[Senate Hearing 115-258]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-258

 TEN YEARS OF CONSERVATORSHIP: THE STATUS OF THE HOUSING FINANCE SYSTEM

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

                                HEARING

                               BEFORE THE

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

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

   EXAMINING THE STATUS OF THE HOUSING FINANCE SYSTEM, INCLUDING THE 
  STATUS OF FANNIE MAE, FREDDIE MAC, AND THE FEDERAL HOUSING FINANCE 
   AGENCY IN ITS ROLE AS CONSERVATOR AND REGULATOR OF THE ENTERPRISES

                               __________

                              MAY 23, 2018

                               __________

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

                      MIKE CRAPO, Idaho, Chairman

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

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Travis Hill, Senior Counsel

                          Matt Jones, Counsel

                 Elisha Tuku, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

           Beth Cooper, Democratic Professional Staff Member

             Megan Cheney, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                      Cameron Ricker, Deputy Clerk

                     James Guiliano, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MAY 23, 2018

                                                                   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...........................................    28
    Responses to written questions of:
        Senator Brown............................................    32
        Senator Scott............................................    32
        Senator Cotton...........................................    37
        Senator Menendez.........................................    38
        Senator Warner...........................................    41
        Senator Warren...........................................    44
        Senator Cortez Masto.....................................    46

              Additional Material Supplied for the Record

Letters submitted by Senator Tim Scott...........................    55

                                 (iii)

 
 TEN YEARS OF CONSERVATORSHIP: THE STATUS OF THE HOUSING FINANCE SYSTEM

                              ----------                              


                        WEDNESDAY, MAY 23, 2018

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 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 Fannie Mae, 
Freddie Mac, and the broader housing finance system.
    The Banking Committee has been busy over the past year-and-
a-half.
    Yesterday the Committee reported favorably a bipartisan 
bill to update the rules governing CFIUS and the export control 
regime.
    Earlier this year, the Senate passed S. 2155, bipartisan 
legislation focused on rightsizing regulations for community 
banks and credit unions, which was passed by the House 
yesterday and will hopefully soon be signed into law.
    But we have not forgotten about housing finance reform, 
which remains one of my top priorities as Chairman.
    Fannie Mae and Freddie Mac have now been in conservatorship 
for close to 10 years. You appeared before this Committee a 
year ago, Director Watt, and we talked about the importance of 
finding a permanent solution for our housing finance system.
    The status quo is not a viable option. The Government plays 
too big a role in the mortgage market today.
    You stated last year, as you have many times in the past, 
that ``unequivocally . . . 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.''
    I agree with this sentiment, and I look forward to 
continuing to work with you and your staff as we delineate a 
way forward.
    Meanwhile, over the past couple years, FHFA, Fannie Mae, 
and Freddie Mac have all been busy. The underwriting 
requirements on conforming mortgages have progressively 
weakened over time. The enterprises began purchasing loans with 
less than 5 percent down in 2014. Since then, Fannie's and 
Freddie's 97 LTV loans have become increasingly popular.
    Freddie recently announced a new program called HomeOne, 
separate from its existing low downpayment program, which will 
allow low downpayment loans without any income or geographic 
restrictions.
    According to one report, Freddie ``is about to supercharge 
its 3 percent down program'' as it ``takes aim at FHA.''
    Meanwhile, both enterprises have also experimented with 
pilot programs that allow certain lenders to sell loans with 1 
percent or even 0 percent down.
    Last summer, Fannie Mae raised its maximum debt-to-income 
ratio from 40 to 50 percent, and according to reports, both 
GSEs saw a surge in high DTI loans in the second half of last 
year.
    Additionally, Fannie and Freddie have continued to expand 
into other markets, such as single-family rentals. Freddie Mac 
has also begun providing lines of credit to nonbank mortgage 
servicers, presumably at cheaper rates than available in the 
market.
    I understand your role, Mr. Watt, requires juggling 
multiple mandates as both conservator and regulator. I also 
appreciate that Fannie's and Freddie's underwriting standards 
remain tighter than they were at the peak of the housing boom.
    However, the overall trends I am seeing toward greater 
taxpayer risk and greater Government presence in the mortgage 
market are concerning to me and further demonstrate the need 
for Congress to turn to housing finance reform expeditiously.
    I appreciate you being here with us today and look forward 
to our discussion.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Director Watt, 
welcome back. Nice to see you again.
    I want to thank the Chairman for calling this hearing to 
continue the Committee's discussion of the current status and 
future of housing finance. At the center of our discussion 
today, of course, are millions of American families, 
homeowners, aspiring homeowners, and renters, each one with a 
different income, each one with different needs. All of them 
want one specific thing: a safe, affordable place to call home.
    The secondary mortgage market was developed to give 
borrowers in each of our States access to that opportunity, but 
leading up to the crisis, as new private entities entered the 
secondary market, the secondary market tail started wagging the 
dog. Lenders churned out loans to meet the demands of risk-
seeking investors, and homeowners suffered the consequences. 
Communities in Ohio and across the country are still dealing 
with the foreclosures and blight that resulted from the housing 
crisis.
    There have been significant changes in GSEs' activity since 
the crisis. They have reduced their portfolios. They have ended 
investments in the high-risk private label securities that 
drove losses to taxpayers. The GSEs have also undergone 
additional changes since you last appeared before this 
Committee.
    Last year I expressed my concerns that under the terms of 
an agreement with Treasury, GSEs' capital cushion could soon go 
to zero, putting taxpayers and GSEs at unnecessary risk. I 
applaud your work with the Treasury Secretary to allow each 
enterprise to retain a small capital buffer to absorb quarterly 
accounting fluctuations. This small but meaningful change 
provided certainty to mortgage investors and the enterprises 
and ultimately to homeowners. And in January, GSEs began 
implementing plans to meet their duty to serve underserved 
markets. These steps are important to so many American 
families.
    But we need to take a close look at what has not changed. 
Far too many creditworthy borrowers still struggle to access 
sustainable credit in the mortgage market, particularly in 
communities of color. In February, the Center for Investigative 
Reporting released data showing that people of color were far 
more likely, in some cases five times more likely to be denied 
a conventional mortgage in the 61 metropolitan areas they 
surveyed.
    Yesterday, a really good day for the banking industry, was 
the day that the FDIC announced in its quarterly report that 
bank profits were up 13 percent from this quarter over a year 
ago, continuing the string of almost every year a double-digit 
increase in bank profits. That does not count the tax cut, 
which would mean their profits would have been 27 percent. 
Community bankers did quite well also. But yesterday the reason 
it was such a good day for bankers was that the House of 
Representatives passed legislation to weaken rules and 
regulations on banks in an overreach, especially as it moves to 
help Wall Street, which the collective amnesia that this body 
seems to enjoy continues to stun us. Yesterday the House of 
Representatives' bill that it passed makes it harder to detect 
and protect against violations of fair housing laws, 
particularly reverse redlining, which devastated borrowers in 
communities during the crisis. It just begs the question of why 
we have not learned or do not care to learn.
    Meanwhile, borrowers in Ohio are still unable to access 
low-balance loans to revitalize properties and neighborhoods 
throughout the State. As you know, more than one-quarter of all 
renters pay more than half their income in rent. And it is just 
important that all of us--many of us in this crowd, on this 
panel, many of you watching this do not know people that spend 
half their income on rent and what can happen to them if one 
thing goes wrong in their lives. It is important we continue to 
think about that.
    Today's discussion of the secondary market is at its core a 
discussion about access. Going forward, decisions made in this 
Committee will determine whether borrowers across each of our 
States will continue to have access to a 30-year fixed-rate 
mortgage and whether community bankers will still be able to 
compete with large lenders to serve their customers.
    Today I hope we explore the elements of the secondary 
market that are essential to facilitate affordable home 
ownership and should be preserved and explore new ways to 
address remaining problems and unmet housing needs. I look 
forward to working with Director Watt and to hearing from him 
about the work that FHFA and the GSEs are doing.
    Thank you.
    Chairman Crapo. Thank you very much, and I will resist the 
temptation to reengage in the debate over S. 2155.
    Senator Brown. You guys did win, right?
    Chairman Crapo. And definitely, Director Watt, I will not 
bring you into it.
    Thank you again for being here with us today, and you now 
have the opportunity to make your presentation.

