsuit?

   LDoes FHFA need any additional statutory authority 
        in order to appropriately oversee bank or nonbank 
        mortgage servicers?

A.2. The size of the Enterprises' portfolios currently serviced 
by Ocwen is confidential, nonpublic information, but it 
represents a relatively small share of the Enterprises' 
outstanding unpaid principal balance. In 2015 Fannie Mae and 
Freddie Mac, as part of their counterparty risk management, 
began reducing their exposure to Ocwen through transfers of 
servicing. In addition to significantly reducing the volume of 
loans serviced by Ocwen, Fannie Mae and Freddie Mac instituted 
contingency plans which included more frequent monitoring of 
Ocwen's servicing operations and financial condition, more 
frequent discussions with Ocwen senior management, and the 
programmatic transfer of servicing on delinquent loans to 
another servicer. FHFA has issued supervisory guidance 
directing its regulated entities to identify high-risk and 
high-volume counterparties and establish contingency plans to 
manage counterparty risk exposures (see Advisory Bulletin 2013-
01, ``Contingency Planning for High-Risk or High Volume 
Counterparties,'' (April 1, 2013)). Additionally, both Fannie 
Mae and Freddie Mac hold partial collateral on their exposure 
to Ocwen in addition to the asset value of the mortgage 
servicing rights.
    On March 10, 2016, the Government Accountability Office 
(GAO) published a report entitled ``Nonbank Mortgage Servicers: 
Existing Regulatory Oversight Could Be Strengthened'' (GAO-16-
278; available at: http://www.gao.gov/assets/680/675747.pdf), 
which stated ``Congress should consider granting FHFA explicit 
authority to examine third parties that do business with'' the 
Enterprises. In response, FHFA generally agreed with GAO's 
conclusion that servicers should be subject to consistent 
regulations and that there is a need for parity among financial 
institution regulators in oversight authority for the business 
counterparties of their regulated entities (see p. 94, Appendix 
VI: Comments from the Federal Housing Finance Agency). The 
Financial Stability Oversight Council has also recommended that 
FHFA be granted this authority in its last two annual reports 
and FHFA has included a similar recommendation as part of its 
own Annual Reports to Congress.

Q.3. Nevada has long led the Nation in underwater homes--where 
borrowers owe more on their mortgage than the property is 
worth. At the height of the crisis, nearly 70 percent of 
Nevadans were underwater on their mortgages. Even today, Nevada 
leads the Nation with nearly 19 percent of borrowers with a 
home mortgage being underwater.

   LFHFA announced a modest principal reduction pilot 
        in April 2016. Do you know how many Nevadans received 
        principal reductions pursuant to the April 2016 pilot? 
        What is the average loan-to-value ratio of a Nevada 
        borrower that received a modification pursuant to this 
        pilot?

A.3. Under the Principal Reduction Modification program, 
eligible borrowers could receive a principal reduction one of 
two ways. First, an eligible borrower could accept and complete 
a Principal Reduction Modification (PRM) offered by his or her 
servicer. Second, an eligible borrower could accept any trial 
loan modification with a first payment due date between May 1 
and December 1, 2016, following successful completion of the 
modification trial period, the principal forbearance component 
of the modification would be converted to principal 
forgiveness. The estimates below include borrowers in both of 
these categories and do not include Enterprise borrowers who 
have received principal reductions in conjunction with Nevada's 
Hardest Hit Fund, which is a separate program.
    The Enterprises estimate that 20 Nevada borrowers have 
received permanent principal reduction modifications, and an 
additional 21 Nevada borrowers have received loan modifications 
with principal forbearance and are likely to be eligible to 
have this forbearance converted to principal reduction. The 
weighted average loan-to-value ratio of these borrowers is 142 
percent. Please note that this data is subject to change and 
may be revised in the
future.
    Since the height of the crisis, a number of factors have 
resulted in a substantial decrease in the population of 
seriously delinquent, underwater Enterprise loans, including 
those borrowers eligible for the Principal Reduction 
Modification program. These factors include loan-to-value 
ratios caused by rising home prices, improving borrower 
performance, other successful modification and refinance 
programs provided by the Enterprises, properties entering REO/
short sales, third-party sales, and Enterprise sales of 
nonperforming loans (NPLs).
    At the time the principal reduction program was announced, 
the Enterprises estimated that approximately 33,000 borrowers 
were eligible for a Principal Reduction Modification 
nationwide. A borrower's actual eligibility for principal 
reduction is determined by the borrower's servicer and the 
Enterprises can only estimate eligibility for this program. 
FHFA and the Enterprises were aware that the population of 
eligible borrowers would decrease in the period between program 
announcement and servicer implementation of the program. FHFA 
does not have final estimates of the decline in the population 
eligible for the Principal Reduction Modification program, but 
the population of eligible loans did decrease substantially 
from the time of announcement through the end of last year.
    At the same time FHFA announced the Principal Reduction 
Modification Program, FHFA also required all buyers of 
Enterprise NPLs to start evaluating all deeply underwater 
borrowers for modifications that include options for principal 
reduction and/or arrearage forgiveness, thus increasing the 
likelihood that these borrowers would receive principal 
reductions after an NPL sale.

