[Senate Hearing 116-180]
[From the U.S. Government Publishing Office]
S. Hrg. 116-180
HOUSING FINANCE REFORM: NEXT STEPS
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
RECEIVING AN UPDATE FROM GOVERNMENT AGENCIES ON DEVELOPING A FRAMEWORK
FOR ADMINISTRATIVE AND LEGISLATIVE REFORM OF THE FEDERAL HOUSING
FINANCE SYSTEM
__________
SEPTEMBER 10, 2019
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Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
40-380 PDF WASHINGTON : 2021
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Matt Jones, Counsel
Beth Cooper, Democratic Professional Staff Member
Megan Cheney, Democratic Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, SEPTEMBER 10, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 42
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 42
WITNESSES
Steven T. Mnuchin, Secretary, Department of the Treasury......... 4
Prepared statement........................................... 44
Responses to written questions of:
Chairman Crapo........................................... 53
Senator Brown............................................ 54
Senator Menendez......................................... 64
Senator Scott............................................ 65
Senator Warren........................................... 66
Senator Rounds........................................... 71
Senator Tillis........................................... 72
Senator Moran............................................ 73
Senator Cortez Masto..................................... 75
Senator Sinema........................................... 82
Benjamin S. Carson, Sr., M.D., Secretary, Department of Housing
and Urban Development.......................................... 6
Prepared statement........................................... 45
Responses to written questions of:
Senator Brown............................................ 83
Senator Menendez......................................... 86
Senator Scott............................................ 87
Senator Warren........................................... 89
Senator Cortez Masto..................................... 94
Mark A. Calabria, Ph.D., Director, Federal Housing Finance Agency 8
Prepared statement........................................... 49
Responses to written questions of:
Senator Brown............................................ 99
Senator Menendez.........................................
Senator Scott............................................ 104
Senator Warren........................................... 105
Senator Cotton........................................... 109
Senator Tillis........................................... 111
Senator Moran............................................ 111
Senator Cortez Masto..................................... 113
Senator Sinema........................................... 126
Additional Material Supplied for the Record
Letters submitted by the National Urban League on behalf of
coalition of civil rights and affordable housing organizations. 128
Letter submitted by the Credit Union National Association (CUNA). 138
Letter submitted by the Real Estate Roundtable................... 142
Letter submitted by the CRE Finance Council...................... 143
Statement submitted by the Independent Community Bankers of
America (ICBA)................................................. 144
Letter submitted by the National Association of Federally-Insured
Credit Unions (NAFCU).......................................... 151
Letter submitted by the National Multifamily Housing Council
(NMHC) and the National Apartment Association (NAA)............ 152
Statement submitted by the American Bankers Association.......... 154
HOUSING FINANCE REFORM: NEXT STEPS
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TUESDAY, SEPTEMBER 10, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m. in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
Today we are joined by the leading voices within the
Administration on reforming and strengthening our housing
finance system: the Secretary of the Treasury and the Secretary
of Housing and Urban Development, both of whom have just
submitted housing finance reform proposals to the President, as
well as the Director of the Federal Housing Finance Agency, who
serves as the regulator and conservator of Fannie Mae and
Freddie Mac.
I want to thank each of you for coming to the Committee
this morning.
Last Friday marked 11 years since the Government bailed out
and put Fannie Mae and Freddie Mac into conservatorship, where
they remain today.
Prior to 2008, the two Government-sponsored enterprises
held just 45 cents in capital for every $100 in mortgages they
guaranteed. Now they hold just 19 cents, after a historic $200
billion bailout from the taxpayers.
Eleven years later, these systemically important companies
continue to be too big to fail and are even more leveraged than
they were before the financial crisis, and taxpayers inevitably
remain on the hook in the event of the next market downturn.
In March, President Trump signed a Presidential Memorandum
directing the Department of the Treasury and the Department of
Housing and Urban Development to develop a plan for
administrative and legislative reform of the Federal housing
finance system.
Many of the legislative recommendations in the plans that
were released on Thursday are consistent with my outline to fix
our housing finance system, including attracting private
capital back into the market, protecting taxpayers against
future bailouts, and promoting competition, as well as
preserving certain important incremental reforms that have
already taken place during the conservatorship, including a
robust transfer of credit risk, the single security and common
securitization platform, and loan pricing that does not vary
based on a lender's size.
The status quo is not and has not been acceptable, and my
strong preference remains to fix it through comprehensive
legislation.
Five years ago, this Committee demonstrated that it is
possible to come together and advance a comprehensive solution
on this topic.
This year, I released my housing reform outline, which
builds upon many of the same principles of those previous
efforts.
It sets out a blueprint for a permanent, sustainable new
housing finance system that protects taxpayers by reducing the
systemic, too-big-to-fail risk posed by the current mortgage
guarantors.
It preserves the existing infrastructure in the housing
finance system that works well while significantly increasing
the role of private capital.
It establishes several new layers of protection between
mortgage credit risk and taxpayers.
It ensures a level playing field for originators of all
sizes and types while also locking in uniform, responsible
underwriting standards.
And it promotes broad accessibility to mortgage credit,
including in underserved markets.
Ultimately, only Congress has the tools necessary to
provide the holistic, comprehensive reform to our system that
will be durable through any market cycle.
However, it is important for the Administration to begin
moving forward with incremental steps that move the system in
the right direction.
After 11 years of conservatorship, it is long past time to
make the hard decisions and address this last unfinished
business of the last financial crisis.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Welcome to the
witnesses. Welcome back to my colleagues.
We are going to hear from the Trump administration today
about the ``next steps'' on housing finance reform. It is clear
from the plan they put out last week what President Trump
thinks these steps should be: The Trump plan will make
mortgages more expensive and harder to get.
We should not have to tell the President we have an
affordable housing crisis in this country. We all know it; we
all see it.
I see it when I talk to residents of a manufactured housing
community on the verge of losing their homes because they
cannot afford the rent increase imposed by wealthy private
equity investors from outside their States who just bought
their community.
I see it when I drive past the boarded-up houses that
belonged to the victims of predatory lending in my home city of
Cleveland, in my neighborhood of Slavic Village, and it happens
across the country.
I see it when I talk to young people in their twenties and
thirties who want to buy a home, but who drown in student debt
and cannot save enough for a downpayment or afford a mortgage.
These are the real crises facing real families all across
Ohio and across our country.
They are renters, they are homeowners, and they are former
homeowners. They all have one thing in common: They cannot
afford a place to call home.
We have had productive hearings in this Committee where we
talked about what it would take for the housing finance system
to actually work for working families.
In March, we held two hearings with representatives from
the home builders, the Realtors, the mortgage bankers, the
credit unions, the civil rights community, and multifamily
lenders.
We heard during those hearings that affordability and
access are not just components of housing finance. They are the
whole reason we have a housing finance system. They cannot be
an afterthought once we have answered other questions about the
structure of the housing finance system. They have to be built
into the system.
We need a housing system built on a mission to serve
borrowers and renters, no matter who they are, what kind of
work they do, or where they live.
That means we need policies that focus on increasing
service for underserved markets, like rural areas and
manufactured housing homeowners and borrowers who have been
locked out of the market for decades because of discrimination.
And we need a system that helps a wide variety of lenders
and borrowers participate so that they can meet all families'
needs, particularly those who have been left behind for
generations.
In our March hearings and in the hearings since, we have
heard housing stakeholders remarkably coalescing around a few
foundational principles for reform. They have consensus. They
have said that reform should protect access to affordable 30-
year fixed-rate mortgages. They have said that reform should
provide a catastrophic Government guarantee. They have said
that we should structure loan guarantors like public utilities,
providing a regulated rate of return. They have said we should
serve a broad, national market. They have said we should serve
lenders of all types and sizes equitably. They have said we
should maintain a duty to serve all markets and all borrowers.
They have said we should maintain affordable housing goals and
metrics. They have said we should expand investment in
affordable housing. And they have said we should maintain the
GSEs' successful multifamily business models and ensure
continued or better access for financing of affordable rental
housing.
Yet, unsurprisingly, President Trump and his Administration
missed the point.
Rather than create a system that addresses the needs of
working families, the Trump administration has put out half-
baked proposals that will make mortgages more expensive and
harder to get.
In addition to increasing costs, the plan would make it
harder for small lenders to compete and would gut the existing
tools we have now to help underserved families finally find an
affordable apartment or own their first home.
The President's plans would also roll back consumer
protections and investor disclosures put in place following the
financial crisis, and as we know, there has been a collective
amnesia on this
Committee and in this Administration to prevent predatory loans
and toxic securities from building up in our financial system.
So let us be clear: Whether you are renting and want to buy
a home or own a home and someday want to sell it, President
Trump's plan hurts you--all to funnel, no surprise here, all to
funnel more money to the same Wall Street system that wrecked
the housing market and wrecked families' lives in 2008.