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 this 
morning.
    When I last appeared before this Committee, I spent much of 
my time describing some of the important reforms FHFA has made 
to Fannie Mae and Freddie Mac while they have been in 
conservatorship. Today, because I suspect this could be my last 
time before this Committee, I would like to highlight some of 
the challenges that lie ahead.
    One obvious challenge that has clearly been exacerbated by 
conservatorship is the difficulty of managing and planning in 
the face of uncertainty about the future. As I said in a speech 
I gave at the Bipartisan Policy Center in 2016, ``Here, I am 
not talking about plans for housing finance reform but plans 
for everyday operations, including strategic planning that 
every well-run business does, and project planning that is 
necessary to continue key initiatives. Without looking somewhat 
down the road, FHFA and the enterprises would both lose their 
momentum and jeopardize day-to-day success. The key dilemma 
when you have an uncertain future, however, is how far down the 
road to look and how to retain the necessary talent to 
implement either short-term or longer-term plans.''
    In my written statement, I outline two specific examples of 
this challenge: one related to enterprise board turnover, and 
one related to our decision to transition Fannie Mae from a 
property owner to a tenant.
    A second challenge that I think is also exacerbated by 
being in conservatorship has been how to ensure market 
discipline for the enterprises in the absence of the market 
forces that normally inform operating and business decisions. 
In the absence of market forces that normally enforce market 
discipline, FHFA has had to develop its own regime for market 
discipline. FHFA developed a conservatorship capital framework 
and requires both enterprises to use this aligned capital 
framework when making business decisions.
    FHFA also uses this framework in its role as conservator to 
assess guarantee fees, the economic reasonableness of risk 
transfers and other business decisions, and to guard against 
the enterprises making competitive decisions adverse to safety 
and soundness.
    FHFA will soon be building on the conservatorship capital 
framework we developed to propose a risk-based capital and 
minimum leverage capital rule to replace the old capital 
standards that OFHEO had in place that have been suspended 
during conservatorship.
    While any final rule adopted by FHFA would also be 
suspended during conservatorship, we believe it is important 
for our agency as a regulator to use the experience we have 
gained during this long conservatorship period to articulate a 
view on prudential capital requirements for the enterprises. We 
also believe our proposed rule will provide valuable 
transparency to the public and will be a catalyst for 
thoughtful discussions about capital requirements that would be 
appropriate for the enterprises or other entities playing 
similar roles going forward in a reformed housing finance 
system. The input we receive will also help us refine the 
capital framework we continue to use during conservatorship.
    Another serious challenge I think we must all confront is 
the affordability of home ownership and rental housing. This 
challenge is not unique to conservatorship and, unfortunately, 
is a significant challenge facing the market as a whole. We 
have taken a number of different approaches to try to respond, 
especially encouraging the enterprises to test and learn 
through pilots that can be replicated and implemented safely 
and soundly.
    We are also engaging collaboratively with other industry 
stakeholders, all of whom acknowledge this as an urgent and 
growing concern that may prove to be our most intractable 
problem in the present and in the future.
    Thank you again for inviting me to testify, and I look 
forward to answering your questions.
    Chairman Crapo. Thank you very much, Director Watt.
    Just a couple of quick ones. In January, the FHFA released 
its Perspectives on Housing Finance Reform, which, by the way, 
I appreciated. I thought it was a very good document. The FHFA 
explained that the guarantors in the future system should be 
subject to comprehensive capital and liquidity requirements so 
that they could survive a severe housing stress like the recent 
financial crisis and continue to write new business.
    At a hearing last year, I stated the need to have 
substantial, robust, loss-absorbing private capital at 
guarantors comparable to the capital at G-SIBs to protect 
taxpayers from losses as needed.
    Considering the size and the role that guarantors would 
play in our financial system, do you agree that substantial, 
robust capital standards must be imposed on such institutions?
    Mr. Watt. I do, and I think that is one of the reasons we 
are undertaking this proposed capital rule to get the public, 
Members of this Committee and the House Committee, and other 
stakeholders involved in this discussion so that those 
appropriate capital standards can be set not only for Fannie 
and Freddie in the present but for guarantors going forward.
    Chairman Crapo. Well, thank you. And another question on 
this in general: In your written testimony for the hearing 
today, you again wrote that it is your firm belief that these 
conservatorships are unsustainable, and you wrote that it is 
the responsibility of Congress, not the FHFA, to decide on 
housing finance reform and that you hope we will do so 
expeditiously.
    Could you explain a little more fully the consequences for 
consumers and taxpayers and the economy if Congress does not 
act to reform the housing finance system?
    Mr. Watt. Well, I think one of the things I referred to is 
the uncertainty that is associated with continuing 
conservatorship and the inability to look forward and plan for 
the future. So that is certainly a problem.
    I think having a capital regime would be necessary to move 
forward into the future and would help inform good business 
decisions that are both compatible with the mission of the 
enterprises and compatible with safety and soundness. I just 
think having this much of our economy in conservatorship is 
just not a sustainable idea and is not a good idea under any 
circumstances.
    Chairman Crapo. Well, I appreciate your perspective on that 
and your advocacy with regard to it.
    On a different topic, the FHFA recently announced that the 
enterprises will begin issuing a single security, the UMBS, on 
June 3, 2019. FHFA has said that one of the key goals of the 
initiative is to reduce cost to taxpayers caused by the 
difference in liquidity among Fannie Mae and Freddie Mac 
securities.
    At the same time, in a recent 10-Q filing, Fannie Mae 
listed the transition to the uniform MBS as a risk factor, 
citing both financial and operational risks.
    Could you provide the Committee with an update on the 
progress on this single security and a description of the 
benefits and costs of moving to the MBS?
    Mr. Watt. Well, you know, in securities filings, both 
Fannie and Freddie have to be very forward-leaning on 
identifying potential risk, and we have been very transparent 
in saying that you cannot build a platform for issuance of 
securities without incurring risk, and you cannot make a 
transition to a single security without incurring risk. So I do 
not think they are unduly emphasizing the risk associated with 
it. They are just being transparent and honest, as we have.
    The benefit, of course, is that it is going to provide 
additional liquidity in the marketplace and additional 
standardization so that everybody knows what the rules of the 
road are when it comes to operating in the space. And it will, 
of course, close the pricing differential between Freddie Mac 
and Fannie Mae stock--or Fannie Mae securities, not stock but 
their securities.
    Chairman Crapo. And you are on target to hit the June 3, 
2019----
    Mr. Watt. We are definitely on target to hit the June 2019 
implementation date of the second phase of it. The first phase 
went swimmingly well. The best indication of that, of course, 
is that nobody even read anything about it in the paper. But 
Freddie is actually operating on the platform now to issue 
their securities without any problems whatsoever, and when we 
get to the June 2019 timeframe, both enterprises will be 
operating, and they will be issuing a single unified security.
    Chairman Crapo. Well, thank you very much.
    Senator Brown.
    Senator Brown. Thanks, Mr. Chairman. Thank you, Director 
Watt.
    In 2008, when you were a Member of the House, Congress 
reaffirmed the GSEs' duty to serve lower-income families in 
underserved markets. FHFA's rulemaking and Fannie and Freddie's 
duty-to-serve plans discuss parts of the housing system that 
have not been well served by the market. Talk about that, if 
you would. Where did FHFA find gaps in mortgage credit access 
as you finalize the duty-to-serve rule? And why have these 
markets been left behind?
    Mr. Watt. Well, three of those gaps are identified in the 
duty-to-serve legislation, that is, manufactured housing 
preservation, and rural housing. And there are substantial 
challenges in rural communities, different challenges in rural 
communities than in metropolitan communities. And the recovery 
in rural communities has clearly not been as robust as the 
recovery in metropolitan areas.
    Senator Brown. Although very uneven in metropolitan areas.
    Mr. Watt. Very uneven in terms of--so you have got a 
different set of problems in metropolitan areas. The 
affordability is just off the charts in metropolitan areas. 
Availability of houses in rural communities is a problem. So 
the duty-to-serve rule is designed to meet that unavailability 
of housing in three areas: manufactured housing, which is 
prominent in rural areas; rural housing that is not 
manufactured, which is a serious challenge; and the 
preservation of affordable housing in all areas. So duty-to-
serve, when it is fully implemented, as it is now in the 
process of being geared up, should help to solve that problem. 
But there will continue to be problems as I identified in my 
opening statement.
    Senator Brown. Thank you. I would differ on one point. In 
metropolitan areas, I know you said it was uneven, but you also 
said the increased cost of housing is off the charts. In many 
areas that were hit the hardest in 2006, 2007, and 2008 in my 
State, in Cleveland and Dayton and Cincinnati and Youngstown, 
especially, that is not always the case by a long shot, as you 
know.
    Mr. Watt. That is correct.
    Senator Brown. Let me talk about the national market. 
Congress set out five purposes for Fannie and Freddie in their 
charters. One of these was ``promote access to mortgage credit 
throughout the Nation, including central cities, rural areas, 
underserved areas.'' A recent report released by Brookings 
showed that by purchasing and guaranteeing loans, particularly 
loans from community financial institutions, the GSEs are the 
single largest source of mortgage credit in rural areas.
    So as we consider housing financing reform proposals in 
this Congress or the next, discuss the importance of a national 
market and discuss, if you would, which borrowers lose access 
to affordable mortgage credit without a national market.
    Mr. Watt. Well, our opinion is that a national market is 
critically important in any housing finance system because 
right now we have national pricing. A person in Florida gets 
the same rates as a person in New York, California, or Ohio. 
And without a national market, guarantors could go in, lenders 
could go in and cherrypick just the best credit risk. So a 
national market is absolutely critical, we think, to preserving 
access to credit and providing liquidity across the board to 
everybody. So we think that is one of the most critical aspects 
of a housing finance reform proposal.
    Senator Brown. Thank you. One last question. In my State, 
homebuyers, and especially in the cities where property values 
took the hardest hit during the foreclosure crisis, are still 
struggling to finance small purchases. In many cases this means 
that first-time homebuyers looking to stay in their communities 
are pushed out of the market by cash buyers, often investors 
who will never live there, who do not need mortgage financing.
    What has FHFA and what have the GSEs done to work with 
lenders in communities to help creditworthy families like those 
in need of small-balance loans to move toward home ownership?
    Mr. Watt. Well, we tried to make it easier for them to 
transfer those loans--make it easier for lenders to transfer 
those loans to the GSEs so that they can be securitized and the 
risk spread around the world. So that is an important 
ingredient. Reducing downpayments when you can do it 
responsibly and with compensating factors is important. We have 
got pilots related to student debt that we are testing out to 
see if they can be implemented responsibly.
    There are all kinds of things that we are trying to solve 
this problem. You know, access is just an intractable problem, 
and some of the things as I described in my written testimony--
I did not have time to do it in my oral testimony. Some of 
these things are things that we just do not as a regulatory or 
conservator agency have leverage over. Incomes are uneven. 
Education is uneven. I mean, there are things that we cannot 
control in our lane. So we try to collaborate with other 
stakeholders to get them working on that also.
    Senator Brown. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Shelby.
    Senator Shelby. Director Watt, you bring a lot of 
experience to your job as Director. We have worked together in 
conferences, sometimes on the same side, dealing with these 
issues.
    Mr. Watt. I always try to be on the same side as you.
    Senator Shelby. I know. Thank you. Me, too.
    You brought up several things that I think are very 
relevant and very interesting. The conservatorship, I never 
thought that would last this long. I never thought that we, 
Congress, and several Administrations would let that happen. 
But it is what it is right now.
    But what have you learned as the Director--and maybe you 
can impart this to us, too--of the failures and the mistakes 
that were made in dealing with Freddie and Fannie? And if we 
ever reform them--and God knows we hope and pray. We have a lot 
of plans out there, but none of them have been implemented yet. 
I believe, one, as you say, we have got to have more than 
adequate capital because people believe in that--I do, too--and 
liquidity. And this national market and the GSEs do bring some 
liquidity to the market. The GSEs have brought national 
housing, you know, like you have referenced, if it is my State 
of Alabama or if it is Michigan or Pennsylvania, you have got 
the same opportunity in a sense with the mortgages. But is all 
of that basically based, or a lot of it, on the express or 
implied guarantee of the taxpayer? And how important is that?
    Mr. Watt. Well, you have asked several different questions. 
Let me try to go back and----
    Senator Shelby. You are up to the task, though.
    Mr. Watt. ----try to address them as I remember them. I 
thought the first question you asked was----
    Senator Shelby. What have you learned?
    Mr. Watt. What did we learn about the problems that caused 
the meltdown? I think what we learned, first and foremost, is 
that having one foot in the public sector and one foot in the 
private sector does not work because when you have a foot in 
the public sector, taxpayers take the risk, and a foot in the 
private sector, shareholders take the benefit. So I think the 
first thing I would try to solve is getting one foot out of the 
public sector and one foot in the private sector. And then the 
second----
    Senator Shelby. How do you do that?
    Mr. Watt. Well, I think, first of all, you have got to 
build capital from the private sector that you put at risk 
ahead of taxpayers. That does not necessarily mean that there 
is not taxpayer remote backing of the mortgage sector, because 
I think most people agree that without remote backing of the 
taxpayers for the mortgage sector, you will not have 
necessarily a 30-year fixed-rate mortgage. So if you want to 
have a 30-year fixed-rate mortgage, I think you can have remote 
backing of the Federal Government. That will also lower rates 
because that allows access to capital from all around the 
world. People do not understand that people all over the world 
are financing our housing in this country because we were able 
to securitize and spread the responsibility of the capital and 
money responsibility around the world.
    But the real problem was that I think because there was 
this competition to make money for the private sector, there 
developed a race to the bottom, and the competition was to get 
more and more and more business rather than a competition to 
provide responsible lending and backing of responsible loans. 
And both the private sector lenders and the GSEs were guilty of 
that. And so I always harken back to one thing that I said to 
Senator Corker in my confirmation hearing. What was needed in 
this industry was somebody to make responsible decisions and 
not let access overburden safety and soundness. Both of those 
are important responsibilities, and the most important 
responsibility we walked as FHFA and we have walked through our 
conservatorship and the enterprises should continue to walk 
going forward is balancing those two things, not a race to make 
more money, not a race to only provide access, but a balance of 
safety and soundness and access to credit. And it is a 
difficult balance to walk, and it has to be walked responsibly. 
It cannot be walked politically. It cannot be walked--I mean, 
you know, these are tough decisions, and they require good 
judgment.
    Senator Shelby. I agree with you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Director Watt, 
thank you for your service and your leadership.
    I want to ask about a few of the postconservatorship 
priorities highlighted in the perspectives document you sent to 
this Committee in January. Do you have concerns that a system 
with too many guarantors could result in a race to the bottom 
where guarantors chase volume by eroding underwriting standards 
and pricing?
    Mr. Watt. Yes, I do have that concern.
    Senator Menendez. Do you believe that a mandate on 
guarantors to serve a national market is necessary to promote 
affordable and sustainable home ownership opportunities for 
creditworthy borrowers, including those in urban and rural 
underserved areas of the country?
    Mr. Watt. I believe that, yes.
    Senator Menendez. And do you agree that guarantors should 
be prohibited from offering pricing discounts to lenders based 
on their higher volumes because it disadvantages smaller 
community lenders?
    Mr. Watt. I do believe that, yes.
    Senator Menendez. All right. I deduced that from the 
document, but I just wanted to put it on the record.
    Data released last week by the Federal Reserve Bank of New 
York shows housing wealth is becoming increasingly concentrated 
among older Americans, a marked change from before the crisis 
when younger and older Americans had similar shares of home 
equity. Moreover, home ownership rates continue to be down 
overall from their peaks, but this is particularly true for 
millennials. With mounting student loan debt, a limited supply 
of affordable housing, the difficulties of assembling a 
downpayment, I am concerned that too many of those who are 
coming of age during the financial crisis and recession are 
missing out on their opportunity to have a piece of the 
American Dream.
    So under your leadership at FHFA, what steps have the GSEs 
taken to expand home ownership opportunities for younger 
Americans? And, looking ahead--second part of the question--
what do we in Congress need to do to ensure millennials are not 
precluded from assessing affordable home ownership 
opportunities?
    Mr. Watt. Well, we have taken some serious looks at the 
burden that student loan debt is placing on millennials, and we 
are looking at pilots that would address that. We have got to 
do it responsibly because student loan debt is a debt that gets 
taken into account in debt-to-income ratios. The question is: 
Are there ways that we could mitigate that by perhaps having 
parents be backers to millennials?
    The biggest problem is millennials do not have 
downpayments. They have exorbitant debt because of student 
loans. Nobody takes into account rental payments in assessing 
creditworthiness, or at least the credit rating score do not do 
that.
    So there is this cascade of things that make it 
disadvantageous for millennials, and, in addition, our studies 
indicate that millennials are waiting later and later to get 
married, which has historically been a true indicator of when 
somebody wants to buy a home. So, you know, there are all kinds 
of things that go into this, and we try to take all of those 
things into account as we structure programs that will at least 
try to address, if not completely eliminate, these problems.
    Senator Menendez. Looking at what Congress could do, if 
we--for example, there is legislation that calls for allowing 
$1 trillion in student loan debt collectively nationwide to be 
ultimately refinanced at historical lows. We would significant 
cut the debt, and that might create an opportunity for those 
millennials who want to purchase a home to be in a better 
position to do so.
    Mr. Watt. That would be one of the things that would be 
outside our lane, but, you know, that would be a legislative 
decision, so I try to stay out of those.
    Senator Menendez. I liked it better when you were in the 
legislative area.
    [Laughter.]
    Senator Menendez. Finally, FHFA recently closed a request 
for input in updating Fannie and Freddie Mac's credit scoring 
model. S. 2155, which passed the House yesterday, requires the 
GSEs to establish a new process for approving the user of other 
credit scoring models, and I have concerns that this provision, 
which will soon become law, will delay your ability to update 
the credit scoring model, ultimately harming those consumers 
that could benefit from increased access. On top of that, I 
think this provision raises questions about competition and 
consolidation of power by the consumer reporting agencies.
    Now that the input period is closed, do you have concerns 
about competition in the credit scoring marketplace?
    Mr. Watt. Well, we had concerns about it initially because 
credit scoring is one of those things where, you know, 
competition is good if you are competing on the right things. 
But if you are competing just to get more business in the 
credit scoring arena, that is not a good thing. So we were very 
concerned about that and put a bunch of questions in our 
request for input so that we could get feedback, and we remain 
concerned about it. And people who commented were concerned 
about it.
    Regarding the provision in Senator Crapo's bill on credit 
scoring, it could have come at a better time for us. I would 
have to say that. And we are trying to see whether we can 
proceed with what we had started by making the request for 
input on credit scoring and get to a conclusion that will now 
have to be an interim conclusion because the bill, as I read 
it, would require us now to go back and make an assessment and 
set up a set of rules about how to assess credit scoring 
agencies. So we do not want to delay--and that is, what a 2-, 
2\1/2\-year buildout under the statute. It probably will take 
even longer than that, depending on how you define assessing 
credit scoring models. So it could have some impact on our 
ability to move forward on this, and so--but, you know, we will 
comply with the statute if it is signed by the President.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Crapo. Senator Corker.
    Senator Corker. Mr. Chairman, thank you. Director Watt, 
thank you for being here. You will be heading to North Carolina 
and I will be heading to Tennessee about the same time, it 
looks like. But I have enjoyed very much working with you. Mel, 
you and Bob have been very accessible to us. We have not always 
agreed, but I appreciate the way we have tried to talk through 
differences and tried to strengthen agreements that we have 
had. So, again, thank you for being here and for your service.
    Mr. Watt. I have enjoyed working with you, too.
    Senator Corker. Thank you.
    Mr. Watt. Sometimes.
    [Laughter.]
    Senator Corker. The capital issues that you are talking 
about, I know that you are getting ready to put some papers 
out. I appreciate some of the conversations our staffs have had 
about that. Do you agree, though, that capital for these 
institutions should be fairly close at least to some of the 
larger banking institutions that we have in our Nation?
    Mr. Watt. Well, I think you will see when we put the 
proposed rule out that we are following a format that is 
similar to banking capital. But these enterprises are not 
banks, and capital is about protecting against risk. So you 
have to really assess the risks that are being undertaken, 
compare them to what risk banks have, and there are some 
differences. And one of the reasons we think it is good to put 
this proposed rule out is to start those very kinds of 
discussions because you do not want a cookie-cutter approach to 
building this capital rule.
    Senator Corker. Yes. They are monolines. In many ways the 
risk is concentrated, so some people might say that they would 
be riskier than banks. But I know that----
    Mr. Watt. Some people would say that, and then some people 
would say that by risk-transfer transactions, they might be 
less. But, you know, I think those are discussions that really 
need to be had, and they need to be transparent discussions, 
not behind-the-scenes decisions.
    Senator Corker. Well, I appreciate you getting ready to 
send those out, and there will be discussions.
    My sense is that the institutions may well stay in 
conservatorship for some time, and I think your discussion 
about having one foot in one camp and one foot in another is 
true. And I think for some people--not everyone--them being 100 
percent in the Government footprint where, you know, the 
Government obviously is putting up all the risk by guaranteeing 
the mortgages, and there are some people that kind of like it 
that way. Seriously, they like the fact that then the 
Government benefits from whatever surpluses, if any, exist.
    I know that likely there will be some executive decisions 
that are made that hopefully can be complemented over time with 
some legislative action. I do not think there is any way there 
is going to be legislative action that takes place, at least 
not in the near future. But what I hope is going to happen----
    Mr. Watt. I am sorry to hear you say that.
    Senator Corker. Well, I am just acknowledging the realities 
of it. I think you know I began--my first bill, I wound down 
both institutions. I did not have any cosponsors. And we have 
evolved to a place where we have tried to seek a balance, 
working with you and Bob and other members of this Committee. 
But, you know, it is evidently not going to happen. We may 
leave a bill behind that others may pick up at some point.
    One of the things that--I know we have gotten our hedge 
fund activity in both operations down to about $250 billion 
each, which was the Treasury directive, the portfolio business 
that occurred within the institutions, and I appreciate the----
    Mr. Watt. We are actually ahead of schedule on that, yes.
    Senator Corker. I appreciate you doing that. You know, the 
footprint had been reducing to a degree. There are some areas 
where it has expanded, and I wondered if you might respond. We 
have a situation now where Freddie Mac is now lending, they 
have become a lender to their servicers. Some of the pilot 
programs over the last 5 years have actually expanded the role 
of the two GSEs. The multifamily business, which is operated in 
a great way--I mean, they have done an outstanding job. But at 
Freddie, it is up about 30 percent over last year. Fannie 
recently raised debt-to-income from 45 to 50 percent, which is, 
again, an expansion. The GSEs have pushed to 3 percent 
downpayments, again, an expansion. And now we have Fannie that 
is financing Airbnb, again, an expansion. And then one last 
one, we have--I know this is one of the bad guys that our 
Ranking Member would not appreciate, but Invitation Homes just 
did a dramatic expansion by having a huge investor-owned 
acquisition. Again, I am not criticizing what they are doing in 
any way. I am talking about the investor-owned enterprises. 
But, in essence, that was loaned to by one of the GSEs.
    So there has actually been an expansion of mission, and so 
while we have gotten the portfolios down, it appears that 
instead of trying to decrease the footprint over time, over the 
last 5 years, we are beginning to, especially in the last 
couple years, expand the mission.
    Mr. Watt. I think if you look at every single one of those 
things that you talked about--except Airbnb, which I want to 
come back to and correct what you said. We are not financing 
Airbnb. Be clear on that. All we have said is that income that 
people make from renting their houses through Airbnb or their 
apartments through Airbnb can be considered as income. We are 
not financing Airbnb. So let us be clear on that. But 
everything else that you talked about, including multifamily, 
Invitation Homes, all of that is in the space dealing with 
affordable--backing of affordable loans so that people can get 
access to affordable housing. And that is where the challenge 
comes in because when you do that, there is the perception that 
you are doing it by increasing risk. As the Chairman said in 
his opening statement, we have lowered the credit standards. I 
did not agree with that. What we have done is tried to 
responsibly make lending available to other people. So this 30-
percent expansion you are talking about in Freddie's 
multifamily space is only in the affordable area. And if we 
were not doing that, the private sector would not be doing it. 
And there would not be affordable rental housing taking place.
    So you have to put--I think all of the things that you have 
talked about there, the whole list, except for Airbnb, which, 
you know, I just have to take issue with your characterization, 
but everything else that you described is designed to make 
housing more affordable to people who cannot now afford to have 
either affordable home ownership or affordable rental. And if 
we do not do that, I do not know who does it in this country 
when the mandate of these enterprises is to provide liquidity 
for the housing market. I just do not know how else we do that.
    Senator Corker. I understand, and, again, it is an 
observation, though, that the mission continues to expand.
    Mr. Watt. I do not think that is--the mission has been 
there all along.
    Senator Corker. But the footprint continues to expand, and 
I think where we were headed at one point was toward trying to 
reduce the footprint and the reliance. And instead, over the 
last couple years, it has expanded, and taking Airbnb income 
into account when making a loan is what I was referring to, and 
that is what is happening.
    I am sorry it went over so long, and----
    Mr. Watt. Can I just make one comment?
    Senator Corker. ----filibustering, and I tried to do a good 
job of cutting through.
    Chairman Crapo. All right. Senator Warner.
    Senator Warner. Director Watt, it is great to see you.
    Mr. Watt. Good to see you.
    Senator Warner. I want to thank you for all your service. I 
also, as someone who, as Senator Corker and others, have spent 
years trying to learn the housing finance business, it is 
extraordinarily complicated and complex. I support a lot of the 
things you have done around affordability and access. I think 
it is very important. I support particularly--and one of the 
things we think we have learned, particularly on the 
multifamily side, how successful the program has been on 
multifamily, did not cause the crisis in the first place, and 
we need to continue that good work.
    But one of the things we have granted you as Congress, 
because we failed to put in place a legislative solution, we 
have granted you as FHFA Director during conservatorship 
enormous, enormous power. And I think you have generally done a 
very good job.
    What I wonder, though--and I just have some questions I 
would like to run through, and hopefully we can get brief 
answers because I have got a couple of follow-ups. Your tenure 
ends in January of 2019, and I would argue editorially that the 
Trump administration has not been necessarily favorable toward 
a lot of the expanded access and other issues. But the Trump 
administration--elections have consequences--they are going to 
appoint a new Director in 2019, and some of those forces who 
say they are for progressive causes, who have been advocates of 
the status quo, I really do wonder what they will say come 
January when a new Director is put in place.
    Let me just go through, I believe, some of the powers that 
your replacement will have, particularly if these entities 
remain in conservatorship. Wouldn't the next FHFA Director have 
the authority to lower loan limits?
    Mr. Watt. Within statutory limits. There are statutory 
requirements related to loan limits.
    Senator Warner. They would be able to----
    Mr. Watt. Yes.
    Senator Warner. Would he or she have the authority----
    Mr. Watt. And some argue that as conservator we could 
disregard the loan limits.
    Senator Warner. Some of these could even be----
    Mr. Watt. But I do not agree with that.
    Senator Warner. But a future Director might.
    Mr. Watt. A future Director might.
    Senator Warner. Would he or she have the authority to 
tighten minimum credit requirements?
    Mr. Watt. Yes.
    Senator Warner. Would he or she have the authority to raise 
the overall G-fee and increase the loan level price 
adjustments?
    Mr. Watt. Yes.
    Senator Warner. Would he or she have the authority to 
reduce GSEs' offerings of certain loan types?
    Mr. Watt. Yes.
    Senator Warner. And in an area that you have leaned in, I 
think appropriately, would he or she have the authority to move 
GSEs to fully based risk pricing while at the same time rolling 
back affordability goals and duty-to-serve goals?
    Mr. Watt. Yes.
    Senator Warner. So all of the work that you have been able 
to move forward by leaving these entities in conservatorship, a 
new Director, particularly appointed by this Administration, 
could roll back all that progress and do it administratively 
without any input from Congress. Is that not correct?
    Mr. Watt. I think that is right. Obviously, some of those 
decisions could have consequences for the economy, and I would 
assume that those consequences would be taken into account 
because this is a substantial part of the economy. So whatever 
decisions get made, I hope they get made in a----
    Senator Warner. We are hoping, based upon maybe a new 
enlightened Presidential appointee. I am not sure I would make 
a large wager on an appointee that would follow your direction 
in the agency.
    Also, some of the more recent actions that some of us have 
been talking about had actually--I think some of the proposals 
we have been talking about would have dramatically increased 
the amount of resources going to low- and moderate-income 
homeowners and I think hopefully will be a guidepost on a 
going-forward basis. I just do not understand some of the folks 
who seem to be caught up with status quo, thinking that status 
quo is going to be maintained, and that your progressive 
leadership is going to be replaced by this Administration's 
appointee come January when that person will be put forward.
    In the last couple of seconds here, wouldn't the new 
Director also have the ability to put the entities through 
receivership? And what would be the effects of putting these 
entities through receivership?
    Mr. Watt. The authority is there. The impact of doing that 
would be to erase--without some legislation that did otherwise, 
would be to erase the Government backing. And so that would 
certainly be a consequence of that.
    Senator Warner. I just believe, Mr. Chairman, that there 
are a lot of folks who have been reluctant to fully engage--and 
you have fully engaged, and I appreciate your work with our 
office, but a lot of folks who have been reluctant to fully 
engage on what a legislative solution would be that would still 
make sure we have that kind of access and affordability. And my 
great fear is having indicated all the powers that a Director 
has under conservatorship, that come next year at this point in 
time there may be a lot of folks saying, ``Gosh, we missed a 
really great opportunity.''
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. Director Watt, 
thanks for returning to the Committee. Good to see you again.
    Mr. Watt. Good to see you.
    Senator Toomey. The first thing, just quickly. As you are 
very well aware, under the Preferred Stock Purchase Agreement, 
the Treasury made funds available to the GSEs, and over the 
course of several years, there were drawdowns on this 
availability. My understanding is the cumulative total of the 
draws is about $191 billion. Does that sound about right to 
you?
    Mr. Watt. That sounds about right, yes.
    Senator Toomey. And then there was an obligation to pay 10 
percent on that initially, and then the Government came along 
and abrogated that agreement and basically forced a new 
agreement whereby it just confiscates everything that is 
earned. And so instead of a 10-percent dividend payment, which 
was the original contractual agreement, there is just a sweep, 
so all retained earnings go to the Government.
    The cumulative total of what started as dividend payments 
and then became the sweeps is about $279 billion. That is 