Q.4. Ensuring clear communications with borrowers with limited 
English language proficiency can make consumers more 
comfortable with mortgage borrowing, and can help grow our 
economy. Also, during the foreclosure crisis, Nevadans for whom 
English was not their first language often had difficulties 
securing loan modifications, especially when their servicing 
kept being transferred from one company to another.

   LIn an October 2016 speech, you stated a commitment 
        to ``finding a way forward'' on language access issues 
        at the Enterprises. Can you elaborate on your plans and 
        commit to a timeframe for action?

A.4. The 2017 Conservatorship Scorecard directs the Enterprises 
to support access to credit for borrowers with limited English 
proficiency by assessing the impact of language barriers 
throughout the mortgage life cycle. In May 2017, FHFA released 
a Request for Input (RFI) to solicit input on access to credit 
for borrowers with limited English proficiency, including 
current industry efforts, potential legal implications and 
concerns, operational impacts, and suggestions for process 
improvements. The RFI can be found at FHFA's website here: 
https://www.fhfa.gov/Media/PublicAffairs/
PublicAffairsDocuments/Language_Access_RFI.pdf.
    Based on the results of the RFI and other research and data 
gathering efforts, the Conservatorship Scorecard requires the 
Enterprises to develop a multi-year plan, appropriate to their 
role in the housing finance market, to improve access to credit 
for borrowers with limited English proficiency.

Q.5. I appreciate the goal of Credit Risk Transfers deals, in 
terms of trying to shift risk away from taxpayers by selling-
off credit risk to private investors. But I want to understand 
the long-term implications for borrowers and neighborhoods.

   LAre loans that participate in Credit Risk Transfers 
        eligible for innovative strategies for community 
        stabilization? For example, can these loans be sold off 
        through the Neighborhood Stabilization Initiative?

   LWe know how difficult it was for borrowers to 
        secure loan modifications when it was just Fannie and 
        Freddie that owned their loan. As we involve more 
        private sector investors in Enterprise-guaranteed loans 
        through Credit Risk Transfers, has FHFA considered how 
        it may complicate loss mitigation?

A.5. Mortgage loans included in Credit Risk Transfer (CRT) 
transactions are eligible for the same community stabilization 
relief measures as loans not covered by CRT, including loss 
mitigation programs such as loan modifications. Under the 
current design of CRT structures, the Enterprises continue to 
own the credit risk on the mortgages and their servicing 
guidelines continue to apply. In fact, most servicers are 
unaware of whether any individual loan is part of a CRT 
transaction. When a loan becomes delinquent, servicers are 
instructed to apply an array of loss mitigation options to 
reduce the possibility of a credit loss as directed in the 
Enterprises' servicing guides. The Neighborhood Stabilization 
Initiative focuses on selling properties that are in the REO 
channel to nonprofits who can ensure that the properties remain 
affordable. NSI is not affected by CRT.

Q.6.a. One point I frequently hear from Nevada constituents is 
that the inventory of single-family homes available for 
purchase is woefully low. I say this to raise concerns about 
FHFA recently allowing Fannie Mae to guarantee a $1 billion 
loan for a single-family rental landlord, Invitation Homes, 
which owns nearly one thousand properties in Nevada. Before you 
approve any additional deals of this nature, will you consider 
the possible impact on home ownership in the impacted markets 
and submit a cost-benefit analysis to Congress before the deal 
is consummated?

A.6.a. Following the mortgage crisis, single-family rentals 
have become an increasing component of the rental market for 
low- and moderate-income families. According to the Joint 
Center for Housing Studies, there are now approximately 15.5 
million detached single-family rental units in the United 
States comprising approximately 37 percent of the total rental 
housing stock. Single-family rental properties can provide 
affordable housing alternatives to families in need of more 
space than a traditional multifamily apartment can provide. The 
Enterprises have historically engaged in the single-family 
rental market by financing loans to investors of 10 or fewer 
single-family properties, and the majority of single-family 
rental assets are owned by smaller owners. Institutional 
owners, such as Invitation Homes, own less than 2 percent of 
the total single-family rental housing stock. FHFA reviewed the 
Invitation Homes transaction, and approved the transaction with 
conditions. FHFA will consider the impact of single-family 
rentals on home ownership, as well as other policy 
implications, in the approval of any future transactions or 
single-family rental initiatives by the Enterprises.
    Further, FHFA is reaching out to participants in this 
market and gathering data to assess how single-family rentals 
impact home ownership. Because data on the houses and tenants 
living in single-family rental homes is not readily available, 
at this time, FHFA does not anticipate having the data to 
support a cost-benefit analysis, but FHFA will provide a 
detailed analysis in support of any further action the Agency 
approves in this space with the information available.

Q.6.b. If FHFA is going to permit any future deals of this 
nature, will you work with mission-driven landlords in 
communities that commit to promoting rental affordability?