I was encouraged when I saw that Treasury's plan had nine
separate proposals dedicated to ``leveling the playing field.''
I thought this might mean, maybe hope against hope, might
mean leveling the playing field for communities of color, young
households trapped by student debt, or renters who cannot
afford to save for a downpayment.
So you can imagine my disappointment when I saw that all
nine proposals--every last one of them--were about ``leveling
the playing field'' for Wall Street, which is looking to make
money off of working families' mortgages.
Really?
Of course, we should not be surprised. The White House
looks like a retreat for Wall Street executives. Only this plan
is the same as every other Trump administration plan. It is
about making it easier for Wall Street, in the President's home
city, making it easier for Wall Street to profit off
hardworking families.
These plans come in the midst of a flurry of other
troubling Administration proposals to weaken fair housing and
fair lending protections, to gut a bedrock civil rights law,
the Community Reinvestment Act.
Taken together, the President has once again--once again--
decided to betray working families in Youngstown, in Cleveland,
in Baltimore--Baltimore, Secretary Carson, Baltimore the city
that the President finds is so beloved--once again decided to
side with Wall Street wealth over the dignity of work.
We do not need to make it easier for Wall Street to get
richer. To quote Secretary Carson, ``news flash, rich people
are going to get richer anyway.''
We need to make it easier for every American family to find
an affordable place to call home.
Housing should not be optional. It is a basic need. No one
should go without it in this great country.
Thank you, Mr. Chairman.
Chairman Crapo. Our witnesses today are the Honorable
Steven T. Mnuchin, Secretary of the Treasury; the Honorable
Benjamin S. Carson, Secretary of Housing and Urban Development;
and the Honorable Mark A. Calabria, the Director of the Federal
Housing Finance Agency.
Secretary Mnuchin, you may begin.
STATEMENT OF STEVEN T. MNUCHIN, SECRETARY, DEPARTMENT OF THE
TREASURY
Mr. Mnuchin. Thank you. Chairman Crapo, Ranking Member
Brown, and Members of the Committee, I am pleased to be with
you today to discuss the Treasury Department's Housing Finance
Reform Plan that will protect taxpayers and foster competition
in the market.
I would like to thank Chairman Crapo and the Committee for
your work on this important issue. The outline you released in
February was a productive step toward ensuring the safety and
stability of our housing finance system.
In September of 2008, the Government-sponsored enterprises
Fannie Mae and Freddie Mac were placed into conservatorship by
FHFA. Treasury has provided the GSEs with over $190 billion in
taxpayer assistance.
Eleven years later, the GSEs remain in conservatorship and
continue to be supported by a Treasury commitment to keep them
solvent. The continued conservatorships of the GSEs have
perpetuated far-reaching Government influence over the housing
finance sector. The lack of reform has left taxpayers exposed
to future bailouts.
Treasury's Housing Plan includes almost 50 recommended
actions. These measures would reduce the role of the Federal
Government, enhance taxpayer protections against future
bailouts, and increase private sector competition in the
housing system.
As required by President Trump's directive, Treasury's plan
shows that the GSEs can and should be reformed to ensure their
safety and soundness. Although no law prescribes a specific
endpoint for the conservatorships, no conservatorship is meant
to be permanent, and that includes FHFA's management of the
GSEs. The plan provides a road map to release them from
conservatorship.
Treasury's reform plan takes great care to preserve what
works in the system. Each of the Treasury's recommended reforms
is incremental, realistic, and balanced. In particular, the
Treasury plan would preserve the longstanding Government
support of the 30-year fixed-rate mortgage loan. That support
should be explicitly defined, tailored, and paid for. Treasury
recommends that Congress authorize an explicit, paid-for
guarantee backed by the full faith and credit of the Federal
Government that is limited to the timely payment of principal
and interest on qualifying mortgage-backed securities. To
foster competition, this guarantee should be available to the
GSEs and also to any other FHFA-approved competitor.
Moreover, the regulatory environment should be harmonized
so that the GSEs and private sector competitors operate on a
level playing field. For example, the GSEs currently have a
competitive advantage over other participants under the so-
called QM patch to the Consumer Financial Protection Bureau's
ability-to-repay rule. In July 2019, the CFPB announced that
the QM patch would expire in January 2021 or after a short
extension. Treasury supports the CFPB's planned expiration of
the QM patch, and it also supports further revisions to the
ability-to-repay rule to ensure that mortgage lenders continue
to have a bright-line safe harbor after the QM patch.
Finally, I must emphasize our recommendations make it clear
that the Administration's preference is to work with Congress
to enact comprehensive housing reform legislation. Legislation
could achieve long-lasting structural reform that tailors
explicit Government support of the secondary market and repeals
the GSEs' congressional charters and other statutory privileges
that give them a competitive advantage. At the same time, we
believe that reform can and should proceed administratively.
Pending legislation, Treasury will continue to support FHFA's
administrative actions to enhance regulation, promote private
sector competition, and satisfy the preconditions set forth in
the plan for ending the GSEs' conservatorships.
Under the leadership of the President, I am proud of all
the work we have done to create conditions for greater economic
growth, more and better opportunities for working families, and
higher wages for all Americans. Today I look forward to
discussing with you the critical issue of housing finance
reform. I truly hope that the Committee will work with us on a
bipartisan basis to move forward with legislation.
Thank you very much, and I look forward to answering your
questions.
Chairman Crapo. Thank you, Secretary Mnuchin.
Secretary Carson.
STATEMENT OF BENJAMIN S. CARSON, SR., M.D., SECRETARY,
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Carson. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, thank you for this opportunity to
appear before you today to discuss how the U.S. Department of
Housing and Urban Development will support this
Administration's effort to reform the Nation's housing finance
system.
I also want to thank the tremendous team that we have
assembled at HUD. We say we have the ugliest building but the
best people, and a special shout-out to Mike Kelley, whose
birthday is today.
In the years since the financial crisis, the Federal
Government has continued to play an outsized role in the
Nation's housing finance system. It is imperative that Congress
and the Administration act to refocus this system that we
support appropriate and responsible access to credit and ensure
Government programs do not overlap with and crowd out private
capital.
I am pleased to present an overview of HUD's Housing
Finance Reform Plan we submitted to the President last week.
HUD supports millions of families with affordable homeownership
opportunities through the Federal Housing Administration and
Ginnie Mae, providing credit access and liquidity in the
mortgage market.
During the financial crisis, and because of the policies of
the previous Administration, FHA's and Ginnie Mae's balance
sheets swelled, growing by approximately 350 percent and 400
percent, respectively, between the years of 2007 and 2018. Our
reform plan will reduce the Federal Government's outsized role
in housing finance and protection taxpayers.
To that end, I ask Congress to work with the Administration
on four key pillars: number one, return FHA to its core mission
of serving low- and moderate-income families, including first-
time home buyers, who cannot be served through traditional
underwriting; to protect American taxpayers, number two, from
the risk of bailouts; number three, to provide FHA and Ginnie
Mae with the tools they need to manage the risk associated with
oversized portfolios; and, four, to provide liquidity to the
housing finance system.
Our Housing Finance Reform Plan contains many
recommendations, but for the sake of my oral testimony today,
let me focus on just a few.
First, return FHA to its core mission. We ought to allow
the private market to work, and in those areas where it cannot
or will not work, we must make certain that we target programs
to borrowers not served by traditional underwriting.
Historically, this has been FHA's most important contribution
to the American housing market: facilitating earlier entry into
home ownership for these families, particularly first-time home
buyers. Without FHA mortgage insurance, millions of lower-
income and middle-income families would lack access to
affordable mortgage credit. Refocusing on its core mission will
strengthen FHA's ability to help creditworthy borrowers build
equity and avoid foreclosure.
Second, a central principle of our plan is that Federal
mortgage credit policies should be better coordinated in order
to allow qualified borrowers to access responsible and
affordable credit options. Our plan proposes that HUD and FHFA
will coordinate to ensure Fannie Mae, Freddie Mac, and FHA
serve defined roles within the marketplace. HUD recommends that
Congress establish FHA, the Department of Veterans Affairs, and
the Department of Agriculture as the sole source of low-
downpayment financing for borrowers not served by the
conventional mortgage market.
Third, to better protect taxpayers, we need to strengthen
FHA's risk management systems. FHA currently insures more than
$1.4 trillion in mortgage debt. Meanwhile, Ginnie Mae
guarantees more than $2 trillion in mortgage-backed securities.
It is imperative that FHA and Ginnie Mae conduct their business
in a manner that protects American taxpayers. FHA must maintain
an appropriate level of capital reserves. It is unacceptable
for the agency to ever again require a draw on taxpayer funds
to sustain its book of business, as it did in the previous
Administration. Our plan strengthens FHA governance and builds
its capital ratio well above the statutory 2 percent minimum to
safeguard the agency against episodes of market decrease.