according to FHFA's data. Does that sound about right to you?
    Mr. Watt. I do not--I have the figures somewhere, but I 
think that is probably in the neighborhood, yes.
    Senator Toomey. So, anyway, I do not have the precise dates 
on which the drawdowns occurred, and I do not have the precise 
dates on which the payments were made, so you cannot make 
precise interest accrual calculations. But you can back-of-the-
envelope that, and if the third amendment had never occurred 
and instead the 10-percent payments were made--and, by the way, 
the third amendment was justified at the time, and it is still 
on the website, as being a favor to Fannie and Freddie because 
they would never be able to pay the 10-percent dividends. In 
fact, it occurred just as they were turning the corner and 
starting to make money.
    My point is if you were crediting amounts above a 10-
percent interest payment to a principal repayment, it looks to 
me on the basis of a back-of-an-envelope that the total 
obligation that the GSEs would owe is somewhere between 0 and 
$50 billion. Does that sound about right to you?
    Mr. Watt. I honestly do not know, Senator Toomey, because I 
was not involved in any of those discussions about the third 
amendment, the PSPA, and I just--I mean----
    Senator Toomey. Yeah, OK.
    Mr. Watt. Our agency is a party to the agreement, but that 
is all----
    Senator Toomey. I got it.
    Mr. Watt. ----the involvement I had with it.
    Senator Toomey. So I would like to move on to actually a 
follow-up to the line of questioning that Senator Corker was 
pursuing, because some of the new practices and pilot programs 
caught some of my constituents and some Members of Congress a 
little bit by surprise. Are you familiar with Freddie's pilot 
program called ``IMAGIN''?
    Mr. Watt. Yes, I am.
    Senator Toomey. OK. So my understanding is that is a new 
practice whereby rather than having the mortgage insurance 
provided at the point of sale, the point of origination, 
instead Freddie essentially assigns one of several prearranged 
insurers to be providing the mortgage insurance. They are 
usually Bermuda-based, and that is a departure from the 
historical practice of Fannie and Freddie. And so my question 
is a simple one: Why the change? What is the purpose of this 
pilot program? And why is it needed now?
    Mr. Watt. Well, I think we are constantly trying to make 
the market more efficient, and this is one of the things that 
we are testing to see if it will make it more efficient. It is 
absolutely consistent with the statute.
    Senator Toomey. I do not dispute the legal authority to do 
it. I am just--you know, as I say, it caught us by surprise. It 
caught the industry by surprise. It is somewhat disruptive to 
the private mortgage insurance industry. And I am just 
wondering why there was not maybe even a traditional rulemaking 
process or a period of public comment to consider this. And 
there are other areas. Senator Corker went through a list that 
included the financing of the mortgage service companies that, 
again, this looks like new kinds of activities, new practices, 
where we have not seen an explanation, an opportunity to 
comment and to get public input on.
    Mr. Watt. You know, if I took public comment on every pilot 
that we did, we would never do any. You know, there is--and we 
have information that determines how we move forward. We 
approved that transaction. So Freddie just did not jump up and 
do it on their own. We had some discussions with the industry 
about it in advance, but, you know, we cannot allow any 
particular interest in the housing finance system to protect 
their turf by saying you cannot innovate. This is a risk 
transfer, a front-end risk-transfer transaction that everybody 
has been begging for.
    Senator Toomey. It is a change in the mechanism by which 
the risk transfer occurs, right? The risk transfer occurred in 
the scenario where the mortgage insurance is originated at the 
point of origination. You have changed the mechanism of 
applying it. We are pretty much out of time, but I would 
appreciate it if you could send us an explanation for what is 
the rationale behind this program.
    Mr. Watt. I would be happy to do that.
    Senator Toomey. What does it hope to achieve? Why has it 
been implemented? And what about doing it now as opposed to the 
decades during which my understanding is there was a different 
practice?
    Mr. Watt. I would be happy to do that.
    Senator Toomey. Thank you.
    Chairman Crapo. Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Mr. Watt, I want 
to thank you for your years of service. You and I got a chance 
for the first time to sit down and talk at length, and I was 
able to understand why you are so highly regarded on both sides 
of the aisle, on both sides of the Capitol. So thank you for 
your many years of service.
    Last year Fannie Mae announced a pilot to allow homeowners 
to overcome downpayment hurdles by using income from home-
sharing, Airbnb in particular. But at the same time, several 
cities have conducted studies that indicate that there is at 
least a marginal decrease in housing supply where these home-
sharing platforms are prevalent. And so my question for you is: 
Both at the policy level and in terms of analysis, how do you 
balance those two things? They seem to be in tension. But I 
also think there is just a lack of credible data because a lot 
of the data is done by individual cities, and some of the data 
is either provided by Airbnb or their adversaries. So it seems 
to me an appropriate role for FHFA to analyze the impact of 
these platforms on the availability of housing.
    Mr. Watt. We have actually done work in that area. In fact, 
I have been to California and met with the folks at Airbnb. We 
had very serious concerns about the impact of these kind of 
house-sharing rent arrangements on the availability of housing. 
There is really nothing we could do about it, but we wanted to 
understand the impact. And I do not think we have a credible 
answer about what impact this is having yet, but we are still 
gathering information. In the meantime, the income that comes 
from it, I mean----
    Senator Schatz. You feel like you have got to count it----
    Mr. Watt. ----to not count that would be, I think, unfair 
to the people who are doing it.
    Senator Schatz. Fair enough, but, obviously, these things 
are in tension in terms of your goals. But I will also offer 
that we really do need some objective information here, because 
nobody who is providing me any information regarding the impact 
of these platforms is disinterested. They are not bad people, 
but we need some objective analysis. And so although I am sure 
you have a number of staff people kind of ruminating on this, I 
think it is about time for a proper study that policymakers can 
analyze, both at the Federal level but maybe even more 
importantly at the municipal level.
    Yesterday, as you know, Congress passed a law requiring you 
to consider alternative credit scoring models, which actually 
sounds pretty good to me. Senator Kennedy and I and others have 
been working on reforming what I think is an absolutely broken 
system with these credit bureaus. And the problem is 
essentially they operate in the dark. They are unaccountable. 
We are characterized as customers, but we never enter into a 
customer-business relationship. They are monetizing our data 
without our permission, and as you know, there are significant 
error rates. Nontrivial numbers of people are unable to get a 
house, a job, a car as a result of the errors that these credit 
bureaus make. And so the idea of an alternative scoring model 
makes a lot of sense to me.
    Here is the catch: VantageScore is really what we are kind 
of considering at this moment, and VantageScore is owned by the 
three credit bureaus that we are all so angry at.
    And so my question for you is: How concerned are you that 
moving to a VantageScore model will give too much power to the 
existing infrastructure and do nothing to reform it?
    Mr. Watt. Well, we expressed that as one of our concerns in 
the request for input that we put out, and not surprisingly, we 
got some feedback from responders to that request for input 
that expressed the same level of concern. This is an opaque 
area. It is hard to get good information. And I have said 
repeatedly that of all of the challenges that I faced at FHFA 
during the period I have been the Director, this is clearly the 
most difficult issue that I have had to deal with, because it 
is hard to get information, people protect their vested 
interests. The theory is that competition is good regardless 
of--you know, competition is good as long as you are competing 
for the right objectives.
    Senator Schatz. And if it is real competition.
    Mr. Watt. And if it is real competition.
    Senator Schatz. If these three credit bureaus own the new 
alternative, this is worse than the status quo. This is 
doubling down on the status quo. And just one final point about 
this. In terms of the data sets that they currently use, they 
actually exclude certain data sets because they cannot rely 
upon it. But now their theory of the case is if you take all 
the data that they are in possession of, which they currently 
do not use because they should not use it, if you put it in one 
big pile, that creates some reliable algorithm that smoothes 
out all the admitted errors in their data sets that they have 
excluded. It is totally preposterous, and only in Congress do 
we consider taking the three incumbents and allowing them to 
create a new entity, only in Congress do we consider that an 
alternative and competition. This is not competition. This is 
doubling down on the status quo. And I certainly hope that as 
you abide by the statute, you think very carefully about 
whether or not this is going to make the situation worse.
    Thank you.
    Chairman Crapo. Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Director Watt, it is good 
to see you again. I also want to echo the comments of my 
colleagues. Thank you for your service.
    Mr. Watt. Thank you.
    Senator Cortez Masto. And thank you to your staff who are 
here as well. I appreciate the conversation this morning.
    Last year when you testified, I urged you to prohibit 
contract for deed mortgages. As you well know, these are 
installment contracts where borrowers build no equity. They 
lose all of their monthly payments and downpayments if they 
miss a single month's payment.
    What is the status of contract for deed mortgages?
    Mr. Watt. Well, we basically prohibit them, but we are 
doing some looking into shared equity arrangements, which could 
be a means of getting people from rental into home ownership. 
``Contracts for lease'' is a bad term, but, you know, one way 
of getting from rental to home ownership is to start off in 
rental and go through the process of proving that you are able 
to pay the rent and have that applied.
    I am not as categorical about saying that----
    Senator Cortez Masto. No, and I appreciate you prohibit 
them, which is fantastic. But you are still trying to figure 
out a way----
    Mr. Watt. Yes, yes.
    Senator Cortez Masto. ----to move from rental to home 
ownership.
    Mr. Watt. Absolutely.
    Senator Cortez Masto. And that is something that we should 
be working with you on trying to achieve.
    Mr. Watt. Yes.
    Senator Cortez Masto. So thank you for that.
    Let me jump to affordable housing, because in Nevada this 
is the number one issue that I hear in the northern part of the 
State and the southern part of the State. We do not have enough 
affordable housing, both in our urban and rural areas. We have 
a lack of housing, a lack of inventory. And so one of the 
things I wanted to talk to you about, you know Nevada was 
ground zero for the foreclosure crisis, and last year we 
discussed my concern about FHFA allowing Fannie Mae to 
guarantee a billion dollar loan for a single-family rental 
landlord that owns nearly 1,000 properties in Nevada. And let 
me just couch this. We do not have enough housing, rents are 
too high. I have just seen a statistic that is horrific. This 
is March of this year. Nevada ranks last among all States for 
providing affordable rental housing for its poorest families.
    And so the challenge we have, high rents, not enough 
inventory, there is this $1 billion loan that you engaged in 
with a company. I am concerned that FHFA subsidy for this 
single-family landlord is putting home ownership out of reach 
for many Nevadans. What's more, I am more concerned that the 
deal did not come with any affordable housing conditions or 
tenant protections for those rental properties.
    So last time we talked, you were studying this. It had been 
relatively new. You wanted to study the impacts. What research 
have you done about the impacts of this deal on home ownership 
in communities like Nevada?
    Mr. Watt. So we have done several things. First of all, we 
are not doing any more that do not have affordability 
requirements in them. We are gathering information which is the 
reason that we approved the Invitation Homes transaction it's 
called so that we could gather information about whether we 
could raise the standards in this area. And we are trying to 
figure out whether this is really reducing home ownership or 
whether it is paving the way for more people to get into home 
ownership. I mean, I think you can argue both sides of that.
    A lot of people do not want to rent in high-rises. They 
would rather rent a single-family home. And a lot of these are 
people who could afford to buy a home. So we are still trying 
to evaluate that. That is one of the things we are trying to 
do.
    The second thing is Freddie Mac is undertaking similar 
things with private sector entities that are doing almost 
exclusively middle- and lower-income affordable kinds of 
projects. This is one of these areas where we are just--we are 
testing and learning.
    Senator Cortez Masto. Well, and that is why--my time is 
running out, but this is why I inquire, because I have had 
roundtable discussions in the northern part of the State and 
the southern part of the State with our key stakeholders, 
including Government entities, about how we address affordable 
housing. If you have data, if you have information that can 
help us as we go down this path and figure out an answer, a 
solution to more affordable housing, not just in Nevada but 
across the country, I would be open to working with you. So I 
would love to see the data, what you have learned from it, and 
how we put protections in place.
    Mr. Watt. We will give you the information we have on this 
transaction and on Freddie's transactions as they develop the 
information. It takes a while to get the information so that we 
can analyze it. But it is clear that supply of housing is a 
problem. I identified that as one of the issues in my written 
statement. I did not specifically deal with it in my oral 
statement because the oral statement has to be shorter. But 
prices are a function of demand and supply. Just like 
everything else, housing prices are a function. And there is 
just not enough supply being generated now. Nobody is building 
new housing. And when they do build new housing, it is at the 
very top of the market.
    So it is just a very difficult problem that has multiple 
aspects to it, some of which we cannot control. But to the 
extent we can gather information and use that information to 
help impact that, we are trying to do it.
    Senator Cortez Masto. Well, thank you. And I know my time 
is up, but I appreciate your comments earlier, because this is 
something your agency is working on. And if you are not doing 
it, nobody else is.
    Mr. Watt. That is correct.
    Senator Cortez Masto. And so that is our challenge. So 
thank you for everything you do. I appreciate it.
    Mr. Watt. Thank you.
    Chairman Crapo. Thank you.
    Senator Heitkamp.
    Senator Heitkamp. Director Watt, thank you so much for your 
commitment to the country and commitment to affordable housing. 
I think we all look upon your tenure and think about what you 
brought to this discussion, and I think you have brought not 
only an incredible capacity to understand this issue, but also 
a sense of your community back home and what you need to do to 
make things better in this country for people who go to work 
every day who cannot afford housing.
    You know, I find it remarkable that we can talk about 
prescription drugs and we can talk about tax reform and we can 
talk about all these things that hit the pocketbook. But the 
single greatest challenge American families have right now is 
finding affordable housing, and we do not seem to--it never 
seems to rise above kind of the political rancor or the 
prioritization that we need to advance in this body if we truly 
represent working people.
    You know, I have watched steadily as the percentage of 
disposable income that is utilized for housing actually 
increases year over year, causing huge amounts of disruption in 
the community. And as you said, it is a function of supply and 
demand. So I want to talk about a couple things.
    Number one, I think Senator Menendez asked you about your 
comments regarding too many market entities. You kind of talked 
a little bit about that. Right now we have two. There are some 
proposals to go to five. You think five might be too many. As 
we look at advancing any kind of legislation right now, do you 
have a number in mind where it would not be too many?
    Mr. Watt. I do not. But regardless of how many there are, 
we need to control what they are competing for, which is why in 
our perspectives document we thought of this, of the service 
that the enterprises play, Fannie and Freddie now, and future 
guarantors would play, as utilities.
    Senator Heitkamp. I think this is going to be very, very 
hard to kind of quantify and work through as we look at this, 
understanding that there are people who, if they were here 
right now, they do not think there should be any level of 
guarantee, any level of Federal participation, which I think 
would lead to a collapse of the 30-year fixed-rate mortgage. No 
one would take on that credit risk, that interest rate risk.
    And so, you know, when we talk about--one of the issues 
that I would like to just kind of put on your radar, because 
there is always a lot of focus on urban and suburban housing, 
one of the greatest challenges that we have in North Dakota is 
affordable housing and quality housing in rural areas as well. 
In fact, we used to in economic development think if you build 
it, they will come. But a lot of people are not moving to those 
areas because they cannot find affordable housing. And so what 
are your thoughts on the challenges of increasing the supply of 
affordable housing? I just want to build on your discussion 
with Senator Cortez Masto. If, in fact, we build more supply 
and we have a demand, that is going to drive up prices. You see 
this right now in Seattle, houses that maybe 10 years ago would 
have sold for $150,000, $200,000, now being $1 million houses. 
So that house that would have been affordable 10 years ago is 
no longer affordable because of the lack of supply.
    How do we, without some kind of Federal program 
guaranteeing access to affordable housing--even if we build a 
supply of housing, it is going to be gobbled up at the top end. 
So how do we tackle this problem of affordable housing, making 
sure that working families can get into a house and save for 
retirement?
    Mr. Watt. What we have tried to do is support the market at 
the affordable level, at the entry level, because right now----
    Senator Heitkamp. But do you think it is working?
    Mr. Watt. Well, it is certainly not working effectively.
    Senator Heitkamp. That would be my point.
    Mr. Watt. And efficiently, right.
    Senator Heitkamp. There is no indication that what we are 
currently doing is solving this problem. And I think it is the 
sleeper issue for this body, economic issue in this Congress 
and the next Congress. And so it cannot be just about GSE 
reform. It cannot be just about providing that 30-year fixed-
rate mortgage. We have got to look at the supply of housing, 
how we can--without disrupting the market too dramatically, how 
we can get people into homes. And I have seen projects in San 
Francisco where, you know, developers will build and there is a 
set-aside for policemen who want to live in the city, who do 
not want to drive, you know, 45 minutes into the city to serve 
their community but cannot afford to live in the city that they 
put on, you know, armor every day to protect. There is 
something wrong with that in this country.
    And so I want to applaud you because I know you have been a 
champion for affordable housing. I know that you have looked at 
it from every angle. I hope that you use the remaining time 
that you have to really drill down on this issue of 
affordability, and do not just look at it as building supply. 
We cannot get affordability by simply building more houses, 
because those houses may be houses that, you know, are 
$200,000, $300,000 houses that will sell in certain markets for 
$500,000 or $600,000 because of the lack of supply.
    So single-family housing, ownership, and affordability are 
key components to what built this country. I hope that you will 
use your time remaining well and try and help us figure out how 
we are going to get more Americans into that dream of home 
ownership.
    Mr. Watt. Thank you.
    Senator Heitkamp. Thank you.
    Chairman Crapo. Senator Jones.
    Senator Jones. Thank you, Mr. Chairman. Thank you, Director 
Watt, for being here, and thank you for your service. I will go 
through all of that as well. But I also want to thank my 
colleagues, Senators Cortez Masto and Heitkamp. I am also 
inclined to just say, ``Ditto,'' and call this hearing a day.
    [Laughter.]
    Senator Jones. But I really appreciate----
    Mr. Watt. The Chairman might appreciate that.
    Senator Jones. Yes, I understand that.
    Chairman Crapo. Should we do that?
    [Laughter.]
    Senator Jones. I am sorry. There is no such luck in the 
U.S. Senate, OK?
    Mr. Watt. I might even appreciate it.
    Senator Jones. This will be easy, though, but I appreciate 
having that dialogue about affordable housing. And I want to 
talk just a moment, though, about the other leg, the 30-year 
fixed-rate mortgage. Everyone seems to say that that is such a 
staple, we have got to do something about the 30-year fixed-
rate mortgage for creditworthy borrowers across a wide range of 
incomes. And we talk about that a lot, but yet we are still 
struggling with how to do that.
    I want to ask you from maybe a little bit different angle, 
and the answer is probably going to seem obvious, but in my 
short time here, I realize that sometimes even the obvious--we 
need to be reminded of the obvious. So let us talk about the 
fact that suppose Congress--we do a very poorly designed 
attempt to create a system that did not prominently feature the 
30-year mortgage. What kind of effect is that going to have on 
our markets? What would happen to us?
    Mr Watt. Well, I think if you reduced the term of a 
mortgage to 15 years, for example, the monthly payment on that 
mortgage is going to be substantially higher. It is going to 
price more people out of the market. If you move toward 
adjustable rate mortgages, people do not have certainty that 
allows them to plan for their future, so you could easily lose 
the certainty that comes with a fixed-rate mortgage.
    So these decisions have real impacts, and imagine paying 
what would be 30 years of payments, compressing those payments 
into 15 years. It does not double the payment, but it would 
substantially increase.
    Senator Jones. And it would just knock a lot of people out 
of the market.
    Mr. Watt. Yes, it would knock a lot of people out of the 
ability----
    Senator Jones. And I am also assuming--I have seen so many 
people in terms of the adjustable rate mortgage, it is great 
when you can first get hold of it and it is a low thing, but 
all of a sudden, you do not plan on whatever might come down 
the road, and the next thing you know we are back in a 
foreclosure problem. Is that right?
    Mr. Watt. That is correct.
    Senator Jones. All right. I want to mention briefly in the 
time remaining--and I applaud you for your work in expanding 
the Neighborhood Stabilization Initiative, which is a really 
innovative program, I think, to tackle the lingering effects of 
the foreclosure crisis. This program was expanded to 
Birmingham, Alabama, in December of 2017. The number of 
properties in Birmingham is fairly modest, but it is also 
persistent, and I am hopeful that that Neighborhood 
Stabilization Initiative can help our communities and groups 
and local governments turn a corner and foster economic 
development.
    So I would like for you to just talk about that program 
just a little bit and the lessons learned since you started 
that program in 2014, how they have been applied to cities as 
you expand, like Birmingham, and what you see as the future of 
that particular program.
    Mr. Watt. Well, we hope that a time comes where you do not 
need that program anymore, but that time is not coming anytime 
soon. So the theory of the program was you had all of these 
houses that were in foreclosure, in distressed neighborhoods, 
and you could sell them off to investors who could make money, 
or you could incentivize neighborhood groups to be involved 
with purchasing them and stabilizing the neighborhood--
neighborhood stabilization. So if these houses sat there empty, 
they were going to depress the value of houses down the street 
or right next to them. So we did not want that to happen. We 
wanted people who had a vested interest in the neighborhood to 
be involved with either owning these properties so they could 
rent them to people so that they could convert them to 
homeowners, and the Wall Street interests were gobbling these 
things up initially, so the Neighborhood Stabilization 
Initiative has played just a very critical role. And we started 
it in the places where housing had taken the hardest hit as a 
result of the economic downturn. And then we expanded it to 
places that--but all of it was scientifically based. It was 
based on the numbers, who got hit the hardest and what 
neighborhoods were getting hit the worst and were most 
vulnerable, which is why we called it ``Neighborhood 
Stabilization Initiative''. And it has been a great success in 
places. It does not solve all the problems. Nothing we do 
solves all problems.
    Senator Jones. Well, it does not solve all the problems, 
but it is a step in the right direction.
    Mr. Watt. It is definitely a step in the right direction.
    Senator Jones. I certainly applaud your efforts and 
innovative programs, because I think we do not see enough of 
that in Government sometimes with innovative programs, stepping 
out of your comfort zone to do something a little bit 
different. So thank you very much, and I hope that before your 
tenure is over that you will come down to Birmingham and see 
firsthand what we are trying to do with your programs. Thank 
you very much.
    Thank you, Mr. Chairman.
    Mr. Watt. I have got some good friends down there, so I 
would love to do that.
    Chairman Crapo. Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. Director Watt, 
thank you for your service. It was great to serve with you in 
the House, and we have been proud of your efforts in your 
current job.
    I also want to applaud you for making sure that the Housing 
Trust Fund remains stable. I know after the passage of the tax 
bill there were some unanticipated consequences with respect to 
the valuation of the enterprises' deferred assets, which, as I 
understand, required you to take a draw from the Treasury.
    Mr. Watt. That is correct.
    Senator Van Hollen. Is that right?
    Mr. Watt. Yes.
    Senator Van Hollen. And that did put the Housing Trust Fund 
potentially in jeopardy, so thank you for taking action to save 
that.
    My question does relate to the Housing Trust Fund. In your 
experience, what has been the role of the Housing Trust Fund in 
providing more affordable housing in the country?
    Mr. Watt. Well, we think the Housing Trust Fund has been 
administered in a way that provides more housing. We do not 
administer the funds. Part of the funds go to Treasury to 
administer; part of the funds go to HUD to administer. So we do 
not necessarily track what happens with the funds after they go 
into the Housing Trust Fund. We can get that information and 
provide you more information on it, and we meet with interest 
groups around the country that say that the Housing Trust Fund 
is critical to the provision of affordable housing.
    It does not solve the whole problem. Nothing we do solves 
the whole problem. But it is another ingredient and the problem 
would be worse without it, is I guess the way to characterize 
it.
    Senator Van Hollen. Look, I appreciate that. As you said, 
there is no one thing to address this issue, and even with the 
measures that have been taken, including your provision of 
funds to the Housing Trust Fund, we have actually seen an 
increase in--let me put it this way: a reduction in the supply 
of affordable housing around the country.
    Mr. Watt. Right.
    Senator Van Hollen. Just stories in the last couple days 
about the reduction in supplies around the country of new 
housing starts and affordable housing.
    What are the levers, other than that fund, what are the 
other key levers within your authority that relate to the 
provision of affordable housing? I know there are many moving 
parts within the enterprises, but what would you say are the 
key levers?
    Mr. Watt. Well, a big key is there is not enough supply, 
and we are trying to attack it from that perspective. But on 
the borrower side, the big challenge for getting to affordable 
housing, there are two things: downpayment and debt-to-income 
ratios. And if you put those two things together and kind of 
stack them on top of each other, they do increase the level of 
risk. If the debt-to-income ratio is high and the value ratios 
are out of whack, you could have problems.
    So we have tried to structure programs that do not increase 
the risk but take into account that debt-to-income is not 
necessarily a one-to-one correlation with defaults. In fact, 
there is a lot less correlation between debt-to-income ratios 
and defaults than people would postulate. There is a lot less 
correlation between downpayment, the amount of downpayment that 
people put into a home and defaults than people would 
postulate. You just have to control and have compensating 
factors when you do these programs.
    So those are the things that we have tried to do, and we 
try to do it--and we have been successful, interestingly 
enough, because the default rates and the delinquency rates on 
those 97 percent product loans, low downpayment, and the higher 
DTI loans, debt-to-income ratio loans, those defaults rates are 
consistent with the default rates and the delinquency rates of 
people who are paying a lot more down. Now, we have not gone 
through a downturn in the economy that would test that longer 
term, but we think we have done this in a responsible way that 
is both safe and sound.
    Senator Van Hollen. I appreciate that. A last question, and 
I will be brief. And Senator Warner raised some concerns that I 
have with respect to who might succeed you and the enormous 
authorities that they have and what could be done with them. 
But one issue he did raise was the duty to serve. Now, as you 
know, that duty to serve has now been put into statute as part 
of the 2008 Housing and Economic Recovery Act, HERA. So can you 
just talk about that issue? Because it is a statutory 
requirement. How much does the management oversight provided 
impact that duty to serve?
    Mr. Watt. Well, we have to do it responsibly. I think the 
point that Senator Warner was making was don't you have the 
authority not to do duty to serve? Well, yes, the prior 
Director of this agency did not do a duty-to-serve rule. We did 
a duty-to-serve rule.
    Senator Van Hollen. Even though it is a statutory 
requirement?
    Mr. Watt. Even though it was a statutory requirement. We 
did a duty-to-serve rule. There was no duty-to-serve rule 
before I became the Director of this agency, so we went through 
the process, and we are controlling it in a way to make sure 
that it can be implemented safely and soundly. And, you know, 
the people who wanted it, interestingly enough, are people who 
are now sometimes the most vocally opposed to it. Duty to serve 
is really about serving rural and manufactured housing 
interests. Think about who uses those programs more than 
anybody else. Right? So duty to serve is an important 
ingredient to the provision of housing in this country, because 
in rural areas people use manufactured housing. In North 
Carolina, in Alabama, in Nevada, you know, in Kentucky, 
Tennessee, you know, manufactured housing, there is a lot of 
manufactured housing, and it is more higher quality now so it 
can be done more safely and soundly.
    So we have had to put controls around it, but having a rule 
and having the enterprises go through the process of making 
proposals that get commented on and monitoring how it is done 
is critically important to the success of this program.
    Senator Van Hollen. Thank you, Mr. Director.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator. And that concludes the 
questioning and the hearing. Before I give the final wrap-up 
instructions, I want to again thank you, as I think every 
Senator has, for your service, Director Watt. I have 
appreciated working with you, and as I said in my opening 
remarks, I intend to keep working with you until the very last 
day, and thereafter.
    Would you like to say something?
    Senator Brown. Yes, I would add I hope this is not your 
last hearing, Director Watt.
    Chairman Crapo. That is right. We are all kind of----
    Senator Brown. It is with great sincerity and genuineness 
that I say that.
    Chairman Crapo. It is very possible this will not be your 
last hearing. Who knows?
    [Laughter.]
    Mr. Watt. I was feeling pretty good until both of you all 
said that.
    [Laughter.]
    Chairman Crapo. Well, keep that smile on your face, and we 
will keep working with you. We are going to work aggressively 
on housing finance reform, and I think that there is an 
opportunity for us to make great progress. I do not count 
anything out, even in this Congress. But no matter what 
happens, we will be moving the ball down the field and 
appreciate your help and your assistance in doing so.
    For Senators who wish to submit questions for the record, 
those questions are due on Tuesday, May 30th, and I encourage 
you, Director Watt, to respond to questions, if you receive 
them, promptly.
    And with that, this hearing is adjourned.
    [Whereupon, at 11:38 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 23, 2018
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for inviting me to testify this morning.
    At my last appearance before this Committee, I described at some 
length some of the many ways FHFA has worked to reform Fannie Mae and 
Freddie Mac (the Enterprises) while they have been in conservatorship. 
I am pleased to report that the work and reforms in all the areas I 
outlined in my prior testimony have continued. Detailed updates on 
recent developments in some of these areas are included in the 2017 
Scorecard Progress Report, Credit Risk Transfer Progress Report, and An 
Update on the Single Security Initiative and the Common Securitization 
Platform. For the convenience of the Committee, we have also provided 
to each member a copy of FHFA's Annual Report to Congress which 
includes a recap of FHFA's conservatorship of the Enterprises and its 
supervision of the Enterprises and the Federal Home Loan Banks during 
2017.
    At your last oversight hearing I also focused some of my remarks on 
my concern that the capital buffers for the Enterprises were scheduled 
to reduce to zero as of January 1 of this year. I expressed my concern 
that zero capital buffers would almost certainly lead the Enterprises 
to have to make additional draws of taxpayer support that could 
potentially result in negative consequences for liquidity and market 
stability. I am pleased to report that the Secretary of the Treasury 
and I were able to reinstate a $3 billion capital reserve buffer for 
each Enterprise through a letter agreement that modified the terms of 
the Senior Preferred Stock Purchase Agreements (PSPAs) to address those 
concerns. While both Enterprises were required to make small draws of 
taxpayer support in the last quarter of 2017 as a result of 
revaluations of their deferred tax assets following the passage of the 
tax legislation last year, I am confident that the modest buffer 
adjustments agreed to with Secretary Mnuchin will avert the need for 
the Enterprises to make additional draws of taxpayer support in the 
future in the absence of exigent circumstances.
    When I was last before this Committee, several Members of the 
Committee also asked me to provide FHFA's views on the critically 
important topic of housing finance reform. In response to those 
requests, on January 16, 2018, I provided to Chairman Crapo and Ranking 
Member Brown a document entitled ``Federal Housing Finance Agency 
Perspectives on Housing Finance Reform'' (the Perspectives Document). 
As I indicated in our Perspectives Document, we consider the 
perspectives we expressed to be ``responsible, balanced, viable and 
important to consider,'' and I am happy to answer any questions Members 
of the Committee may have about them. However, I think it is also 
extremely important for me to emphasize points that I made when I sent 
the Perspectives Document to the Chairman and Ranking Member to ensure 
that Members of this Committee understand that FHFA continues to be 
clear about the role we expect to play in the housing reform process. 
In my letter to the Chairman and Ranking Member, I said:

        We seek to provide our views independently and transparently to 
        those who have requested them while continuing to provide 
        technical assistance to the Committee and its members on other 
        proposals that may be introduced. Consequently, to the extent 
        that any proposal gains support from members of Congress, 
        whether it includes the perspectives contained in the enclosure 
        or not, we look forward to continuing to provide technical 
        assistance to facilitate your work. This is consistent with my 
        strongly held view that it is the prerogative and 
        responsibility of Congress, not FHFA, to decide on housing 
        finance reform.

    To be clear, despite having expressed views in our Perspectives 
Document as some Members of this Committee requested, I want to 
reaffirm my strongly held view that it is the responsibility of 
Congress, not FHFA, to decide on housing finance reform and I hope you 
will do so expeditiously. On September 6 of this year, we all will mark 
an occasion that I believe I can confidently say no one expected or 
foresaw back in 2008. That will be the 10-year anniversary of the 
Enterprises' conservatorships. As I first said publicly in a speech at 
the Bipartisan Policy Center on February 18, 2016:

        FHFA's role as conservator of Fannie Mae and Freddie Mac has 
        been unprecedented in its scope, complexity, and duration--
        especially when you consider Fannie Mae and Freddie Mac's role 
        in supporting over $5 trillion in mortgage loans and 
        guarantees. This is an extraordinary role for a regulatory 
        agency also because we are obligated to fulfill both the role 
        of supervisor and conservator at the same time.