A.6.b. FHFA is currently conducting additional research on 
owners of single-family rental houses and will gather 
information about the effect of the Invitation Homes 
transaction on the single-family rental market, and FHFA and 
Fannie Mae will carefully monitor the results of this 
transaction. FHFA has also permitted Freddie Mac to explore one 
or more limited transactions in the detached, single-family 
rental market and expects them to announce their transactions 
soon.
    FHFA's priority is to understand the single-family rental 
market and determine if there are areas of needed liquidity in 
this relatively untested market where the Enterprises could 
improve access to affordable rental housing. FHFA will consider 
mission-driven landlords and affordability for tenants of low- 
and moderate-incomes as primary factors in any approved single-
family rental strategy going forward.

Q.6.c. If FHFA is going to permit any future deals of this 
nature, will you impose affordability restrictions or require 
landlords to adopt certain ``best practices'' in terms of 
tenant protections?

A.6.c. The reporting from both Enterprises, and strategies 
developed by the Enterprises for FHFA review, will enable FHFA 
and the Enterprises to engage with stakeholders in the coming 
months to better understand challenges, and possible 
opportunities, consistent with our objective to provide 
affordable rental housing. This will allow us to assess what 
role, if any, the Enterprises should play in the market, and 
what, if any, best practices should be
required.

Q.7. To follow-up on a question from Ranking Member Brown 
during your testimony, will you commit to expressly prohibiting 
buyers of Enterprise-guaranteed nonperforming loans or 
Enterprise-owned foreclosed properties (i.e., REOs) from using 
contract-for-deed arrangements with borrowers on a prospective 
basis? If so, please stipulate your precise timeframe for 
making this change.

A.7. FHFA is working with the Enterprises to limit the 
utilization of contract-for-deed and lease-to-own arrangements 
in future sales of Enterprise-owned REOs. Fannie Mae has 
already implemented a prohibition on both contract-for-deed and 
lease-to-own agreements to REO buyers, with exceptions for 
certain qualified nonprofits and for-profit entities that 
responsibly use this tool to support home ownership. Fannie Mae 
also introduced a REO investor surveillance program to monitor 
large REO purchasers. Freddie Mac is considering similar 
actions.
    Fannie Mae and Freddie Mac are committed to encouraging 
sales of foreclosed homes to firms that engage in the 
responsible
acquisition and resale of REO properties, including to 
nonprofits through the Neighborhood Stabilization Initiative.
    FHFA is presently working to modify the existing 
nonperforming loan sale requirements to restrict or prohibit 
the use of contract-for-deed arrangements on loans Fannie Mae 
or Freddie Mac sell through their programs except to nonprofit 
entities.

Q.8. The guidelines FHFA adopted for the purchase of lender-
placed insurance do not address the practice in which insurers 
provide servicers with free or below-cost services (that are 
unrelated to providing the lender-placed insurance) and then 
recapture the cost of those services through premiums. 
Insurance tracking is the biggest example. As a result, it 
appears that the Enterprises pay twice for those services, once 
through the servicing fee that is intended to cover such 
services, and again when they pay lender-placed insurance 
charges that appear to be inflated by the insurer to recapture 
the cost of the free/below-cost services they provided. The 
State of New York has adopted regulations to restrict this 
practice after finding that it unfairly raises the cost of 
lender-placed insurance. Has FHFA researched the impact of this 
practice on the cost of force-placed insurance charged to 
homeowners? What is FHFA doing to address this problem?

A.8. FHFA began working with the Enterprises in 2012 to address 
concerns about certain practices related to, and the cost of, 
lender-placed insurance (LPI).
    The 2015 Conservatorship Scorecard directed the Enterprises 
to continue to engage in efforts to reduce the costs of LPI. 
FHFA continued to review the Enterprises' LPI arrangements 
during the year and directed the Enterprises to establish an 
aligned, three-tiered minimum deductible for LPI coverage. This 
raised deductibles in order to lower premium costs. These 
efforts built on changes to the Enterprises' servicing guides, 
effective June 1, 2014, that prohibit Enterprise servicers from 
receiving commissions or similar incentive-based compensation 
from LPI carriers. FHFA reviewed servicers' practices related 
to tracking and recognizes they are an element of inflated 
costs, but concluded that the above measures were more 
effective means of reducing the Enterprises' LPI expenditures. 
As an insurance regulator, New York State's Department of 
Financial Services is in a better position to issue regulations 
related to specific insurance industry practices such as 
tracking.
    At FHFA's urging, the Enterprises have developed more 
robust internal reporting metrics for LPI. These new internal 
metrics give insight into and quantify the costs of LPI to 
borrowers and enhance the Enterprises' capacity to manage LPI 
costs.
    These and other efforts have helped to lower premiums and 
improve oversight of LPI expenses. Lower LPI premiums have been 
reflected in the claims for reimbursement that servicers have 
submitted to the Enterprises. For example, the average amount 
of a claim for reimbursement submitted to Fannie Mae fell from 
almost $4,000 for the 2009 coverage year to under $1,400 for 
the 2014 coverage year, a decrease of 64 percent.

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