To fulfill this duty to taxpayers and ensure it continues
to provide affordable access to mortgage credit for mission-
focused borrowers, FHA needs some independence from broader HUD
protocols that govern staffing, procurement, and technology.
Therefore, our plan has recommended that Congress enact
legislation that would restructure FHA as an autonomous
Government-owned corporation within HUD.
In conclusion, the Presidential Memorandum provides an
opportunity for Congress and the Administration to work
together to ensure FHA and Ginnie Mae serve their important
missions effectively, responsibly, and sustainably. I welcome
Congress' participation as this Administration reforms these
agencies to be better able to fulfill their responsibilities to
borrowers and to the American taxpayers with that cooperation.
Thank you, and I look forward to answering your questions.
Chairman Crapo. Thank you, Secretary Carson.
Director Calabria.
STATEMENT OF MARK A. CALABRIA, Ph.D., DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY
Mr. Calabria. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Committee, thank you for the
invitation to appear at this morning's hearing. I can think of
few issues in our financial system deserving of more attention.
Our Nation's housing finance system is in urgent need of
reform. The status quo poses significant risk to taxpayers,
homeowners, renters, and the entire financial system.
I want to thank Secretary Mnuchin and Secretary Carson for
their efforts to develop comprehensive housing finance reform
plans. They lay out a responsible road map to build a more
resilient housing finance system that protects taxpayers and
maintains access. I also want to thank Secretary Mnuchin for
the opportunity to have offered commentary on the Treasury's
plan during its development.
These plans are broadly consistent with my top priorities,
first of all to cement FHFA as a world-class regulator; second,
to restore Fannie and Freddie to safe and sound condition by
building capital to match their risk profiles. Building capital
would also begin the process to end the conservatorships, which
have lasted more than 11 years. I will note by comparison the
longest bank conservatorship was 18 months.
A root cause of the 2008 financial crisis was imprudent
mortgage lending backed by insufficient capital. I believe that
this fundamental problem remains unresolved today. While
borrower average credit scores have modestly improved, the
enterprises' shares of low downpayment and high debt-to-income
mortgages are back to their 2004 levels. Fueling rapidly rising
house prices with easy mortgage credit from undercapitalized
enterprises is a mistake, and it will end in disaster.
In their current financial condition, the enterprises are
not equipped to withstand a downturn in the housing market. The
enterprises own or guarantee a combined $5.5 trillion in
single-family and multifamily mortgages out of a $12 trillion
combined market. Yet with just $6 billion in allowable capital,
the enterprises approach a combined leverage ratio of nearly a
thousand to one.
In comparison, our Nation's largest financial institutions
have an average leverage ratio of ten to one.
The most recent DFAST for the GSEs I think illustrates this
example. In the last crisis, housing prices declined by about
27 percent. The DFAST results modeled a 25-percent decline.
Under such conditions, the enterprises lose over $40 billion in
capital.
Given that the housing supply appears to have become more
inelastic since the crisis, we should actually expect greater
price volatility going forward.
Let me also emphasize that our current mortgage finance
system undercuts sustainable home ownership. The enterprises
have expanded with the economy recently yet maintained risk and
capital levels that ensure that they will fail in a downturn.
This procyclical pattern harms low-income borrowers, making it
easier to extend credit when the economy is strong but harder
to keep those homes when the economy is weakened.
Our housing finance system is supposed to serve homeowners
and renters while protecting taxpayers. In my view, it does
neither. The Administration's plan aims to address these
problems, and I applaud them for their efforts.
Congress, however, is the only body that can enact the
structural reforms that are needed to fix today's broken
system.
Compared to the duopoly of the enterprises, a fair and
competitive secondary mortgage market would better serve
borrowers and renters and promote long-term stability by
ensuring that inefficient firms do not survive and that no firm
is ``too big to fail.''
The Ranking Member mentioned increasing service and access,
a goal I share. I think we have witnessed in one industry after
another that the best guarantee for increasing access and
lowering prices is an open, competitive market, not a monopoly,
not a duopoly.
Some would argue that reform should wait for a crisis. I
believe that this would be shortsighted. We found in the last
crisis that it is difficult to do reform in the midst of a
crisis. To paraphrase President Kennedy, the time to repair the
roof is when the sun is shining.
Now is the time for needed reforms because our economy and
housing market are strong. This will not always be the case.
While I am, of course, not forecasting a downturn, I do
believe it is my responsibility as a potential regulator to
hope for the best but to prepare for the worst.
Therefore, I intend, fulfilling my statutory duties, to
strengthen FHFA, enable the enterprises to build capital to
match their risk profiles, and to end the conservatorships.
These reforms are critical to building a resilient mortgage
finance system that protects taxpayers and delivers a diverse
range of housing options at affordable prices. In the interim,
I believe modest reforms can help me do my job better.
For instance, in June I asked Congress for the authority,
similar to other financial regulators, to develop broader
capital standards and to charter new enterprises. These
commonsense proposals that other financial regulators have
these powers need not wait for broader reform.
In far too many areas of our Nation, we face an affordable
housing crisis. Too often this has been the result of misguided
local land-use and building regulations. In other areas,
housing supply remains constrained due to a lack of
construction labor. For the enterprises to play an important
role in addressing this crisis, they themselves must be fixed.
Adding more weight to an already cracked foundation is to
invite collapse.
Thank you again for the opportunity to testify, and I look
forward to your questions.
Chairman Crapo. Thank you, Director Calabria.
My first question is to all three of you, and this could be
a yes or no answer, but feel free to elaborate if you would
like to clarify.
Do you all agree that Fannie Mae and Freddie Mac are
systemically important companies, that they continue to be too
big to fail, and are even more leveraged now than they were
before the financial crisis? Secretary Mnuchin.
Mr. Mnuchin. Yes, in their current form, I do.
Mr. Carson. I would agree as well.
Mr. Calabria. Yes, in their current form.
Chairman Crapo. All right. Thank you.
I think I heard you each say this, but I want to ask it
again. Do you each agree that the ideal outcome is for Congress
to reach a comprehensive solution?
Mr. Mnuchin. I absolutely support that.
Mr. Carson. I think that would be the best permanent
outcome.
Mr. Calabria. I would emphasize that I believe only
Congress can reach a comprehensive solution.
Chairman Crapo. So by saying that, Director Calabria, that
does not mean that the Administration and the appropriate
regulatory agencies cannot make significant steps?
Mr. Calabria. Absolutely correct.
Chairman Crapo. And that leads to my next question, and
that is, as we work to get a solution here in Congress, do you
also agree that it is time for the Administration to act and to
start building the foundation and taking the necessary steps
that it can take in order to address this issue and actually
help Congress get to a comprehensive solution?
Mr. Mnuchin. We absolutely feel it is our responsibility to
work both tracks, but our priority is to work with Congress on
a bipartisan basis, and we will do everything we can to achieve
that.
Chairman Crapo. Thank you. Secretary Carson?
Mr. Carson. And I think, you know, housing is obviously
very important to everybody across any political spectrum. And
anything that we do is going to be questioned as biased. So,
yes, working with Congress is going to be the best way to do
it.
Mr. Calabria. Absolutely, Mr. Chairman, I think that the
Administration should move forward. I should move forward. I
will tell you, as a safety and soundness regulator, when I look
at a $3 trillion institution that is leveraged a thousand to
one, it keeps me up at night. So my focus is fixing that.
Chairman Crapo. Well, thank you, and I will answer that
same question back to you. I also believe that while it is the
proper role for Congress to solve this and that only Congress
can give the comprehensive solution that is needed, there are
significant reforms that can be accomplished and can help
actually move us in the direction of the reform that I have
outlined in my outline and that I believe we need to achieve
here in Congress. And I encourage you to act and to help us to
get to that point.
In that context--and this question really is probably more
specifically to Treasury and HUD--I would like you to talk a
little bit about what the next steps that can be taken should
be. And, again, in that context, it seems to me that a couple
of the important ones that I have identified in your reports
and in the discussion are capital and amending the PSPAs. But
whatever your answer to the question is, what do you believe we
should start seeing prompt action on?
Mr. Mnuchin. So our priority is to make sure that the GSEs
have more capital. We are in active discussions with the
Director and the FHFA about renegotiating our agreements with
them, which would allow for removing the net worth sweeps so
that we would allow a significant amount of capital to be
accumulated, but in return for that, make sure that the
taxpayers are compensated for the ongoing Treasury support. And
that is something that the Director and I hope to achieve very
quickly.
Chairman Crapo. Secretary Carson?
Mr. Carson. I think the most important things are obviously
refocusing Ginnie Mae and FHA on our primary mission, which is
providing opportunities for capital and credit to be extended
to nontraditional markets; also providing the tools to these
two entities that are necessary to deal with the various risks
associated with management; providing liquidity to the world's
largest financial market; and protecting the taxpayers. That is
really what a lot of this is all about, and what happened last
time around should never be allowed to happen again.