    I have expressed this opinion, perhaps using different words, on 
numerous occasions since then. I have also expressed repeatedly my firm 
belief that these conservatorships are unsustainable.
    I spent the bulk of my time before the Committee last year 
describing some of the important reforms FHFA has made to the 
Enterprises while they have been in conservatorship, things I referred 
to as ``GSE reform.'' However, this could well be the last time I 
appear before this Committee as Director of FHFA, and I believe it is 
important for me to identify and focus today on some of the serious 
challenges that remain ahead. Some of these challenges are obviously 
exacerbated and made more difficult to deal with because we have been 
operating Enterprises of this size in conservatorship for such a 
protracted period of time. From my perspective, as I have said before, 
the challenges in this category will become more and more difficult the 
longer the conservatorships continue. However, there are also 
challenges that will continue regardless of whether the Enterprises are 
being operated in conservatorship. Throughout my term as Director of 
FHFA, we have made concerted efforts to address and minimize the 
adverse impact of all housing challenges, regardless of whether they 
fit into the former or the latter category.
    One challenge that is clearly exacerbated by conservatorship is the 
ability to plan and manage in the face of uncertainty about the future. 
Our experience as conservator confirms that it is extremely difficult 
to manage the Enterprises in the present without establishing some kind 
of plans for the future. I doubt that I can express this concern any 
more coherently than I did in my speech at the Bipartisan Policy Center 
back in 2016. I expressed it this way:

        Here, I'm not talking about plans for housing finance reform, 
        but plans for everyday operations, including strategic planning 
        that every well-run business does, and project planning that's 
        necessary to continue key initiatives. Without looking somewhat 
        down the road, FHFA and the Enterprises would both lose their 
        momentum and jeopardize day-to-day success. The key dilemma 
        when you have an uncertain future, however, is how far down the 
        road to look and how to retain the necessary talent to 
        implement either short-term or longer-term plans.

    Two concrete examples help illustrate this challenge:
    1. When the Enterprises were placed into conservatorships almost 10 
years ago, most members of their boards and many members of their 
management teams were replaced with new boards and management teams. 
While no one anticipated at that time that the conservatorships would 
last more than a few years at most, a maximum tenure of 10 years was 
established for service on the Enterprises' boards. While some 
Enterprise board members have left and been replaced over almost 10 
years of conservatorship, a number of the members appointed 10 years 
ago continue to serve and have provided experienced oversight and 
valuable continuity to the Enterprises. No doubt, when the history of 
this conservatorship period is written it will fail to give the credit 
these board members deserve for the heroic roles they played in the 
transformation of these Enterprises. Replacing the experience and 
transformative spirit of these board members who will soon cycle off 
the boards as their 10-year service periods end will be a significant 
challenge.
    2. A second example relates to the decision to sell Fannie Mae's 
buildings and relocate them to rental space. Without going into detail 
about the many factors FHFA and the Enterprises considered over the 
last several years in the process of making these decisions, I'm 
certain that it will be obvious to everyone that these decisions would 
have been much easier to make had we been sure about Fannie Mae's 
future and had Fannie Mae not been in conservatorship.
    A second challenge associated with operating these Enterprises in 
conservatorship has been how to ensure market discipline. Because the 
Enterprises have been insulated while operating in conservatorship from 
normal market forces that would otherwise inform their operations and 
business decisions, FHFA has had the responsibility for creating its 
own regime for market discipline. FHFA has taken several steps to 
address this ongoing challenge. One of the most important steps has 
been to require the Enterprises to use an aligned capital framework 
when evaluating business decisions even though they are not able to 
build capital beyond the limited buffer agreed to in the PSPAs.
    Incorporating capital requirements into the analytics of day-to-day 
business is essential to making rational business decisions about when 
to conduct different transactions or pursue certain ideas. FHFA has 
worked with the Enterprises to develop a Conservatorship Capital 
Framework that establishes aligned capital guidelines for both 
Enterprises across different mortgage loan and asset categories. Both 
Enterprises now use this aligned framework to make their regular 
business decisions. FHFA also uses this framework in its role as 
conservator to assess Enterprise guarantee fees, activities, and 
operations and to guard against the Enterprises making competitive 
decisions that could adversely impact safety and soundness.
    FHFA has found the Conservatorship Capital Framework to be a useful 
tool because it reflects a refined approach to assessing the relative 
risks of different mortgage loan categories. To build on this work, we 
are planning in the very near future to propose a risk-based capital 
and minimum leverage capital rule that would replace the OFHEO capital 
standards that were in place prior to conservatorship and that are now 
suspended while the Enterprises are in conservatorship.
    While the new capital rule would also be suspended while the 
Enterprises remain in conservatorship, we believe it is important for 
our Agency, as a regulator, to articulate a view on prudential capital 
requirements for the Enterprises based on their current operations. We 
also believe our proposed rule will provide valuable transparency to 
the public about capital and will be a catalyst for serious and 
thoughtful discussions and opinions about the capital requirements that 
would be appropriate for the Enterprises and/or other entities playing 
similar roles in the housing finance system going forward, regardless 
of the form these entities are required to take as a result of housing 
finance reform legislation. Public input on our proposed rule will also 
provide valuable feedback to FHFA about refinements that may be 
appropriate to our Conservatorship Capital Framework, which we will 
continue to apply to the Enterprises while they remain in 
conservatorship.
    I emphasize that this rulemaking is not connected in any way to any 
efforts or ideas others may have about recapitalizing and releasing the 
Enterprises from conservatorship. The rule may need to be further 
revised to take into account the provisions of housing finance reform 
legislation and FHFA will suspend any final capital rule adopted while 
the Enterprises remain in conservatorship, just as the OFHEO rule that 
is currently on the books has been suspended.
    Another challenge that FHFA and the Enterprises continue to try to 
address is affordability of both home ownership and rental housing. 
This challenge is not unique to conservatorship and will, 
unfortunately, persist after the conservatorships end. While FHFA and 
the Enterprises have taken a number of different approaches to try to 
responsibly improve access to credit and the availability of affordable 
rental housing, many of the challenges associated with affordability 
are beyond the control of FHFA or the Enterprises. They are significant 
challenges facing the market as a whole.
    One problem that does not get as much attention as it probably 
should is that the supply of affordable single-family and multifamily 
housing is simply not keeping up with demand, especially in most cities 
and metropolitan areas. Following the foreclosure crisis, single-family 
new construction has lagged behind historical norms. With new household 
formation showing signs of increasing, the limited availability of 
housing on the market--both single-family homes and affordable rental 
units--presents a challenge that will not go away any time soon. 
Multiple approaches are needed to address the different facets of this 
low supply.
    We have encouraged the Enterprises to launch pilots that can test 
new approaches to affordability, access and supply on a small scale to 
ensure that they work to help address these problems and to ensure that 
they can be replicated and implemented safely and soundly. The 
Enterprises' Duty to Serve Plans also incorporate a number of pilots 
and initiatives that will help address these challenges by better 
serving the manufactured housing, affordable housing preservation, and 
rural housing markets. We will continue to work with the Enterprises on 
pilots and initiatives to make progress where we think it is possible. 
We are also engaged in broader discussions and efforts with other 
industry participants--lenders, builders, Realtors, housing counselors 
and others--all of whom acknowledge these serious and growing 
challenges that require concerted efforts across all market sectors.
    There are, of course, a number of other challenges that FHFA 
continues to work on and try to address, each of which would merit 
extensive discussion. Some of these include assisting borrowers who 
have limited English proficiency, evaluating and improving mortgage 
loan servicing, assessing updated credit score models, implementing the 
REMIC structure for some credit-risk transfer transactions, and 
implementing the Uniform Mortgage-Backed Security on the Common 
Securitization Platform on June 3, 2019. Suffice it to say that we have 
attempted to be collaborative with stakeholders and thoughtful in our 
approach to each challenge we face, and I expect to continue to do so 
throughout the remainder of my term as Director. I, of course, would be 
happy to respond to questions about any of these challenges, as well as 
any other aspect of our work.
    I thank you again for the opportunity to be here and for the 
opportunity I have had to serve in this position. I look forward to 
answering your questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM MELVIN L. WATT

Q.1. In your testimony, you discussed the work that the Federal 
Housing Finance Agency (FHFA) and the Enterprises have done to 
expand access to credit among borrowers who might not fit 
today's tighter credit box. But I am also concerned about 
access to credit for borrowers who qualify for a loan but are 
struggling to find a mortgage lender who will serve distressed 
markets where property values have still not recovered. A 
recent report from the Urban Institute shows that homes up to 
$70,000 make up almost 14 percent of home sales but just 5.5 
percent of mortgage loans. \1\ While the GSEs provide access to 
credit for 53 percent of all mortgages, they provide access to 
credit on just 45 percent of these smaller balance loans. These 
smaller balance loans are more than three times as likely to be 
held in portfolio. With limited secondary market access, 
creditors may be constrained in their ability to make lower 
balance mortgages, giving cash buyers and investors a leg up in 
the sale process. In the time since you appeared before the 
Committee, I have been contacted by another Ohioan who lives in 
a community where many property values remain below $50,000 and 
that has limited access to loans. This lack of access to credit 
has constrained revitalization of a residential district and 
access to housing that could help address the affordability 
issues we see in our community.
---------------------------------------------------------------------------
     \1\ McCargo, et al., ``Small Dollar Mortgages for Single-Family 
Residential Properties'', Urban Institute, April 2018, available at 
https://www.urban.org/sites/default/files/publication/98261/
small_dollar_mortgages_for_single_family_residential_properties_0.pdf.
---------------------------------------------------------------------------
    What are FHFA and the GSEs doing to facilitate access to 
smaller balance loans?

A.1. The 2018 Scorecard requires Fannie Mae and Freddie Mac 
(the Enterprises) to assess the availability of low-balance 
loan financing and develop recommendations as appropriate. 
FHFA, with the Enterprises, has engaged with lenders, community 
organizations, and State and Local housing finance agencies to 
examine challenges to financing small balance loans and to 
explore possible solutions to address the issues associated 
with low value properties. The Enterprises have identified 
several barriers to financing low value properties, including 
high costs for originating small balance loans, lack of 
products for property rehabilitation, and challenges for 
smaller lenders to participate with the Enterprises in their 
programs. In response, the Enterprises are exploring various 
potential solutions, including pricing initiatives, 
partnerships with local housing financing agencies, lender 
education and training, and REO marketing.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
                      FROM MELVIN L. WATT

Q.1. I'm concerned that the Agency's proposed rule on the 
FHLBs' Affordable Housing Program is going to hinder the Banks' 
ability to finance affordable housing.
    Each FHLB addresses regional needs in its own way. What 
works in the Southeast might differ from what works in the 
Northeast.
    The proposed rule is going to make those tailored 
approaches difficult to pull off.
    Please answer the following with specificity:
    Do you share these concerns?

A.1. FHFA's objective for proposing amendments to the 
regulations governing the FHLBank System's Affordable Housing 
Program (AHP) was to enhance each FHLBank's ability to address 
the affordable housing needs in its district. In fact, our 
intention was to improve each FHLBank's ability to develop the 
tailored approaches you refer to in your question. FHFA is 
currently reviewing and analyzing the public comments we have 
received in response to the proposed rule, many of which have 
also expressed concerns about the FHLBanks' ability to address 
district-specific affordable housing needs under the existing 
regulation. As we move forward, FHFA will carefully consider 
these concerns to ensure that the final regulation does not 
restrict or hinder a FHLBank's ability to respond effectively 
to these needs.

Q.2. What is your rationale for pursuing such a rule?

A.2. The current rule that governs administration of the 
FHLBank's Affordable Housing Programs has been in effect with 
only minor alterations since 2006. It has been regularly 
criticized by the FHLBanks as too restrictive on their ability 
to address the affordable housing needs in their districts. 
FHFA developed the proposed rule in an effort to provide the 
FHLBanks with more authority to address the specific affordable 
housing needs within their districts. FHFA also designed the 
amendments to reduce the regulatory requirements that are 
redundant with other Federal programs and to make the program 
easier to use. Under the proposed amendments, the FHLBanks 
would have more authority to allocate their affordable housing 
program funds. For example, the proposal would provide the 
FHLBanks additional flexibility to allocate their total annual 
affordable housing program funds in order to address the 
specific home ownership and rental housing needs in their 
districts. The proposed amendments would also allow the 
FHLBanks to establish special competitive funds that target 
specific affordable housing needs in their districts that are 
unmet, have proven difficult to address in the past, or align 
with objectives identified in the FHLBanks' strategic plans.
    The proposed rule would require that each FHLBank award a 
minimum percentage of its annual total AHP subsidies to 
projects that address statutory and regulatory priorities. The 
proposed regulatory priorities include preserving affordable 
housing, the affordable housing needs of underserved 
communities and populations, and the creation of economic 
opportunities in conjunction with affordable housing. These 
priorities encompass a broad range of affordable housing 
initiatives the FHLBanks routinely address through their 
affordable housing programs.
    The proposed rule would also authorize the FHLBanks to 
design and implement their own project selection scoring 
criteria. These proposed amendments would enable the FHLBanks 
to tailor and customize their affordable housing programs in a 
manner that effectively and efficiently addresses the 
affordable housing needs within each district and regions 
throughout the country.

Q.3. GSE Charter Creep--The GSEs' charters strictly prohibit 
them from ``originating mortgages.'' They also state that the 
Enterprises should ``respond appropriately to the private 
capital market.''
    I fear the potential for giving certain market actors an 
unfair competitive advantage while crossing the charters' 
boundaries with pilot programs like IMAGIN and Day One 
Certainty.
    Please answer the following with specificity:
    How do you interpret these provisions, both the definition 
of ``mortgage origination'' and ``responding appropriately to 
the private capital market?''

A.3. The Enterprises' purposes where responding to the private 
capital markets is discussed make clear that both Enterprises 
serve an important role in supporting the secondary mortgage 
market. While the term ``mortgage origination'' does not appear 
in either Enterprise charter, both charters include a 
prohibition on the Enterprises using their lending authority to 
originate mortgage loans. With respect to Day One Certainty and 
IMAGIN, both pilots deal with mortgages that have been 
originated by bank and nonbank lenders, not by the Enterprises. 
Day One Certainty provides lenders with the ability to more 
efficiently confirm they have met Fannie Mae data verification 
requirements and thus mitigate representation and warranty 
risk. With respect to IMAGIN, the pilot provides traditional 
lenders an additional new option to obtain charter-compliant 
mortgage insurance for the mortgages they originate.

Q.4. How are you guarding against creating uneven playing 
fields with these pilot programs? How do you choose the market 
participants?

A.4. In conservatorship, Fannie Mae and Freddie Mac have taken 
a number of ongoing steps to help level the playing field for 
market participants, including eliminating volume-based 
discounts on guarantee fee pricing, so that lenders of all 
sizes can better maintain competitive access to the secondary 
market. Additionally, the Enterprises are currently engaged in 
a large number pilot programs covering a range of activities 
from income and asset verification to front-end credit risk 
transfers. These pilot programs vary in size, scope, and 
activity and are focused on improving credit risk assessment, 
improving access to credit, efficiency and innovation, reducing 
cost, reducing inefficiencies and redundancies in the mortgage 
process, and credit risk transfer. We are always mindful of the 
potential impact participation in pilots can have on lenders 
and other market participants of varying sizes. While we do not 
select Enterprise pilot market participants, we encourage the 
Enterprises to offer pilots to a variety of potential 
participants when doing so is feasible. For example, Freddie 
Mac's IMAGIN pilot and Fannie Mae's similar EPMI pilot feature 
a number of lender participants of various types. Because 
pilots are utilized to ``test and learn,'' it is not always 
possible for the Enterprises to engage a variety of partners in 
a given pilot program. When pilots engage only a limited number 
of counterparties, the Enterprises work to determine whether 
the pilot should be terminated or approved for broad rollout 
and, if approved, expand access to programs as soon as 
practicable.

Q.5. Restoring Insurance Captives to FHLB--In 2016, you stated, 
``Congress has amended the Federal Home Loan Bank Act in the 
past to allow additional entities to become members of a 
Federal Home Loan Bank and it can certainly do so again.''
    I agree with you. Which is why there's a bipartisan group 
of us trying to do that with the insurance captives the FHFA 
expelled.
    These captives were a critical source of private capital 
for the development of affordable housing, something sorely 
needed in South Carolina. They should be restored.

