[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
__________
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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.
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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.
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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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