Chairman Crapo. Thank you. And in my last 30 seconds, I did
not mean to leave you out, Director. You have got a major role
here.
Mr. Calabria. Thank you, Mr. Chairman. Absolutely, my
primary focus at first is going to be trying to build capital,
but also trying to make sure that FHFA as an agency is ready
for a post-conservatorship world in terms of our supervision
function, in terms of the powers we have, and in terms of the
powers we may ask you that we may need.
Chairman Crapo. All right. Thank you. I made it with 10
seconds to go.
Senator Brown.
Senator Brown. I probably will not, Mr. Chairman. Thank
you.
Secretary Mnuchin and Secretary Carson, the Presidential
Memorandum that directed your agencies to complete the plans we
discuss today said those plans were to be submitted to the
President for his approval. A question to the two of you. Has
the President approved your plan, Mr. Secretary?
Mr. Mnuchin. We have briefed the President, and he has
accepted the plans?
Senator Brown. He has approved it?
Mr. Mnuchin. Well, I believe----
Senator Brown. Is accepted approved? Let me ask the
question. Has he approved the plan, yes or no?
Mr. Mnuchin. I do not know if he explicitly approved the
plan. We will get back to you. We briefed the President, and he
accepted the plans.
Senator Brown. So you handed it to him and he said, ``Thank
you for the plan.'' OK.
Mr. Mnuchin. Not we handed it to him. We briefed him. The
Secretary and I went through and extensively briefed him.
Senator Brown. OK, OK. I get it.
Secretary Carson?
Mr. Carson. I agree.
Senator Brown. OK. So is it possible he did not approve the
plan? Because he and his in-depth knowledge of finance and all
things Government knows they will make mortgages more expensive
and harder to get perhaps? You know, if the GSEs and FHFA cut
out their most profitable lines of business and still have to
cover their costs, they will have to raise rates on the
borrowers who are left. I mean, that is clear. It seems to me
that you cannot come here and say the President approved the
plan, even though he wanted--the whole process would be so that
he approved it, because the whole argument comes down to trust
Wall Street. Just trust Wall Street does not really work these
days. We should know.
Secretary Mnuchin, the majority of new households formed
between now and 2030 will be headed by people of color. We
already have a 30-point gap in home ownership between black and
white households, a 25-plus-percent gap between Hispanic and
non-Hispanic white households. This is not mentioned in either
of these plans.
In your press release, you said the Treasury Department met
with ``a wide range of stakeholders, including affordable
housing advocates.'' How does your plan reflect the priority of
civil rights organizations and the need for affordable housing
and community development and credit access for people of
color?
Mr. Mnuchin. Well, let me first just comment we disagree
that this is going to raise mortgage rates, and that we will
be----
Senator Brown. Of course you do.
Mr. Mnuchin.----very clear that we are very careful, we
support the 30-year mortgage, and we are not going to do
anything to jeopardize that for hardworking Americans.
Also, we very much support the duty to serve as well as
affordable housing goals, and we look forward to working with
you and with the Chairman----
Senator Brown. Not a lot of evidence that you support
those.
Mr. Mnuchin. Well, I believe we do. As a matter of fact, we
specifically say in the report, OK, that we believe in
affordable housing but we think that they should be replaced
with something that is more efficient, transparent, and
accountable. We want to make sure that affordable housing goals
are met and that the money is being used carefully. And I look
forward to working with you, so if you have ideas how we can do
this in a better way, we look forward to working with you----
Senator Brown. Well, we do. There was consensus, as I laid
out in my opening statement, and your staff--I do not know how
much of this you read, but your staff certainly saw this,
watched or at least is informed of those hearings where there
was consensus among almost the entire panels and the whole
industry that we could do these things. And you pretty much
ignored that in this.
But go back to this question. Why no mention of people of
color in this gap?
Mr. Mnuchin. I think we have referenced the duty to serve.
That is a very important issue that you have outlined, and this
is something that we look forward to working with you on.
I would say our priority is to make sure we maintain
affordable housing and duty to serve, but also to make sure
that the taxpayers are not at continued risk and we do not have
another bailout of these entities.
Senator Brown. Secretary Mnuchin, your plan calls for
shrinking Fannie and Freddie's role in the housing market,
cutting back on their activities, opening up their underwriting
systems for anyone else to use, giving away their data, giving
price advantages to their new competitors. You also say the
GSEs, all three of you said GSEs need more capital, and suggest
raising capital through an initial public offering, or an IPO.
You grew up in the private investor world and the Wall
Street world. You were a private investor. Would you invest in
GSEs under the Trump administration's plan to shrink them and
give away their assets?
Mr. Mnuchin. I would.
Senator Brown. And to raise the capital you say they need,
you would have to raise more money than any company in IPO
history right after the Trump administration has shrunk their
businesses and given away their most valuable assets in your
sort of cream-skimming privatization scheme that we have seen
in other parts of the Government? It just strikes me as highly,
highly unlikely that they can raise that kind of--they can have
that successful an IPO, that kind of money, considering what
you have done.
Mr. Chairman, before I close, I would like to enter in the
record a letter from 22 civil rights and affordable housing
organizations outlining their principles for reform; a letter
from eight civil rights organizations, the Urban League, the
NAACP, UnidosUS, Center for Responsible Lending, National Fair
Housing Alliance, National Community Reinvestment Coalition,
National Capacity, and the Leadership Conference on Civil and
Human Rights. These letters outline why these civil rights
leaders, what they see as the essential elements of a
sustainable, equitable housing finance system. Few of these
priorities, as we have seen from Secretary Mnuchin's answers,
or non-answers, few of them appear in the President's Housing
Plan.
Chairman Crapo. Without objection.
Senator Toomey.
Senator Toomey. Thank you very much, Mr. Chairman. Thank
you to our witnesses.
Mr. Chairman, first of all, thanks for kind of launching
this conversation with your thoughts recently about how to move
forward on GSE reform. I think what the Treasury report has
laid out is a very, very constructive set of ideas that we
ought to consider very seriously, and I want to thank all of
our witnesses for contributing to that.
Let me start by saying it is clear to me that it is a lack
of housing stock more than a lack of subsidies that is the
primary cause of an affordability problem, which is a real
problem. But it is a Government-inflicted problem. Now,
typically, it is State and local, but housing is not immune to
laws of physics or laws of economics. If there is not
sufficient supply to meet the existing demand, then it becomes
more expensive, and vice versa. And I never ceased to be amazed
by the jurisdictions with the most severe affordability
problems and the things they do to exacerbate the problems,
like San Francisco blocking an affordable housing development
because it casts a shadow on a park. OK? That is going to make
affordable housing more expensive. Or California as a whole
requiring that all new houses have to have solar panels
installed, thereby raising the cost of houses. And rent
control, which clearly and obviously exacerbates housing
shortages where it is imposed.
So, first of all, I want to thank Dr. Carson for important
work that you have been doing in identifying impediments to the
delivery of new affordable housing stock. And I guess I would
like to direct to Dr. Calabria, if there are things that we
could be doing in the reform, acknowledging that I think most
of these obstacles occur at the State and local level, are
there things we can do to go to the fundamental underlying
problem, which is inadequate supply?
Mr. Calabria. First, let me say I could not agree with you
more strongly that the fundamental problem is inadequate
supply. And the primary driver of that is State and local
regulations, and it really does concern me, the damage that has
been done to our economy and to affordability and to access
from these barriers. And this truly is causing an affordable
housing crisis in many parts of this country. And so we have to
recognize that while the mortgage market and mortgage finance
does play a role, it cannot fix this problem by itself.
I think the extent that we can encourage and work with
localities--and, again, I would applaud as well Secretary
Carson's effort in this regard to try to bring some focus on
trying to reform local land use and regulation.
Senator Toomey. So as I understand, the Treasury report
acknowledges that there is a statutory role to support
affordability. But as I read it, the report identifies a flaw
in the mechanism that the GSEs use, and as I think about it, it
seems to me that our GSEs use an indirect subsidy. In other
words, the subsidy does not go directly to people who have a
low income. The subsidy tends to go to high credit risk loans.
And you might think that high credit risk is a good proxy for
low income, but it is really not. A very wealthy person can
have an extraordinarily high risk loan.
Mr. Calabria. Absolutely.
Senator Toomey. And a person of very modest means could
have a very prudent and low-risk loan. So isn't it true that we
could design the subsidy in a more transparent, clear, and
efficient fashion, that if we are going to provide a subsidy,
it is actually targeting low-income folks rather than sort of
distorting and arguably encouraging more high-risk
transactions? And that is really for Dr. Calabria as well as
Secretary Mnuchin.