A.5. On January 20, 2016, the Federal Housing Finance Agency 
(FHFA) issued a final membership rule prohibiting captive 
insurance companies from membership in a Federal Home Loan Bank 
(FHLBank). This rule was issued because certain captive 
insurance companies were being created primarily as vehicles 
for ``back door'' FHLBank membership by entities that are not 
themselves eligible for FHLBank membership. The final rule 
addressed the circumvention of the statute by ineligible 
entities by defining ``insurance company'' to exclude captive 
insurers, thereby making them ineligible for Bank membership. 
Should Congress advance Senate bill 2361, the Housing 
Opportunity Mortgage Expansion Act, FHFA would like to remain 
engaged with your staff and other Congressional staff and 
provide further technical assistance.

Q.6. Credit Score Competition--The Senate and House have passed 
my legislation, the Credit Score Competition Act, to create a 
transparent validation process for which credit scoring models 
can be accepted by the GSEs.
    I think doing so will ultimately benefit creditworthy 
Americans that are trying to achieve home ownership.
    The legislation has the word ``competition'' in its title, 
and that's the key: It was my intent that multiple, 
statistically sound credit scoring models could be used by the 
GSEs.
    I look forward to you enacting this provision without 
delay.

A.6. While FHFA is proceeding as expeditiously as possible with 
efforts to meet the requirements of the Act, we have concluded 
that we will not be able to meet the first critical deadline 
set in the Act (the time for accepting applications for 
validation) and, despite reasonable efforts, may find it 
difficult to meet other subsequent timetables. FHFA will, of 
course, work to propose a rule and to complete the final rule 
as expeditiously as possible. Once the final rule is complete, 
FHFA and the Enterprises will make every effort to complete the 
credit score validation and approval process with the 
timeframes envisioned in the law. However, meeting these 
timeframes will also be extremely challenging. FHFA is in the 
process of developing a preliminary rulemaking timeline for the 
proposed and final rule. Additionally, based on the input 
received from FHFA's recent Request for Information on credit 
scores, almost every industry respondent agreed that the 
industry would need 18 to 24 months to implement a new credit 
score model or models.

Q.7. Tri-Merge Credit Reports--The Agency's December 2017 
Request for Information on credit scoring models stated it was 
`` . . . evaluating whether to change from the current 
requirement of obtaining a credit report and credit score from 
all three of the CRAs to a requirement to obtain only two or 
one report and score from the CRAs for each mortgage 
applicant.''
    Of the 115 respondents to the RFI, just 34 respondents 
addressed the ``tri-merge'' credit report requirement issue.
    Please answer the following with specificity:
    Has the FHFA conducted an independent study on the impact 
on ``credit accuracy'' of a change from the tri-merge 
requirement to a bi-merge or single report requirement? If so, 
what did the FHFA conclude from this study?

A.7. The Enterprises, at the request of FHFA, did conduct a 
preliminary analysis in 2017 comparing the requirement of two 
versus three CRA credit reports. This preliminary analysis 
suggested minimal impact on ``credit accuracy.'' Additional 
analysis is needed prior to FHFA making a determination. 
However, feedback from the FHFA RFI suggests that moving to a 
duel-merge from the tri-merge would increase competition among 
the CRAs and reduce costs for consumers.
    Since Section 310 of the Economic Growth, Regulatory 
Relief, and Consumer Protection Act was enacted, FHFA has been 
evaluating the impact the law will have on the existing credit 
score project and related credit score activities. As described 
in the Director's letter to Congress, FHFA will be shifting its 
focus from these activities in order to expeditiously issue a 
proposed and final rule to comply with the provisions in 
Section 310.

Q.8. If no study was performed, how does the Agency justify not 
studying this issue on its own before making a decision?

A.8. FHFA believes that eliminating the tri-merge requirement 
may improve the level of competition among the CRAs and reduce 
costs for consumers. The questions related to the tri-merge 
report in the RFI were designed to measure industry response to 
such a change, and the Economic Growth, Regulatory Relief, and 
Consumer Protection Act does not address tri-merge. Overall, 
the feedback from the industry was supportive of a change to 
the current tri-merge requirement. However, significantly more 
work would be required by FHFA and the Enterprises to support 
the Enterprises' 2017 preliminary analysis and FHFA's belief 
that eliminating the tri-merge could be beneficial before the 
implementation of any change. FHFA plans to further investigate 
the costs and benefits of changing the tri-merge requirement 
after FHFA issues a final rule in accordance with the 
provisions in Section 310 of the Economic Growth, Regulatory 
Relief, and Consumer Protection Act.

Q.9. If the Agency believes further analysis is required before 
making a decision, what kind of analysis needs to be done?

A.9. As stated above, further analysis is needed prior to FHFA 
making a determination on reducing the number of credit reports 
for mortgage applicants. However, FHFA has not determined what 
additional analysis is needed because the agency is focused on 
expeditiously issuing a proposed and final rule on the 
validation and approval of credit score models in accordance 
with Section 310 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
                      FROM MELVIN L. WATT

Q.1. If the GSEs stated purpose is the help achieve the dream 
of home ownership, what justification is there for the GSEs to 
have about 30 percent of their business activity involved in 
cash-out refis, investor mortgages and 2nd homes?

A.1. Supporting sustainable home ownership is one of several 
stated purposes of the Enterprises, which include:
    Providing stability in the secondary market for residential 
mortgages;
    Responding appropriately to the private capital market;
    Providing ongoing assistance to the secondary market for 
residential mortgages by increasing the liquidity of mortgage 
investments and improving the distribution of investment 
capital available for residential mortgage financing, and;
    Promoting access to mortgage credit nationwide by 
increasing the liquidity of mortgage investments and improving 
the distribution of investment capital available for 
residential mortgage financing.
    By securitizing different mortgage products that serve a 
variety of financial needs, the Enterprises broadly support 
liquidity in the housing finance market and facilitate access 
to mortgage credit that allows not just families to buy a home, 
but also allows investors to provide rental housing, homeowners 
to utilize the equity in their homes to maintain and make 
improvements to them and help pay off other debts such as 
student loans, and for older couples or individuals preparing 
for retirement to buy a second home where they want to retire.

Q.2. Why are the taxpayers being asked to back these loans?

A.2. FHFA is sensitive to the obligations and risks that 
taxpayers have taken on since the Enterprises were placed in 
conservatorship. To that end, FHFA published its Strategic Plan 
for the Conservatorships of Fannie Mae and Freddie Mac, and one 
of the goals of the plan is to reduce taxpayer risk through 
increasing the role of private capital in the mortgage market. 
For the single family credit guarantee business, FHFA directed 
the Enterprises to establish risk transfer programs in which 
the private sector assumes a significant proportion of the 
credit risk in exchange for receiving a portion of the 
Enterprises' guarantee fee. In the these transactions, the 
Enterprises retain a small first loss position in the 
underlying loans, sell a significant portion of the risk beyond 
the initial loss and then retain the catastrophic risk in the 
event losses exceeded the private capital support. The 
Enterprises' credit risk transfer (CRT) programs have become a 
core part of the Enterprises' single-family credit guarantee 
business and include all loans meeting the target criteria, 
including cash-out refinances and mortgages for investor-owned 
properties and second homes. The programs have expanded to 
transfer credit risk to private capital via debt issuances, 
insurance/reinsurance transactions, senior-subordinate 
securitizations, front-end collateralized lender recourse 
transactions, and other pilot transactions. More information on 
CRT programs is contained in FHFA's CRT Progress Report, 
available on FHFA's website at: https://www.fhfa.gov/AboutUs/
Reports/ReportDocuments/CRT-Progress-Report-O42017.pdf.

Q.3. Please list what steps have you taken to:
    Reduce the GSEs involvement in cash-out refis, investor 
mortgages and those for 2nd homes?

A.3. As discussed above, the Enterprises are helping reduce the 
risks to taxpayers in guaranteeing the credit risk of loans 
that include traditional first mortgages and the types of loans 
you are referencing through the expansion of their CRT 
programs. Also, as a result of the Agency's analysis of 
guarantee fees, in 2015 FHFA announced small guarantee fee 
increases for certain Enterprise loans that had risk layering 
attributes, including cash-out refinances and investment 
properties.

Q.4. Reduce the GSEs overall footprint on the U.S. housing 
market? Please include metrics.

A.4. As I have said on numerous occasions, FHFA has no 
statutory mandate to reduce the Enterprises' footprint, and 
FHFA and the Enterprises continue to have the same statutory 
obligations which can only be changed by statute and not by 
regulators. As conservator, FHFA has an obligation to reduce 
risk to taxpayers and we have done so by shifting risk to 
private market participants and away from the Enterprises in a 
responsible way that does not reduce liquidity or adversely 
impact the availability of mortgage credit. FHFA and the 
Enterprises have pursued this objective through several means, 
including reducing the Enterprises' retained portfolios and 
engaging in credit risk transfer transactions. Through the 
PSPAs, FHFA and Treasury agreed that each Enterprise must 
reduce its retained portfolio to $250 billion by December 31, 
2018. In addition, FHFA imposed a requirement that each 
Enterprise reduce their respective retained portfolios by an 
additional 10 percent to hedge against market disruptions. FHFA 
expects each Enterprise to be al or below $225 billion as of 
December 31, 2018. Both Enterprises are on track to meet that 
specific FHFA target of $225 billion by December 31, 2018.
    In addition, from the beginning of the Enterprises' single-
family CRT program in 2013 through the end of 2017, Fannie Mae 
and Freddie Mac have transferred a portion of credit risk on 
$2.1 trillion of unpaid principal balance (UPB), with a 
combined risk in force of about $69 billion or 3.2 percent of 
UPB. Successful implementation of CRT has introduced a 
significant layer of private capital to absorb losses and, 
thus, protect taxpayers.
                                ------                                


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

Q.1. When do you anticipate you will make an announcement as to 
the results of the ongoing review of credit scoring models used 
by the GSEs? Do you anticipate it will be before the end of the 
year?

A.1. FHFA will not reach a decision about updating the credit 
model used by Fannie Mae and Freddie Mac later this year as 
planned. Instead, FHFA is shifting its focus to implementation 
of Section 310 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (P.L. 115-174) enacted in May.

Q.2. In your testimony before the Committee last week, you 
indicated that you would like to reach a conclusion on the 
review of credit scoring models, but you cautioned that 
conclusion would now have to be an ``interim conclusion.''
    Would you please clarify what you meant by ``interim?''

A.2. In response to a question asked during the May 23, 2018, 
hearing, I testified that I thought that FHFA could reasonably 
proceed with the work we had started under the Conservatorship 
Scorecard Initiative despite the provisions in the Economic 
Growth, Regulatory Relief, and Consumer Protection Act that has 
recently been adopted by Congress and was expected to be signed 
into law by the President within days following my testimony. 
However, further review and consultation with my staff has 
confirmed that proceeding with efforts to reach a decision 
based on our Conservatorship Scorecard Initiative process and 
timetable would be duplicative of, and in some aspects 
inconsistent with, the work we are mandated to do under Section 
310 of the Act.
    If we had proceeded with our work to reach a conclusion on 
the review of credit score models, it would have been an 
``interim conclusion'' at best because of the 18-24 month 
period we would have given the industry to implement our 
conclusion.

Q.3. In your view, does Section 310 of S. 2155, now P.L. No. 
115-174, prevent you from making a final decision in the near 
future on the review of credit scoring models?

A.3. Yes, FHFA will not make a final decision in 2018 and 
instead will shift focus to implementation of the Act.

Q.4. Section 310 requires FHFA to issue regulations before 
accepting applications for new credit scoring models.
    How long do you anticipate it will take FHFA to issue final 
regulations?

A.4. While FHFA is proceeding as expeditiously as possible with 
efforts to meet the requirements of the Act, we have concluded 
that we will not be able to meet the first critical deadline 
set in the Act (the time for accepting applications for 
validation) and, despite reasonable efforts, may find it 
difficult to meet other subsequent timetables. FHFA will, of 
course, work to complete the final rule as expeditiously as 
possible. Once the final rule is complete, FHFA and the 
Enterprises will make every effort to complete the credit score 
validation and approval process with the timeframes envisioned 
in the law. However, meeting these timeframes will also be 
extremely challenging. FHFA is in the process of developing a 
preliminary rulemaking timeline for the proposed and final 
rule.

Q.5. Now that Section 310 has been signed into law, what is 
your time estimate for completion of the entire process, 
including issuance of regulations, evaluation, approval, and 
implementation of a new updated credit scoring model?

A.5. FHFA will work as expeditiously as possible to complete 
the final rule. Once the final rule is complete, FHFA and the 
Enterprises will make every effort to complete the credit score 
validation and approval process within the timeframes 
envisioned in the law. However, meeting these timeframes will 
also be challenging. Section 310 allows the Enterprises to 
continue to use a credit score model that has not been 
validated and approved under the Act until November 20, 2020, 
but not does not address implementation by the broader 
industry. Based on the input received from our Request for 
Input, implementation was one of the most significant issues 
addressed by respondents and almost every industry respondent 
agreed that the industry would need 18 to 24 months to 
implement a new credit score model or models. Therefore, even 
with FHFA proceeding expeditiously with the rulemaking process, 
and the Enterprises' application, validation an approval 
process, the subsequent implementation of any new credit 
model(s) by the industry cannot be completed by November 20, 
2020. We will have to evaluate options to address how the 
Enterprises should proceed in that period

Q.6. I was pleased last fall to see FHFA agree to include a 
question on the uniform mortgage application for borrowers to 
indicate their preferred language, something for which I have 
advocated. Another key element of FHFA's language access plan 
is development of a clearinghouse that will be a central source 
of translated materials and educational documents to ensure 
lenders and housing counselors have the tools necessary to 
serve limited English proficient borrowers.
    When do you expect this part of the process to be 
completed?

A.6. As part of the 2018 Conservators hip Scorecard, the 
Enterprises are tasked with finalizing the multiyear borrower 
language access plan and beginning to implement it. The plan 
was finalized May 10, 2018, and posted on FHFA's website. It 
includes development of a language access clearinghouse that 
will host translated mortgage documents. Specifically during 
2018, FHFA and the Enterprises are establishing a clearinghouse 
on the FHFA.gov website that will primarily contain existing 
translated mortgage-related documents and materials produced by 
Fannie Mae and Freddie Mac and Government agencies (primarily 
in Spanish). This first stage of the clearinghouse is designed 
to assist lenders, servicers, document vendors, and housing 
counselors in serving limited English proficiency (LEP) 
borrowers and will contain links to pertinent Government 
resources such as housing counseling services offered by HUD 
and CFPB. FHFA, the Enterprises, and CFPB working with the 
Library of Congress are translating into Spanish a glossary of 
key mortgage terms, such as interest rate, origination charges, 
grace period, and loan modification which will also be included 
in the public clearinghouse.
    During 2019 and 2020, the multiyear plan is to migrate the 
clearinghouse to a standalone ``.gov'' website with an added 
focus towards borrowers and other market participants. During 
this time, additional mortgage documents and materials produced 
by other Federal agencies will be added to the clearinghouse, 
and the documents already in the clearinghouse will be 
translated in the four remaining languages identified by the 
U.S. Census as the most common non-English languages (in 
addition to Spanish) spoken in LEP households (Korean, Chinese, 
Vietnamese, and Tagalog). FHFA and the Enterprises intend to 
add glossaries of key mortgage terms in these languages as 
well.

Q.7. What steps have you taken to ensure that the language 
access multiyear plan will continue beyond your tenure at FHFA?

A.7. In May, the FHFA published the multiyear borrower language 
access plan \1\ with milestones for 2019 and 2020, and has 
engaged with industry stakeholders to assist in meeting those 
milestones. By publishing the plan our anticipation/expectation 
is that future FHFA leadership will continue the work in 
process.
---------------------------------------------------------------------------
     \1\ Available at: https://www.fhfa.gov/PolicyProgramsResearch/
Policy/Documents/LEP-Multi-Year-Plan.pdf.

Q.8. In your testimony before the Committee last week, you 
referenced a number of pilots intended to expand access to home 
ownership for creditworthy borrowers. For instance, you 
mentioned a pilot related to student debt.
    Could you provide a comprehensive list and descriptions of 
currently existing pilot programs?

A.8. The Enterprises are currently engaged in a large number 
pilot programs covering a range of activities from income and 
asset verification to front-end credit risk transfers. These 
pilot programs vary in size, scope, and activity and are 
focused on improving access to credit, efficiency and 
innovation, reducing cost, reducing inefficiencies and 
redundancies in the mortgage process, and improving credit risk 
assessment and credit risk transfer. The goal of each 
Enterprise pilot program is to test a particular approach and 
learn from those results whether the pilot would benefit the 
housing finance market. By necessity, this entails smaller 
scale efforts that are conducted with prior due diligence and 
implemented in a limited and time-bound manner, after which 
careful analysis of the benefits and drawbacks can be 
considered. Because even general information about some of 
these pilot programs amounts to confidential commercial 
information and can lead to disruptive market speculation, FHFA 
cannot publish such a list, but will respond to requests from 
Congress for more information with the understanding that such 
information will not be publicly disclosed.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                      FROM MELVIN L. WATT

Q.1. In the absence of housing finance reform legislation, FHFA 
has the authority to take some key steps administratively to 
continue to reduce the risk that a guarantor on the brink of 
failure requires another taxpayer bailout. While prescribing 
higher risk-based capital and minimum leverage requirements, 
and requiring programmatic credit-risk-transfers (CRT) are both 
positive steps that reduce the risk that an enterprise (or 
guarantor in a fully reformed system) may fail in the future, 
these steps do little to improve the ability to resolve an 
enterprise (or guarantor) in the event that they do wind up 
taking excessive risks in the future.
    Can you please describe what steps, if any, FHFA is 
undertaking to put the GSEs into a more resolvable condition 
and institute a credible resolution regime? In particular, what 
steps are you taking to separate the credit risk-taking 
functions of the enterprises from the critical secondary market 
infrastructure and underwriting systems such that a GSE (or 
guarantor in a fully reformed system) can credibly be allowed 
to fail without that failure and resolution threatening to take 
down the primary market with it?

A.1. Since the beginning of the conservatorships, FHFA has been 
taking actions to reform the Enterprises in order to make them 
more stable institutions and to reduce the risks they posed to 
taxpayers. In particular, FHFA has supported derisking the 
Enterprises through reduction of their retained portfolios and 
engaging in credit risk transfer (CRT) transactions. Under the 
PSPAs, FHFA, and Treasury agreed that each Enterprise must 
reduce its retained portfolio to $250 billion by December 31, 
2018. In addition, FHFA imposed a requirement that each 
Enterprise reduce its respective retained portfolio by an 
additional 10 percent. FHFA expects each Enterprise to be at or 
below $225 billion as of December 31, 2018. Both Enterprises 
are on track to meet this requirement. These reductions have 
significantly reduced the Enterprises' exposure to credit risk, 
while allowing them to continue to support their core credit 
guarantee business.
    For the single-family credit guarantee business, FHFA 
instructed the Enterprises to establish credit risk transfer 
programs in which the private sector assumes a significant 
proportion of the credit risk in exchange for receiving a 
portion of the Enterprises' guarantee fee. These CRT 
transactions have become a core part of the Enterprises' 
single-family credit guarantee business. Through CRT, in 
combination with mortgage insurance, the majority of the 
underlying credit risk on mortgages targeted for CRT has been 
transferred to private investors. The Enterprises continue to 
innovate in the CRT space to identify new ways of reducing 
risk.
    Another reform, outlined in FHFA's 2014 Strategic Plan for 
the Conservatorships of Fannie Mae and Freddie Mac, is the 
development of a new securitization infrastructure for the 
Enterprises for mortgage loans backed by single-family 
properties. Common Securitization Solutions, LLC (CSS) is a 
joint venture formed by the Enterprises under FHFA's direction 
and guidance to achieve that strategic goal. CSS is developing 
and operating the Common Securitization Platform (CSP) that 
supports the Enterprises' single-family mortgage securitization 
activities, including the issuance by both Enterprises of a new 
common mortgage-backed security, the Uniform Mortgage-Backed 
Security (UMBS). UMBS 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, a forward market for certain mortgage-backed 
securities, including those issued by Fannie Mae and Freddie 
Mac. FHFA has mandated that CSS develop the CSP to allow for 
possible future adoption and use by other market participants.
    CSS and Freddie Mac implemented Release 1 of the CSP on 
November 21, 2016. With that implementation, Freddie Mac 
transferred to CSS operational responsibilities for the monthly 
issuance and settlement of single-class mortgage-backed 
securities backed by 15-, 20-, and 30-year fixed-rate loans and 
for the computation of the monthly pool and bond factors for 
Freddie Mac's PCs and Giants. CSS, Fannie Mae, and Freddie Mac 
are testing systems and operational readiness for the 
implementation of Release 2 in June 2019. Upon successful 
implementation of Release 2, both Fannie Mae and Freddie Mac 
will be using the CSP and CSS operations to perform the key 
security issuance, settlement, bond administration, and 
disclosure activities for both single-class securities and 
multiclass securities. Such functionality is a major milestone 
in the separation of the credit risk-taking functions of the 
Enterprises from the secondary market infrastructure.
    In addition to the development of the CSP, other changes 
during the conservatorships that could facilitate entry of 
other market participants include the standardization of 
mortgage data and the ongoing development of standards related 
to electronic mortgage origination and documentation.
    FHFA and the Enterprises have taken all of the above steps 
and others to ensure that a credible resolution regime is never 
needed. However, we continue to believe that ensuring and 
instituting a credible resolution regime is the responsibility 
of Congress, not FHFA.

Q.2. During the financial crisis, we saw the pitfalls of 
overreliance on credit rating agencies, and Congress 
discouraged reliance on ratings to assess counterparty risk in 
Dodd-Frank. Do you have any concern that the Freddie is 
overrelying on ratings to measure the capital strength of 
offshore reinsurers involved in the IMAGIN pilot program?

A.2. Public credit ratings are only one of a number of inputs 
into Freddie Mac's counterparty risk assessment of reinsurers. 
Participating insurers in the IMAGIN pilot are subject to 
Freddie Mac's traditional counterparty approval process and 
framework, which include due diligence on the following: pro 
forma financials, balance sheets, capital plans, business line 
mix and diversification, risk management frameworks, 
concentration limits, excess capital levels, management, and 
track records. Participating insurers are also subject to 
regular quarterly monitoring and credit review as part of 
Freddie Mac's counterparty risk framework. In addition to the 
financial strength provided by the participating insurers' 
balance sheets, the participating insurers also post 
significant collateral to Freddie Mac. In light of the above, 
FHFA does not have concerns that Freddie Mac is over relying on 
credit ratings.

Q.3. At the end of March, the FHFA released a progress update 
on the 2017 Scorecard. Among the items identified was the 
ongoing evaluation of update credit scoring models which has 
spanned more than 3 years. You indicated that after reviewing 
the responses from the recently issued RFI you plan to make a 
decision in 2018.
    When can we expect a decision?

A.3. FHFA will not reach a decision about updating the credit 
model used by Fannie Mae and Freddie Mac later this year as 
planned. Instead, FHFA is shifting its focus to implementation 
of Section 310 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (P.L. 115-174) enacted in May.

Q.4. What impact, if any, will section 310 in S. 2155 have on 
your decision?

A.4. FHFA will not be able to reach a decision about updating 
the credit model used by Fannie Mae and Freddie Mac later this 
year as planned. Instead, FHFA is shifting its focus to 
implementation of Section 310 of the Economic Growth, 
Regulatory Relief, and Consumer Protection Act (P.L. 115-174) 
enacted in May.

Q.5. FHFA's proposed FHLBank Affordable Housing Program (AHP) 
rulemaking could be the most significant change in the 
program's history. Currently, each FHLBank must award at least 
10 percent of its annual required AHP contribution to low- or 
moderate-income households and 20 percent of multifamily units 
for homeless households.
    How would adding on a new requirement to award 55 percent 
of multifamily units in rental projects receiving AHP awards to 
very low income households and increasing the current 
regulatory requirement for the homeless allocation to 50 
percent affect mixed income project opportunities?

A.5. The FHLBanks are required by law to establish an 
affordable housing program (AHP) to enable FHLBank members to 
provide subsidies for long-term, low- and moderate-income, 
owner-occupied and affordable rental housing. The FHLBanks may 
provide AHP subsidies to finance home ownership by families 
with incomes at or below 80 percent of area median income (AMI) 
and the purchase, construction, or rehabilitation of rental 
housing, at least 20 percent of the units of which will be 
occupied by and affordable for very low-income households. The 
current regulations authorize the FHLBanks to establish and 
administer a mandatory competitive application program and an 
optional home ownership set-aside program to meet these 
statutory requirements.
    FHFA specifically requested comments on the appropriateness 
of the proposals in the proposed rule, including alternative 
ways of meeting the statutory requirements while providing 
additional flexibility to the FHLBanks in the design of their 
programs. To date, numerous commenters have addressed the 
implications for mixed income project opportunities. FHFA will 
carefully consider the commenters' concerns and will strive to 
ensure that the final regulation does not have negative 
implications for mixed income projects or the FHLBanks' ability 
to address these projects and their underlying objectives.
                                ------                                


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

Q.1. I appreciate the letter you send to the Banking Committee 
in January that lays out your priorities for reforming the 
housing finance system. It's an important contribution to the 
discussion this Committee has been having about this issue for 
years. I want to focus on your recommendations on access and 
affordability. You write that our current tools like affordable 
housing goals, duty to serve, the Housing Trust Fund, and the 
Capital Magnet Fund should be preserved, or if they are 
replaced, they should be replaced by new tools that, quote, 
``provide benefits at least comparable to these existing 
requirements.'' The home ownership rate today stands at 64 
percent. In the early 2000s--well before the housing bubble--
the home ownership rate was over 68 percent. That 4 percentage 
point decline represents millions of families denied the 
benefits of home ownership. It also means there is 
substantially more pressure on the rental market, raising 
rental costs.
    Why are you satisfied with maintaining the current level of 
emphasis on access and affordability when the home ownership 
rate is so far below historic levels?

A.1. In responding to the Committee's questions about the 
future of the housing finance system, the Housing Finance 
Reform Perspectives document deliberately highlighted that any 
reformed housing finance system should not reduce support for 
affordable rental housing and home ownership--as per your 
citation, the support should be ``at least'' comparable. One of 
the objectives of our Perspectives document was to make it 
clear that responsible access to credit and a lack of housing 
affordability remain important, pressing issues for millions of 
households across the country. Another objective of our 
Perspectives document was to make clear our continuing belief 
that as part of housing finance reform legislation, it is the 
responsibility of Congress, not FHFA, to decide what role a 
future housing finance system should play in addressing these 
needs.

Q.2. The home ownership problem is particularly severe for 
black families. According to the Urban Institute, in 2001, the 
black home ownership rate was 46 percent. As of 2016, it was 41 
percent. That's a 5 percentage point decline--compared to a 1 
percentage point decline among white families over that same 
time period.
    Do you think our current access and affordability approach 
is doing enough for black families?

A.2. FHFA shares your concern about the home ownership gap. It 
is a multifaceted problem that requires many responses, only 
some of which are within FHFA's statutory responsibilities. We 
have aggressively tried to provide responses within FHFA's 
statutory authorities in a safe and sound manner.
    FHFA's efforts related to addressing this gap focus on 
mortgage credit in various ways. They include: encouraging the 
Enterprises to test new approaches to affordability, access to 
credit, and housing supply; monitoring the Enterprises' Duty to 
Serve Underserved Market Plans, which incorporate a number of 
initiatives that will help address these housing affordability 
challenges; monitoring and enforcing the affordable housing 
goals, which provide quantified and measurable directions to 
the Enterprises to reach all segments of the home mortgage 
market; and implementing the Neighborhood Stabilization 
Initiative, which aims to create more and better opportunities 
for home ownership in communities impacted by the financial 
crisis.
    FHFA will continue these efforts to improve access and 
affordability for minority and other underserved populations.

Q.3. In addition to the declining home ownership rate, average 
credit scores on the GSEs' books have increased sharply. In the 
early 2000s, the average credit score for a home loan on Fannie 
and Freddie's books was about 710. Now it's close to 750. That 
increase means that millions of borrowers with solid credit 
scores are not being served.
    Why should we be satisfied with maintaining our current 
access and affordability approach when the GSEs are not serving 
nearly as many creditworthy borrowers as they used to?

A.3. Both Enterprises are carefully seeking ways to expand 
affordable home ownership opportunities through access to 
credit pilots and initiatives with oversight from FHFA as 
regulator and conservator. These efforts include the activities 
referenced in my response to your previous question above.
    As secondary market entities, the Enterprises attempt to 
broaden access to home ownership through establishing a credit 
box that can accommodate a diversity of borrowers, with a 
variety of credit scores, consistent with safe and sound 
underwriting practices. Lending decisions, however, are 
ultimately made by originators and are not within the 
Enterprises control.
    Expanding access to home ownership is an ongoing process. 
Based on the demonstrated need for both affordable home 
ownership and rental housing, FHFA will continue efforts to 
expand access and affordability consistent with safe and 
sustainable underwriting.
                                ------                                


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

Q.1. I believe that shared-equity, deed-restricted mortgages 
can be very useful in helping families find affordable homes 
that provide stability and a possibility for some wealth 
creation.
    During your testimony, you mentioned shared-equity models 
provided by nonprofits. Could you please provide me with 
details on these types of products? Could you also include 
models that are Sharia-compliant, that is, models that do not 
charge interest which might work for some Muslim Americans who 
do not wish to pay interest?

A.1. Shared equity models refer to an array of programs that 
create long-term, affordable home ownership opportunities by 
imposing restrictions on the resale of subsidized housing 
units. When a nonprofit or Government entity is involved in 
such a program, it provides a subsidy to lower the purchase 
price of a housing unit, making it affordable to a low-income 
buyer. In return for the subsidy, the buyer agrees to share any 
home price appreciation at the time of resale with the entity 
providing the subsidy. This helps preserve affordability for 
subsequent homebuyers.
    Although several types of shared equity programs exist, 
they fall into two basic categories: shared appreciation loans 
and subsidy retention programs. Shared appreciation loans are 
second mortgages provided by the public or nonprofit agency 
that buyers repay in full at the time of resale along with a 
percentage of home value appreciation. These funds are then 
reinvested to make home ownership affordable to another low-
income buyer. Most nonprofits, however, typically opt for the 
subsidy retention programs where the resale price restrictions 
ensure that the subsidy remains with the home. The most widely 
implemented subsidy retention programs include deed-restricted 
housing programs and community land trusts (CLTs). According to 
the National Community Land Trust Network, there are 330 CLT 
programs in the country. However, no such programs operate in 
the State of Nevada. As part of their Underserved Markets Plans 
under the Duty to Serve Program, both Enterprises have included 
outreach, loan product development, and Loan purchase 
activities to support the development of shared equity loans.
    Grounded Solutions Network, the leading trade organization 
for nonprofit shared equity, recently released two reports, one 
sponsored by Freddie Mac and one by Fannie Mae as part of their 
Duty to Serve plans. Freddie Mac sponsored a paper on shared 
appreciation lending (https://groundedsolutions.org/new-report-
explores-shared-equity-homeownership-funding-model/), and 
Fannie Mae sponsored a paper on inclusionary zoning (https://
gsn.maps.arcgis.com/apps/webappviewer/index.html?id=c4c8eb
ef970b43f597de7bfd2fd1b954).
    As for potentially Sharia-compliant programs, often these 
may be contract for deed or land installment contracts, where, 
instead of purchasing a home with a mortgage, the buyer agrees 
to directly pay the seller in monthly installments. The buyer 
is able to occupy the home after the closing of the sale, but 
the seller still retains legal title to the property and 
ownership passes to the buyer only after the final payment is 
made. While there may be some nonprofit housing organizations 
that use contract for deed programs to help low-income families 
purchase a home, it is a financing vehicle most typically 
offered by private entities or individuals. The State of 
Minnesota operated a contract for deed program, called ``Bridge 
to Success'', at one time. However, the program has ended. 
Because of the spotty history of contract for deed 
arrangements, neither Enterprise permits contract for deed 
arrangements.

Q.2. The private equity fund Blackstone's single-family home 
business, known as Invitation Homes, was founded in 2012 and 
had an initial public offering (IPO) in February 2017. As part 
of the IPO, Invitation Homes needed to refinance existing debt 
and sought a lower-cost funding structure. Fannie Mae agreed to 
step-in, guaranteeing $1 billion in debt issued by Invitation 
Homes. This guarantee marked the first time that a GSE has 
facilitated financing for a large institutional operator in 
single-family rental properties. According to Invitation Homes' 
SEC filing related to the IPO, the company owns 940 single-
family rental homes in Las Vegas. This deal has been questioned 
on a number of grounds. First, critics have questioned why the 
GSEs are providing financing support for single-family rental 
properties given that single-family home purchase inventory is 
at a historic low in many parts of the country. Second, many 
are critical of hedge funds' maintenance and eviction policies 
towards homeowners and question whether it is sensible for a 
quasi-government entity to facilitate this business model. 
Third, many question the fact that Fannie Mae has imposed no 
rental affordability restrictions on the properties underlying 
the transaction. Fourth, many note that Invitation Homes did 
not necessarily need this financing; instead the Fannie-backed 
loan was used to pay down other debt and secure cheaper funding 
rates. Fifth, many question Fannie Mae's exposure to such a 
huge deal with a single counterparty.
    What is FHFA's response to the criticism of this deal? Has 
FHFA staff learned so far from this investment? Are these 
single-family home rentals affordable? Do they have tenant 
protections? Has FHFA made any large scale single family 
purchases to a private investor? If so, please describe.

A.2. The Enterprises have historically engaged in the single-
family rental market by financing loans to smaller investors, 
for Fannie Mae owners often properties to a single borrower 
and/or Freddie Mac owners of six properties to a single 
borrower. Since the financial crisis, single-family rentals 
have become an increasingly larger component of the rental 
market. Single-family rental units provide affordable housing 
alternatives to families in need of more space than traditional 
apartments. These families may not be able to or may choose not 
to own a home in light of their existing family or financial 
position.
    FHFA approved the Enterprises to do pilot programs in the 
single-family rental market beyond the existing Enterprise 
products available in response to the substantial growth in the 
number of detached single-family homes being rented. These 
pilots provide the Enterprises with opportunities to gather 
data about this market, and this will assist FHFA in making a 
more informed decision on the Enterprises' future participation 
in the single-family rental market. Fannie Mae's pilot 
investment was with Invitation Homes, which is an institutional 
investor in single-family rental. Invitation Homes uses 
standard leases and follows all tenant protection laws required 
by the State or locality in which the asset is located, 
including all eviction standards. In addition, Invitation Homes 
does not have a contract-for-deed or rent-to-own program. 
Freddie Mac's pilot transactions have been smaller and focused 
on affordable single-family rental properties. Both pilot 
programs will provide helpful data to better understand the 
market and help inform the role the Enterprises should play in 
it going forward.
    On June 28, 2017, FHFA hosted more than 60 housing industry 
professionals--including advocacy groups, investors, lenders, 
nonprofits, service providers, and researchers--for a day-long 
discussion to better understand the single-family rental market 
and gather feedback as part of our ongoing stakeholder 
outreach. In addition, FHFA directed the Enterprises to further 
explore this segment of the housing market in the 2017 
Conservatorship Scorecard. The Enterprises submitted revised 
single-family rental strategies to FHFA and the FHFA is 
currently reviewing those strategies. Informed by the 
strategies, transactional learnings, and stakeholder outreach, 
FHFA will determine the Enterprises' future role, if any, in 
serving the single-family rental market beyond the current 
guidelines summarized earlier.