Mr. Calabria. Let me say I absolutely agree. A handful of
studies have looked at this question, and while the correlation
between income and credit is positive, it is weak. And so you
are right, there are plenty of high-income people who have poor
credit and plenty of low-income people who have good credit. So
I absolutely do believe we can better target the resources we
have in a more efficient manner to try to get people home
ownership that would not be there otherwise and get them in
sustainable home ownership.
Senator Toomey. Secretary Mnuchin, it seemed like you were
alluding to this dynamic a moment ago. Is there anything you
want to add to that?
Mr. Mnuchin. Yes, Senator Toomey. I agree with you
completely. First, we absolutely support wanting to make sure
there is affordable housing, but we want to do it in the most
effective way. And I think we would all agree that the previous
system did not work, and that is part of the reason why the
GSEs got into trouble.
So I would hope that this Committee will work with us on a
bipartisan basis to figure out what is the best way to deliver
this support in affordable housing.
Senator Toomey. Thanks very much. I do not have enough time
to get into my next line of questioning, Mr. Chairman, so I
will yield my last 13 seconds.
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you. Thank you to our witnesses.
I would like to start with an important issue for New
Jersey and many other communities represented by Members on
both sides of the Committee. As part of your plan, Treasury is
recommending that FHFA solicit information on whether to tailor
support for higher principal balance loans, which any
reasonable person would interpret to mean that Treasury is
seeking to lower conforming loan limits. Doing so would have a
seriously negative impact on the housing markets in States like
New Jersey.
So, Secretary Mnuchin, why would you recommend that the
FHFA ``solicit information'' on whether the FHFA should
effectively lower conforming loan limits if Director Calabria
asserts that the FHFA does not have the authority to
administratively change conforming loan limits?
Mr. Mnuchin. Congress has the responsibility on loan
limits. Having any changes would require Congress. Having said
that, we always think it is important to solicit information on
the markets, and specifically in New Jersey, we do not want to
do anything to jeopardize the housing markets in New Jersey.
And I completely understand in the tri-State area the cost of
living is significantly higher.
Senator Menendez. It is not just the tri-State area. There
are many places in the country in which----
Mr. Mnuchin. There are many, but I was just referring to
New Jersey and the places----
Senator Menendez. For me, it is not just simply--it is an
important local issue, but it is not a parochial issue alone.
So you do agree then, as Director Calabria said in his
testimony in his nomination hearing, that he does not have the
authority to administratively change those conforming loan
limits?
Mr. Mnuchin. I am going to defer to him on his legal
analysis, but I think our legal analysis is that is Congress'
responsibility.
Senator Menendez. Your legal analysis, Director Calabria,
is still the same as when you testified in your confirmation
hearing?
Mr. Calabria. Yes, Senator.
Senator Menendez. Thank you very much. So we have
established that.
Now let me turn to the multifamily rental housing, which is
a critical part of the housing market in New Jersey and across
the country. More than 18 million households in the United
States live in multifamily rental housing, including a million
New Jerseyans. The GSEs play a vital role by ensuring that
multifamily housing is widely available through the economic
cycle.
As you know, the multifamily businesses at Freddie and
Fannie performed quite well and remained profitable during the
worst of the financial crisis, a time in which we saw most
private investors exit this segment of the market entirely.
Secretary Mnuchin, the Treasury report recommends that
Treasury and FHFA should consider limiting support of the GSEs'
multifamily business. We heard from witnesses before this very
same Committee in the multifamily industry in March that
private capital alone cannot fill the void that would be left
without GSE financing, and that would mean aggravating the
housing crisis that already exists in States like New Jersey
and across the country, leaving renters with fewer and more
expensive housing options.
Have you conducted any analysis on what private sector
financing for the multifamily housing market would look like if
the GSEs' capacity to purchase multifamily loans is curtailed
as described by your plan?
Mr. Mnuchin. Well, I am not sure we necessarily think it is
curtailed. I think we just need to look at it in the risk
context. And I know there are external people who thought the
GSEs should get out of the multifamily business. I do not agree
with that. I think that the GSEs absolutely need to be in the
multifamily business. I would say that, more broadly, there are
issues given the GSEs' exposure in multifamily. There are
obviously certain rent control rules and others that have now--
I am concerned are going to limit the housing stock. So we
absolutely----
Senator Menendez. So you did not conduct an analysis here.
Let me ask you this other question as a follow-up then. What
makes you confident that the private market can fill the void?
Or do you not believe that the private market can fill the
void?
Mr. Mnuchin. I am not saying that the private market can or
cannot fill the void, but we are going to continue to do more
analysis. We are just saying that we want to make sure that the
GSEs have the appropriate risk. So we very much support
multifamily lending with the GSEs.
Senator Menendez. All right. Finally, Secretary Carson, on
a different but urgent matter, in previous cases where lead was
found in drinking water systems, Federal assistance was
critical in helping communities remediate their water systems
and reduce potential lead exposure. As I am sure you know, the
city of Newark
recently discovered elevated lead levels from some limited
water samples. I have already called on the EPA to provide on-
the-ground support and technical assistance, but I believe HUD
needs to be part of the solution as well. In 2016, HUD assigned
a full-time staff member to assist HUD residents in the greater
Flint region and provide technical assistance to city and State
agencies.
So I want to ask you, Mr. Secretary, as the city of Newark
and the surrounding communities continue to address this issue,
would you commit that if HUD-assisted properties are affected,
you will assign a full-time staff member to assist both HUD
residents and city and State agencies looking to tailor their
CDBG funding to mitigate the risks of lead?
Mr. Carson. Well, thank you, Senator, for your interest in
this, and thank you for the help that you gave us on the carbon
monoxide poisoning as well.
As you have noted in our budgetary request over the last 2
to 3 years, we have placed a great deal of emphasis on lead and
on communities that are affected by it. So I will commit to
continuing to do that and continuing to raise the profile of
this issue in New Jersey and elsewhere.
Senator Menendez. I appreciate that, but my specific
question, Mr. Chairman--and I appreciate your indulgence a
moment--is: Would you commit, as we did in Flint, to have a
person who is designated for Newark and the surrounding
communities that are affected by this to assist them as it
relates to the flexibility that has been shown in the past in
CDBG funding?
Mr. Carson. I will commit to doing everything that we
possibly can do to alleviate the problem there, and if that
involves a specific person or a dozen specific people, we will
do what is necessary.
Senator Menendez. All right. Thank you, Mr. Secretary.
Chairman Crapo. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman, and thank you,
gentlemen, for appearing here today. Thank you, Secretary
Carson, in particular for coming down to Arkansas earlier this
year.
I want to return to an issue that Senator Toomey touched
upon, and that is restrictions on supply in housing, and
especially local restrictions. It sounded like we had some
agreement between Senator Toomey, a well-known conservative
mind when it comes to housing and finance policy, and our
Republican witnesses. I just want to read from another
statement about these restrictions and get your response to
them, in particular, Secretary Carson and Mr. Calabria:
Locally constructed barriers to new housing development include
beneficial environmental protections or well-intentioned
permitting processes or historic preservation roles, but also
laws plainly designed to exclude multifamily or affordable
housing. Local policies acting as barriers to housing supply
include land use restrictions that make developable land much
more costly than it is inherently, zoning restrictions, off-
street parking requirements, arbitrary or antiquated
preservation regulations, residential conversion restrictions,
and unnecessarily slow permitting processes.
Secretary Carson, does that sound like a pretty good
catalogue of local restrictions that reduce affordable housing
supply?
Mr. Carson. That sounds like a good catalogue, and,
interestingly enough, what we have observed, in areas that have
the greatest affordable housing needs and the largest number of
homeless people, we have the largest number of restrictions. If
you look at a place like San Francisco, the median home price
in the San Francisco Bay Area is $1.6 million, and you look at
Los Angeles with the requirements for solar paneling, and a lot
of this, quite frankly, is because of NIMBY-ism, you know, not
in my back yard. But NIMBY-ism is actually based on archaic
thinking. They believe that the Federal Government still acts
the way that it used to, you know, building these gigantic
complexes with little forethought, afterthought, or an
immediate thought or support. And that is not what is done
anymore. Now we are talking about public-private partnerships.
We are talking about multiple incomes. We are talking about
conforming to the architectural and cultural issues in the
area. We are not talking about putting a multifamily house or
complex in the middle of a single-family neighborhood. People
have wrong impressions of what we are doing.
We actually care about what people think, but it can be
done in the right way so that firemen and policemen and nurses
can live in the same neighborhood where they work. I think that
actually enhances the community.
Senator Cotton. Mr. Calabria?
Mr. Calabria. Let me say I very fully agree, and I think
part of the problem is, particularly in places like California,
the process just has multiple vetoes where people can object
and object to construction, and you do need streamlining of
that. That said, I think we should look to cities that have
done a good job. As Senator Smith is aware, Minneapolis
recently has upzoned and I think done a very smart maneuver
there on the local level that will help affordable housing in
that area. So I think there are good lessons to learn as well
as some lessons to learn in cities that do not work.