Q.3. How will the new sub-goal for small multifamily properties 
specifically help renters?

A.3. The Safety and Soundness Act requires FHFA to establish 
annual housing goals for mortgages purchased by the 
Enterprises. Included in their housing goals is a small 
multifamily Low-income sub-goal for rental units in multifamily 
properties with 5-50 units that are affordable to families with 
incomes no greater than 80 percent of area median income. The 
sub-goal encourages the Enterprises to provide efficient 
financing for a sector of the rental market that particularly 
serves lower-income renters. Small multifamily properties house 
approximately 22 percent of the population, yet they contain 
more than 55 percent of subsidized units nationwide. \1\
---------------------------------------------------------------------------
     \1\ ``Understanding the Small and Medium Multifamily Housing 
Stock'', Enterprise Community Partners/University of Southern 
California, March 2017, available at http://
www.enterprisecommunity.org/resources/understanding-small-and-medium-
multifamily-housing-stock-19423.
---------------------------------------------------------------------------
    Access to reliable financing helps preserve these 
properties and maintain housing quality.
    Owners of small properties tend to be individuals or small 
companies that need financing when making the major capital 
repairs needed from time to time. Keeping up with capital 
repairs is essential to maintain housing quality for residents 
and lo ensure this source of affordable housing remains an 
enduring community asset.
    Making loans to small multifamily properties requires 
essentially the same amount of resources by the lender as do 
loans to larger properties, but because the returns are smaller 
due to the smaller loan size, lending activity for these 
properties can be uneven. The small multifamily sub-goal 
encourages the Enterprises' participation in this market and 
ensures the Enterprises have the expertise necessary to serve 
this market should private sources of financing become unable 
or unwilling to retain small multifamily property loans on 
their balance sheets. Based on Enterprise performance since 
2015 when the sub-goal was put in place, the sub-goal is 
achievable and encourages a meaningful Enterprise presence in 
this sector.

Q.4. I'm concerned about the ever-growing home ownership gap 
between whites and African Americans and Latinos. What can FHFA 
do to help more Latinos and African Americans buy a home?

A.4. FHFA shares your concern about the home ownership gap. It 
is a multifaceted problem that requires many responses, only 
some of which are in FHFA's purview.
    Some of the home ownership gap is about housing 
affordability. Many communities in the United States have a 
mismatch between housing supply and demand, and local zoning 
and land use policies are a significant contributing/actor that 
restrict greater supply. In communities with strong job growth 
and high incomes, lack of supply can make home ownership 
unaffordable for many potential buyers. In communities with 
flat or declining incomes, even housing that appears affordable 
from afar can remain out of reach.
    Some of the home ownership gap is tied to the wealth gap, 
which reflects that minority communities have been limited in 
their ability to build wealth. The recent financial crisis and 
housing price collapse erased about $7 trillion in household 
wealth nationally, but that impact was more extreme for poorer 
households and for African American and Latino households. 
Because the median net worth of minority households 
historically has been low, building the necessary wealth to 
meet downpayment and closing costs will likely also continue to 
be a challenge for many of these new households.
    Some of the home ownership gap is also tied to income 
differences that continue to persist, as well as outright 
discrimination in spite of decades of work to eliminate housing 
discrimination and promote economic opportunity.
    FHFA's efforts related to closing the home ownership gap 
focus on mortgage credit in various ways. Encouraging the 
Enterprises to better reach underserved African American, 
Latino, and other minority communities requires the same focus 
that FHFA applies across its activities on balancing housing 
finance market liquidity with ensuring safety and soundness. 
Among the steps FHFA is taking are:
    Encouraging the Enterprises to test new approaches to 
affordability, access, and supply on a small scale through 
pilots. This approach helps to ensure that the approaches work 
and that they can be replicated and implemented safely and 
soundly.
    Monitoring the Enterprises' Duty to Serve Underserved 
Market Plans, which incorporate a number of initiatives that 
will help address housing affordability challenges by better 
serving the manufactured housing, affordable housing 
preservation, and rural housing markets. Residential economic 
diversity is one element of the Duty to Serve plans that can 
help focus more specifically on the home ownership gap.
    Assessing the potential impact of the Enterprise's 2017 
update of debt to income ratio (DTI) limits from 45 percent to 
50 percent based on the automated underwriting systems' 
comprehensive risk assessment, which helps people get a 
mortgage who are good credit risks but may have higher DTI 
percentages. African Americans and Latinos are more likely to 
have DTIs above 45 percent than other potential borrowers.
    Monitoring and enforcing the affordable housing goals, 
which provide a quantified and measurable direction to the 
Enterprises to reach all segments of the home mortgage market, 
specifically areas with many low-income or minority residents.
    Implementing the Neighborhood Stabilization Initiative, 
which aims to create more and better opportunities for home 
ownership in communities impacted by the financial crisis, many 
of which are already home to many minority households. 
Sustainable home ownership can be about improving existing 
neighborhoods as well as about empowering households to seek 
home ownership elsewhere.
    These steps are part of efforts to address the home 
ownership gap, but are not sufficient by themselves. Closing 
the home ownership gap will require steps beyond the housing 
finance market and FHFA's oversight of the regulated entities. 
FHFA will have to work with other agencies, stakeholders, and 
partners at the Federal, State, and local levels to promote 
fair and equitable access to affordable housing.

Q.5. In the run-up to the Financial Crisis, Fannie Mae, Freddie 
Mac, and the Federal Home Loan Banks bought residential 
mortgage backed securities. The sellers lied about the quality 
of these securities. In recent years, the Federal Home Loan 
Banks have settled lawsuits with dealers who concealed 
information and lied to them. The Federal Home Loan Bank of San 
Francisco received more than $450 million in settlement funds 
and then set-aside $100 million of the settlement funds it 
received to establish voluntary programs including a Quality 
Jobs Fund. This Fund will help people obtain higher-paid 
employment.
    How much total compensation did the 11 Federal Home Loan 
Banks receive from settlements from fraudulent dealers? What 
did the FHLBanks do with these settlement dollars?

A.5. The FHLBanks were successful in numerous lawsuits against 
parties that were involved in the private label mortgage backed 
security (PLMBS) securitization process. Litigation settlement 
proceeds totaled $2.1 billion as of March 31, 2018. Few, if 
any, further significant litigation settlements are expected.
    The settlement amounts from these lawsuits have been used 
in several ways. Because FHLBanks allocate 10 percent of their 
net income to the Affordable Housing Program (AHP), any 
litigation settlements that accrue to earnings increase the 
dollar amounts to AHP. The FHLBanks have also used the proceeds 
from litigation settlements to strengthen the capital position 
of the FHLBanks and provide value to their members and 
communities. Retained earnings have grown substantially across 
the FHLBank System, strengthening the FHLBanks' capital 
position and dividend rates have increased, partially as a 
result of the settlements, increasing the value of FHLBank 
membership. Some FHLBanks have also declared special dividends 
that coincided with some of the more significant settlements. 
The FHLBank of San Francisco, for example, voluntarily decided 
to make a $100 million charitable contribution to the Quality 
Jobs Fund as a result of the settlements received.

Q.6. Hundreds of employees of banks, mortgage lenders and 
brokers have been indicted for submitting fraudulent loan 
applications, forging signatures, and embezzling in cases that 
affected the loans purchased by Fannie Mae, Freddie Mac, and 
the Federal Home Loan Banks.
    In March, the Office of Inspector General urged the FHFA to 
improve how Fannie Mae and Freddie Mac are told to report 
fraud. The OIG found a disparity between the statutory 
requirement and the criteria set by FHFA. The OIG says by 
statute an Enterprise must ``timely report possible fraud'' but 
FHFA requires the GSEs to report only those they have 
investigated and have a ``reasonable belief'' is fraud. The OIG 
asserts that these investigations result in a delay and is 
inconsistent with Congressional intent.
    What is your view of the OIG report? When will FHFA align 
the reporting requirement to Congressional intent?

A.6. As noted in the FHFA OIG Report, FHFA's Office of the 
General Counsel does not agree with the OIG's conclusion that 
FHFA's interpretation and application since 2010 of the 
``timely report'' requirement in the Housing and Economic 
Recovery Act regarding possible fraud is inconsistent with the 
statute.
    At the time of the statutory enactment, which codified FHFA 
practices and avoided Enterprise liability for reporting 
suspected fraud, FHFA had a robust reporting regime and it 
continues to do so. The regulated entities make a reasonable 
determination of possible fraud to avoid reporting a large 
number of ``false positives.'' A concern about ``false 
positives'' had been raised by law enforcement officials with 
FHFA in the past. FHFA makes a responsible inquiry following a 
``tip'' or of other information, which we believe is 
appropriate. This inquiry does not create a higher reporting 
threshold or delay a timely notification. It provides a 
mechanism by which the regulated entities implement statutory 
and regulatory requirements so FHFA has robust information that 
is timely and will assist both FHFA and law enforcement in 
preventing fraudulent activity.
    The General Counsel agreed to consider any possible 
disparity raised by the FHFA OIG report during the Agency's 5 
year review of its regulations, which is now underway.

Q.7. Employees who submit fraudulent reimbursement requests for 
personal travel that they identify as business-related are 
engaged in theft. The FHFA Office of the Inspector General 
reported that the leadership of the Federal Home Loan Bank of 
Dallas was indicted for stealing more than a million of dollars 
in expenses and uncharged vacation time.
    When did the FHFA become aware of this embezzlement charge?

A.7. FHFA learned from the FHLBank of Dallas (the Bank) in 
September 2013 that issues had arisen with members of its 
senior management. As is usual in these situations, the Bank 
conducted an inquiry using outside counsel. The FHFA OIG 
subsequently was informed of this matter as well. FHFA was kept 
informed of the progress of the investigation and informed that 
the Bank was terminating the employees. FHFA OIG also looked 
into this matter. FHFA reviewed the Bank activities regarding 
the employees and reformed its policies on submission of claims 
and review of billing by senior executives. FHFA then undertook 
an additional effort to secure repayment to the Bank by the 
executives of the estimated benefits to the executives.
    During this period, FHFA remained in touch with the Dallas 
United States Attorney's Office (USAO) as they reviewed 
potential civil or criminal actions. FHFA responded to all 
inquiries and provided all information that it had to the 
satisfaction of the USAO. There were two separate contacts: one 
preceded the actual filing of charges by approximately a year, 
and then another as the USAO approached filing charges.

Q.8. What is the status of the indictment against the former 
Federal Home Loan Bank of Dallas President and Chief Executive 
Officer Terrence Smith, Nancy Parker, and Michael Sims?

A.8. FHFA is aware that the Dallas USAO is preparing/or a 
criminal trial in this matter.

Q.9. What technical assistance has FHFA provided to the Federal 
Home Loan Bank of Dallas board of directors to prevent these 
types of frauds in the future?

A.9. FHFA regularly conducts examinations and ongoing 
supervision, which includes meetings with the full board of 
directors and targeted reviews. Supervision staff met with the 
FHLBank of Dallas board of directors to recommend and/or 
require the implementation of controls related to expense 
reimbursement approval, improved inventory controls, and 
improved fraud reporting.

Q.10. Native Americans face acute housing challenges, spanning 
from affordability concerns to the need for investments to 
improve housing quality.
    I was pleased to see that the Duty to Serve plans from 
Fannie Mae and Freddie Mac include commitments to engage with 
tribal governments, and ensure that the GSEs are serving the 
needs of Native American renters and homeowners. Can you 
discuss why the inclusion of tribal areas was important, and 
will you commit to having the GSEs engage with Nevada tribal 
leaders to understand their housing concerns?

A.10. The Duty to Serve statute encourages the Enterprises to 
improve capital distribution available for mortgage financing 
for underserved markets. The Duty to Serve regulation 
specifically identified serving members of Federally recognized 
Indian Tribes located in Tribal areas as a challenging segment 
of the rural underserved market. This conclusion was reached 
after taking public input through a notice and comment process, 
which identified this population as one that struggles with a 
high concentration of poverty and substandard housing 
conditions. The challenges of lending to tribal populations is 
exacerbated because the land and improvements involved in a 
transaction may not have the same transfer rights and may 
function more like a leasehold estate. This could deter 
traditional lenders from financing mortgages for home purchase 
because they cannot perfect the lien on the collateral.
    Both Enterprises have committed to engaging with Tribal 
leaders in their 3-year Duty To Serve Plans (Fannie Mae Duty To 
Serve Plan p. RH 25-31; and Freddie Mac Duty To Serve Plan p. 
RH 34-46). \2\ FHFA is committed to ensuring that the 
Enterprises fulfill the commitments they made in their public 
plans and will encourage them to look for opportunities to work 
with Nevada Tribal leaders to better understand their housing 
concerns.
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     \2\ Available at: https://www.fhfa.gov/PolicyProgramsResearch/
Programs/Documents/Fannie-Mae_Final-UMP.pdf; https://www.fhfa.gov/
PolicyProgramsResearch/Programs/Documents/Freddie-Mac_Final-UMP.pdf.

Q.11. Director Watt, when you served in the House of 
Representatives, you led the way to ensure people received 
quality mortgages they could afford to repay. The current 
leadership of the Consumer Financial Protection Bureau is 
undermining enforcement and reducing oversight of the mortgage 
market.
    If President Trump's appointed director, Mick Mulvaney, 
stops policing the mortgage market, how might that affect 
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks? Do 
you have any concerns that mortgage lenders might go back to 
steering customers to subprime, costly, and unsustainable 
loans?

A.11. The Consumer Financial Protection Bureau and FHFA are 
separate agencies and play different roles in overseeing parts 
of the mortgage market and housing finance system. FHFA, as 
both regulator and conservator of Fannie Mae and Freddie Mac, 
continues to have the responsibility and authority to establish 
strong underwriting criteria for any loans that the Enterprises 
purchase and to ensure that taxpayers are not again put at 
risk/or possible losses. FHFA will also be working closely with 
the CFPB as ii reviews and updates the qualified mortgage 
standards.

Q.12. Fannie and Freddie have not only repaid the Treasury and 
taxpayers for the investment during the financial crisis. It 
continues to send its profits directly back to the Treasury.
    How much beyond the initial $185 billion have Fannie Mae 
and Freddie Mac sent to the Treasury?

A.12. Through March 31, 2018, the Enterprises have paid 
combined dividends to the Treasury of $278.8 billion as 
outlined under the terms of the Preferred Stock Purchase 
Agreements (PSPAs); Fannie Mae has paid dividends totaling 
$166.4 billion, and Freddie Mac has paid $112.4 billion. The 
draws from the Treasury, also through March 31, 2018, have been 
in the combined amount of $191.5 billion--$119.8 billion/or 
Fannie Mae, and $71.6 billion/or Freddie Mac. The PSPAs, which 
specify the terms of this financial agreement, do not count 
dividends paid toward the reduction of the principal amounts 
invested by the Treasury. Therefore, the Treasury continues to 
own senior preferred stock with a liquidation preference in the 
amount of $191.5 billion.

Q.13. While much of this repayment stems from an increase in 
the value of both GSEs' portfolios, a sizeable amount also 
comes from the guarantee fees assessed on the loans in their 
mortgage-backed securities. These fees, which are intended to 
offset the credit risks borne by the GSEs (and Treasury), have 
increased in recent years from levels that were clearly set too 
low. However, as these fees have increased, so too have the 
credit scores of the average borrowers whose loans comprise 
those securities.
    Are you concerned that the guarantee fees may be higher 
than is needed to cover the risks of the GSEs' current 
portfolio?

A.13. Establishing appropriate guarantee fee levels entails 
balancing the costs of covering projected credit losses over 
the life of each loan, and the Enterprises' cost of holding 
capital to cover these potential losses and administrative 
costs with important considerations related to housing 
affordability. Achieving this balance requires constant 
monitoring of G-fee levels and considering various adjustments 
that might be made.
    FHFA's most recent full-scale review of guarantee fee 
levels was completed in early 2015. Since that time, FHFA has 
been monitoring pricing in light of developments in the primary 
and secondary mortgage markets. FHFA will continue to evaluate 
and reevaluate the level of G-fees as we strive to meet all of 
our statutory responsibilities and will make adjustments deemed 
appropriate.

Q.14. How might a decrease in the guarantee fee level affect 
housing affordability, particularly for first-time homebuyers, 
low-wealth borrowers and borrowers in typically underserved 
areas, such as area with large minority populations?

A.14. G-fees are one of a number of factors that can affect 
housing affordability; however, reductions in G-fees would 
likely have a relatively limited impact on improving 
affordability overall. Increases in home values over the last 
several years, combined with the rise in mortgage rates in' 
more recent periods, have resulted in lessening affordability.
              Additional Material Supplied for the Record
                 LETTERS SUBMITTED BY SENATOR TIM SCOTT
                 
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