Senator Cotton. Well, that long catalogue of local
restrictions that retard the supply of affordable housing comes
from none other than President Barack Obama's White House
Housing Plan in September of 2016. So I hope now that we have
agreement between President Barack Obama, Mark Calabria, Ben
Carson, and Pat Toomey that we could try to address this
problem perhaps by looking at ways to condition grants on more
affordable housing policies at the local level.
Another local policy, of course, is education policy.
Anybody who has a child that has been going to school knows the
pressure of getting in a good school district. I want to read a
few quotes from a well-known book about the stress on middle-
class families:
In the overwhelming majority of cases, a bureaucrat picks the
child's school, not a parent. The way for parents to exercise
any choice is to buy a different home, which is exactly how the
bidding wars started.
The crisis in education is not only a crisis of reading and
arithmetic. It is also a crisis of middle-class family
economics. At the core of the problem is the time-honored role
that where you live dictates where you go to school. Any policy
that loosens the ironclad relationship between location,
location, location and school, school, school would eliminate
the need for parents to pay an inflated price for a home just
because it happens to lie within the boundaries of a desirable
school district. A well-designed voucher program would fit the
bill neatly. Fully funded vouchers would relieve parents from
the terrible choice of leaving their kids in a lousy school or
bankrupting themselves to escape those schools. If a meaningful
public school voucher system were instituted, the U.S. housing
market would change forever.
Gentlemen, those quotes are from----
Mr. Calabria. Elizabeth Warren.
Senator Cotton.----Senator Warren's book from 2003 in
support of a school voucher program. I know that you do not do
education policy, but do you agree that local education rules
can negatively impact affordable housing prices?
Mr. Calabria. I do, and let me also say her passages in
that book on housing subsidies are a delightful read that I
would encourage Members of the Committee to take a look at.
Senator Cotton. I know my time has expired, but perhaps you
can find an ally on the other side of the aisle, along with
Secretary DeVos, to both improve the quality of education in
America and affordable housing. Thank you.
Mr. Calabria. Thank you.
Chairman Crapo. Senator Tester.
Senator Tester. Thank you, Mr. Chairman and Ranking Member
Brown, and I want to thank all the folks who are testifying
today. I will tell you at the onset it is good to have you in
front of the Committee. I wish we had you in front of the
Committee more often. It does not happen enough that we have
folks from the Administration here to visit with us.
Dr. Carson, you are always welcome back in Montana, too.
Mr. Carson. Thank you.
Senator Tester. You got a chance to see some rural housing.
And I do not want to talk about housing in San Francisco or LA
or Denver, New York City or Atlanta or Miami or Houston. I want
to talk about housing in Miles City and Plentywood and Great
Falls and Billings and Missoula, in Pablo, in Rocky Boy,
because, quite frankly, we are talking about large cities, and
we have got just as big a crisis in rural America, if not
worse, and nobody is paying attention to it.
So I want to start with you, Secretary Mnuchin. When this
plan was developed, how much effort was put into getting
information from rural/frontier America on affordable housing?
Mr. Mnuchin. Well, first, let me say I enjoyed visiting
many of those places during the President's campaign, so I put
Montana----
Senator Tester. Yes, you were there, and even during my
campaign. I do not know if you were with him or not, but----
[Laughter.]
Mr. Mnuchin. So I very much appreciate and support this
should not be a big-city housing plan.
Senator Tester. Right.
Mr. Mnuchin. This should be a housing plan that impacts----
Senator Tester. Right, but the question is: How much
information did you gather when you developed this plan from
rural/frontier areas? Because, you know, rural is the area
between Baltimore and Washington, DC, in some people's eye. We
do not have that kind of population in Montana, even in our
most populated areas. So how much information was gathered
from----
Mr. Mnuchin. I think we solicited from a variety, but I am
going to get back to you on the specifics.
Senator Tester. I would appreciate it.
Mr. Mnuchin. But I assure you, more importantly, I
understand the point that you are trying to say, and this
should very much help the people in Montana, not just the
people in New York and California.
Senator Tester. Well, it is critical, and I will get into
that in a second. But when it comes to regulation of shadows
and solar panels and rent control, those are really good issues
for us to talk about here. But Miles City, Montana, the only
regulation is you cannot build in a floodplain. OK? And we
still do not have housing. So that is the point. And in your
plan, I just want to get an idea, you talked about they need to
serve--the guarantors need to serve a national market, but then
it is also suggested that Congress should not require
guarantors to serve a national plan but in individual markets.
Where are you on that? And I assume what you are saying is
that you want to have a rule that supports national service,
but Congress should undermine that and make it individual
markets.
Mr. Mnuchin. No, no, that is not the case.
Senator Tester. Tell me what it says then.
Mr. Mnuchin. We support the national concept, but we are
looking at that and saying it cannot just be a national plan;
it also has to have specific plans, as you said, that impact
places like Montana and make sure that they are not left
behind.
Senator Tester. So the intent was to promote more access
for rural frontier areas.
Mr. Mnuchin. Yes.
Senator Tester. Could it be used to do exactly the
opposite, though?
Mr. Mnuchin. Well, that is not our intent, and as I said,
our priority is to work with Congress so that there is clarity
in these issues. We want to make sure, whether it is this
Director or any other future Director, it does not change----
Senator Tester. I just want to make sure, though, Secretary
Mnuchin, that--you are saying the right things right now, but
the truth is if you have a national plan and then it can be
undermined to serve just individual markets, it looks to me
like it would actually--money would flow to the bigger areas
where there is more population.
Mr. Mnuchin. That is not our intent. And, again, working
with Congress, we will refine and define these issues.
Senator Tester. OK. So let me talk about the 30-year fixed-
rate mortgage for a second because in the report it ultimately
suggests maintaining the 30-year fixed-rate mortgage, but it
also says it is possible that a 30-year fixed-rate mortgage
loan could remain widely available and at similar prices under
a market structure that does not depend on Government support.
Can you tell me why this line is in there?
Mr. Mnuchin. Well, I think there is--first of all, again,
let me just emphasize, we very much support the 30-year
mortgage, although I will say the 30-year mortgage might not be
for everybody, and there are different products----
Senator Tester. I got it, but what I hear that saying is
the 30-year fixed-rate mortgage could exist without any
Government backing. Do you guys believe that?
Mr. Mnuchin. No, we do not. There could be parts of the 30-
year mortgage market--i.e., the large jumbo market--that do not
need Government guarantees and will have a 30-year mortgage.
Senator Tester. So you would agree, without that Government
backing of a 30-year fixed-rate mortgage, that it would have a
pretty negative impact on housing, whether it is--regardless?
Mr. Mnuchin. We need either an implicit or an explicit
Government backing, and that is why we would rather have the
taxpayers compensated for explicit support
Senator Tester. I used your and Toomey's over, so thank
you.
[Laughter.]
Chairman Crapo. I noticed. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman, and I want to
thank you and our panelists for the hard work on these
proposals. Housing finance reform is a difficult issue to
tackle, and I appreciate their dedication to ending the decade-
long GSE conservatorship.
There is something else as well I would like to just add at
this time. There are challenges within housing within the
United States in rural areas, as my colleague on the other side
of the aisle has just indicated. I am just going to give an
example, and I know, Secretary Carson, we had a discussion on
this the other day. Indian reservations, Native Americans, have
a real challenge because we have Indian trust lands, and trying
to find a way to move forward so that they can also purchase
houses is something that is of real importance in South Dakota.
Just as an example, the VA, they do VA loans for Native
Americans who are veterans who now live back on a reservation.
The Minneapolis office about a year ago received recognition
because they had the highest number of those mortgages that had
been issued in the previous year--five in the entire region.
Simply not acceptable. There has got to be a way forward.
And so we look at this, I do not think this is a Republican
issue or a Democrat issue. I think this is a case of where we
have to find a way forward to fix the challenges.
I would like to say to all of my colleagues on both sides
of the aisle that I believe that the door should be open when
it comes to working out pathway forward to ending
conservatorship of the GSEs.
Chairman Crapo was able to come to a consensus with then-
Chairman Tim Johnson, who was my predecessor, about how to
unwind conservatorship in a bill that passed out of Committee
on a bipartisan vote. There is no reason that we should not be
able to navigate those same concerns today.
Today's hearing should also serve as a warning. As we have
all read, the Trump administration is determined to bring the
GSE conservatorship to an end, and it has clearly defined ways
that it can do so. While my colleagues might object to certain
parts of the Administration's plan, these objections are no
justification for not attempting to at least find a path
forward within this Committee. There is common ground that
could be had, and it is very unfortunate if we are not able to
hold a markup on this approach.
It has been 500 days since this Committee has held a
markup. If your concerns are genuine in this Committee, if our
Committee Members are serious about doing something, I think
this is the time in which we can perhaps find some common
ground.
My first question I would like to direct to Secretary
Carson. Mr. Secretary, I note with great interest HUD's
proposal to transform the Federal Housing Administration into
an independently chartered Government corporation. Now, I agree
with HUD that this would provide FHA with the autonomy it needs
to better execute its mission, especially serving first-time
and low-income home buyers, while still allowing for HUD to
have oversight and regulatory authority.
I would like to point out to my colleagues on the other
side of the aisle that this is not an idea that comes from the
radical right. President Obama's FHA Commissioner, Carol
Galante, has proposed the same reform. Nonetheless, Mr.
Secretary, I have drafted legislation that would do just as you
proposed, but some of my colleagues have expressed reservations
that reforming the FHA into a Government-chartered corporation
would impact HUD's funding for other programs. My view is that
the receipts from FHA mortgage insurance would still be
available to offset the costs of other HUD spending.
I have offered to give my colleagues on the other side of
the aisle an opportunity to rewrite or to have input into this
section of the bill, but so far I have not received any takers.
My question is: Could you briefly discuss how to achieve a
more independent FHA without jeopardizing HUD's funding?
Mr. Carson. Thank you for that question, and I did very
much enjoy our time I spent in your State. Interestingly
enough, we have not said anything about the receipts all being
swept into any particular area. So that obviously is not going
to be a particular problem. The reason that we want to separate
it out into an individual corporation very much like Ginnie Mae
is so that they can have the flexibility of doing their own
procurement, their own hiring, staffing, being able to respond
quickly and with agility to market conditions that occur. They
would still report to the HUD Secretary, and we would still be
able to align our missions.
So consider the fact that right now the FHA Commissioner
has to deal with a lot of housing assistance needs also. Those
really require their own separate entity so that we can really
concentrate on public housing, you know, on multifamily, in a
way that it should be concentrated on.
Senator Rounds. Thank you, Mr. Chairman. My time has
expired. I would ask for the opportunity to ask several
questions for the record that I would ask you all to respond
to.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Crapo. Senator Warner.
Senator Warner. Thank you, Mr. Chairman. And good to see
the witnesses.
I have spent a lot of time on this subject over the last
many, many years, and where I want to focus today, Secretary
Mnuchin, is particularly less on what you aspire for
legislatively but what potentially might happen
administratively. And I have to say at the outset I am a little
concerned that it appears to me from your administrative
proposals, we could end up with a system that actually does not
end too big to fail and does not increase affordable access to
credit, and that is of grave concern to me.
First of all, I want to associate myself with Senator
Menendez, who I think rightfully pointed out that in
multifamily, not a problem, was not part of the crisis, but in
the administrative component of your proposal, you are trying
to lower the GSE multifamily caps. To me, that means smaller
support for multifamily. I am concerned about that.
Also in your administrative proposal--so, again, let us not
talk about legislatively--we continue to see this theme around
trying to lower the GSE footprint. If we have a lower GSE
footprint, if we have higher capital requirements, just the
logic of that would mean you would have a much smaller revenue
base, and under that
assumption, wouldn't that mean the GSEs would deliver less
cross-subsidy in the system?
Mr. Mnuchin. First, I just want to acknowledge the work
that you have personally done on legislation, and I truly hope
that you will work with us because I know you have spent a lot
of time on this. And as----
Senator Warner. I know more about this subject than I ever
wanted to know.
[Laughter.]
Mr. Mnuchin. Exactly. And we hope not to lose all that
knowledge.
So, you know, again, I just want to--when we comment on
multifamilies, the GSEs have gone from 25 to 40 percent of
market share, which I think is fine. We are not looking to take
it back down to 25 percent. We just do not want to see it go
higher than----
Senator Warner. Administratively, I thought you said you
wanted to lower the GSE multifamily caps.
Mr. Mnuchin. Again, we want to----
Senator Warner. Which I would read as slowing down. Go to
my other question, though, which is if you are lowering--making
the footprint smaller, if you are raising capital, which is
appropriate, isn't that going to mean de facto a decrease in
the cross-subsidies that take place?
Mr. Mnuchin. No, not necessarily.
Senator Warner. How do we do that?
Mr. Mnuchin. Again, I think that cross-subsidy is something
that we have. As we have talked about, some of it is efficient;
some of it is inefficient. Again, our priority----
Senator Warner. I would like to see some more detail on
that. I do not, respectfully, see how you make that happen.
Dr. Calabria, let me ask you this: If you end up on your
administrative and in the net worth sweeps, will you continue
to fund the Housing Trust Fund? Just give me a yes or no.
Mr. Calabria. As long as the conditions in the statute that
require it, yes.
Senator Warner. So you will sweep all the profits and try
to buildup capital, but you are committing here to continue to
fund the Housing Trust Fund?
Mr. Calabria. As long as the conditions in statute are met
for funding it, then yes, absolutely.
Senator Warner. There is a great deal of discussion about
whether----
Mr. Calabria. What the statute says, agreed. But I am bound
by what the statute says.
Senator Warner. Now, my sense is, Secretary Mnuchin, that--
you know, I know you talk about potentially for additional
entrants coming into the market, but my concern is on your
administrative proposal that what you are really talking about
on Fannie and Freddie is recap and release, which is going to
keep us with a duopoly, even with higher capital standards,
which it is going to put us right back to where we were prior
to 2008. I do not know how that gets rid of our too-big-to-fail
issue.
So one of the things you answered, you both addressed when
Senator Crapo raised about as currently constituted, these
entities are too big to fail. If you go forward--and this is
both for Dr. Calabria and Secretary Mnuchin. If you go ahead
and go through on your recap and release plan, would you both
recommend that the GSEs be designated as SIFIs by FSOC?
Mr. Mnuchin. Thank you. I think that is an important
question. So, first, let me just say we do not believe in a
simple recap and release. I want to make that very clear.
Second----
Senator Warner. That is not the way, respectfully, I read
your proposal, but continue.
Mr. Mnuchin. I just said I want to make that very clear.
The second thing I would say is we absolutely would expect,
either in the administrative way or working with Congress, that
we would go to FSOC, and before we raised public capital, we
would make sure we understood that there was enough capital so
that they did not need to be designated.
Senator Warner. Dr. Calabria?
Mr. Calabria. I would agree with the Secretary's statement
there.
Senator Warner. So neither one of you think under your
recap-and-release scheme that the GSEs will be SIFI designated?
Mr. Calabria. Senator, as a member of FSOC, while I believe
that there is more than sufficient information to begin a
process, I also think it is important as a member of FSOC to
never start with the presumption that any entity is necessary
systemic until you have actually run the process.
Senator Warner. The only thing I would just point out, Mr.
Chairman, is that when you and the Ranking Member had, I
thought, a very helpful hearing on this, I believe every
witness across the ideological spectrum thought that the GSEs
should receive that FSOC SIFI designation. And, again, this
concerns me gravely that we could somehow end up with a scheme
where we end up with a duopoly, somehow they are not even going
to get SIFI designation, and I believe we are right back in the
middle of too big to fail.
Thank you, gentlemen.
Chairman Crapo. Thank you, Senator Warner.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Mr. Director, as an American, do you believe that I have a
right to own a home even if I cannot afford it?
Mr. Calabria. I think you have a right to own property,
yes, own a home. Now, whether you can afford it opens up to
whether you can actually buy that home. I mean, it is the same
in terms of you have the right to drive a Mercedes. Whether you
can afford it or not is a separate question.
Senator Kennedy. Right.
Mr. Calabria. So I am not sure where you are going with the
question, Senator. It would be helpful for me to parse that
out.
Senator Kennedy. I just want to understand your philosophy.
Do you think that as an American, if I cannot afford a home, I
have a fundamental right to have other Americans subsidize me?
Mr. Calabria. Thank you for the clarification. The short
answer would be no.
Senator Kennedy. OK. I think everybody on this Committee, I
think everybody on this panel believes we ought to do
everything possible to make homes and mortgages affordable.
Mr. Calabria. Absolutely.
Senator Kennedy. OK. We can agree on that, right?
Mr. Calabria. Absolutely, 100 percent.
Senator Kennedy. Why would a lender make a loan without
verifying income?
Mr. Calabria. Agreed.
Senator Kennedy. Why would they?
Mr. Calabria. I think the only reason that a lender would
reduce due diligence like verifying is because they can pass
that risk along to someone else----
Senator Kennedy. Yeah.
Mr. Calabria.----like the taxpayer.
Senator Kennedy. Yeah, because they can sell it to you
guys.
Mr. Calabria. Absolutely.
Senator Kennedy. I mean, isn't that the fundamental problem
here, how we got in trouble, was underwriting standards?
Mr. Calabria. Absolutely. We are the ones holding the bag
at the end of the day. After everybody else in the process has
made money and walked away, it is the taxpayer holding the bag.
Senator Kennedy. Well, what have you done to fix that?
Mr. Calabria. Well, Senator, we have begun--I guess
tomorrow will mark 5 months in the job. We have already started
doing a bunch of due diligence internally, try to make sure
that we have the regulatory----
Senator Kennedy. That was not a fair question. What did
your predecessor do to fix that over 11 years?
Mr. Calabria. Senator, I think that, to me, I am looking at
what needs to be done going forward. Obviously, I would have
preferred to have inherited a different situation than I did,
but----
Senator Kennedy. Excuse me for interrupting, but, you know,
we are limited on time, Mr. Director. Have underwriting
standards gotten any more realistic?
Mr. Calabria. They have gotten worse, not better. Certainly
at the GSEs, we saw a massive expansion the last 2 years, at
least, where a whole lot of high-income, high DTI loans were
done that were not previously being done. So underwriting
standards have eroded.
Senator Kennedy. Yeah, that is what I thought.
Mr. Calabria. And it concerns me greatly.
Senator Kennedy. Well, this is just one point of view. This
whole thing is a car wreck. It is a Dumpster fire. We spent
$190 billion of taxpayer money, and we are in worse shape.
Mr. Calabria. Agreed.
Senator Kennedy. Now, here is what I think we ought to do.
I am not in love with every aspect of your plan, but I would
encourage you to get somebody to put it in the form of a bill,
if you have not already, get it introduced, and let us mark it
up in this Committee, Mr. Chairman and Mr. Ranking Member. Let
us put it in front of the Committee, and let Senators be
Senators, and let us try to put out the Dumpster fire. What do
we have to lose? I mean, how long have we been talking about
that? Doing nothing is hard. You know why? You never know when
you are finished.
[Laughter.]
Mr. Calabria. Senator, I could not agree more.
Senator Kennedy. Now, if that does not work--and I am not
going to mislead you--it is going to kind of be like slamming--
trying to slam a revolving door, to pass a bill through the
Senate. I would encourage you, Mr. Director, to saddle up and
go. Tell me what you can do with your administrative authority
to put out this Dumpster fire.
Mr. Calabria. Well, the first thing we----
Senator Kennedy. And by that I mean encouraging people to
make loans to people who clearly cannot afford to pay them
back.
Mr. Calabria. Senator, we will be de-risking the GSEs,
particularly in the----
Senator Kennedy. What does that mean?
Mr. Calabria. That means that, on one hand, if you are
leveraged a thousand to one, you cannot make loans that are
almost guaranteed to go bad. So we have to be able to improve
the quality of the lending of the GSEs in a way that is
sustainable, that does not end up--I 100 percent agree. If we
do nothing, this is going to end very badly, and----
Senator Kennedy. Well, of course it is. We are going to
have a recession at some point.
Mr. Calabria. Absolutely.
Senator Kennedy. What was the leverage ratio, Mr. Chairman,
19 cents for every $100?
Chairman Crapo. That is what I understand.
Mr. Calabria. A thousand to one at Fannie Mae.
Senator Kennedy. Now, let me say it again. I have got 1
second left. Let us put this bill in front of this Committee,
Mr. Chairman and Mr. Ranking Member, and let us see what we can
do. I listened to Sherrod's comments. He made some good points.
I do not agree with all of them, but I think we ought to flesh
it out. But if we are not, let us just admit that Congress is
going to sit on its ice-cold lazy butt, do nothing, and you
need to get started trying to fix this car wreck, Mr. Director.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Jones.
Senator Jones. Thank you, Mr. Chairman. Thanks to the
witnesses.
I want to follow up on my friend Senator Kennedy. I
absolutely agree with that, completely agree. We need to get
this in front of this Committee. We need to get it, and we need
to hash it out. But with all due respect to the Senator, I
think we need to go farther than just this housing issue in
this Committee. We need to get things to the floor of the U.S.
Senate. We need to talk about gun violence. We need to talk
about health care. We need to talk about election security.
There are a lot of things that this Congress of the United
States and the Senate of the United States need to act as the
independent body that the Constitution set up and not just
somebody that is there only if the President of the United
States is going to sign a bill. So thank you, Senator, and I
apologize if I took it a little further than what you
anticipated. But I completely agree.
The second thing, a quick comment, Secretary Mnuchin, and I
will follow this up for the record. I believe that you earlier
testified that--and I could be wrong, but I thought I heard you
testify that the duty to serve the very low-, low-, and
moderate-income families in this country was maintained in this
report. I do not read this that way. I see on page 23 and 24 of
the report where you are talking about reforming that, getting
rid of that mandate, and replacing it with something that would
involve assessments and congressional appropriations, which I
think is a really slippery slope to try to do. As much as I
like Senator Leahy and Senator Shelby's approach to
appropriations, that may not always be the case and subject to
the whim of a Congress or the Administration. So I will follow
up with a question for the record.
Senator Jones. There is one area I do want to talk about
with Dr. Carson. Mr. Secretary, while I appreciate the
Administration's efforts to move forward on housing reform, I
do believe that overall these reforms are going to make it
harder for working-class families to achieve home ownership and
potentially put the dream of home ownership out of reach. In my
view, open the discussions on that.
But, more importantly, while these reforms are being
discussed today, I think we also have to talk about some other
so-called reforms that the Administration is making to housing
in America. We have not seen you here for a few months--a year
and a half, as a matter of fact. I do not know if we will get
to see you again at any time in the future, so I want to ask
you about a recent HUD proposal regarding our rules that I
believe are going to dramatically undermine the ability to
enforce the Fair Housing Act. I have thought time and time
again in this Committee and others that housing discrimination
in 2019 is persistent, but more often than not subtle, not
always direct, and years of legal doctrine, including the
Supreme Court, made it clear that if policies and practices of
businesses unintentionally discriminate against racial minority
or protected classes, it is illegal. It is called ``disparate
impact,'' and the new rules I think make it nearly impossible
to bring forward a discrimination case based on disparate
impact. Fair housing is only as far as it can be enforced, and
if we cannot bring disparate impact housing by very nature, it
ain't fair. And I am concerned about this; every single major
housing rights and civil rights advocate agreed that this rule
is a major blow. Across the board, this rule introduced new
hurdles for plaintiffs, including a new five-part test.
Mr. Secretary, I think we can all agree that housing
discrimination still exists in this country. Black
homeownership rates are down to just 40 percent. That is not
just because of discrimination. I get that. We are still
pulling out of a recession. But the fact is they are down to 40
percent, and black home ownership is actually lower now than it
was in 1968 when the Fair Housing Act was passed.
I would also like to point out that you have the ability to
bring Secretary-initiated complaints. President Obama did it an
average of ten times a year. President Bush did it an average
of five times a year. But in the 2 \1/2\ years of the Trump
administration, we have zero that you have initiated. So a
cynic would say that this new rule is in part to justify the
inaction of HUD in bringing these complaints when we know that
they exist.
So my question to you, sir, my question is simply: Explain
this to me. Explain why we need this rule. Why is it important?
Why do we need this when we know it exists? Give me an
opportunity, give us an opportunity to explain why you are
going to make it nearly impossible for people to bring
disparate impact statements.
Mr. Carson. Well, first of all, let me just mention the
fact that our record stands for itself. The fact of the matter
is, you know, we have initiated the Facebook complaint. We have
gotten an agreement out of Los Angeles after almost 10 years of
not taking care of disabled people's housing needs. We have
launched one against San Francisco for discriminating against
low-income people for housing. And if you look at our list of
suits that have been brought, I think they would compare
favorably with anyone else.
As far as disparate impact is concerned, we are trying to
bring it into alignment with the Supreme Court ruling for----
Senator Jones. Oh, come on, Mr. Secretary. I am a lawyer.
That dog is just not going to hunt. It is just not. This is
not--the Supreme Court barely rolled back this. What you are
doing is making--I have been practicing law for 40 years. What
you are doing is making it just damn near impossible for a
plaintiff to bring a disparate impact statement. It is not in
line with the Supreme Court. The Supreme Court has affirmed
this time and time again.
Mr. Carson. In fact, we brought a complaint against San
Francisco on disparate impact. You should go back and read it,
and----
Senator Jones. I will take a look. I am happy to do that.
Mr. Carson. But the fact of the matter is, if Congress, for
instance, were to raise the minimum wage rate to $15, who would
be disproportionately affected? Low-skilled or unskilled
workers, primarily minorities, in that area. That becomes a
disparate impact against Congress. You begin to see what I am
talking about here. You can have a disparate impact in almost
anything. So what we want to do is clarify the way that it is
done that would save taxpayers a lot of money.
Senator Jones. All right. My time is up, sir, and I may
follow up for the record. Let me just say this: It has been
offered out for public comment, and I want to make sure that my
public comment is recorded right now. If I need to do it in
writing with a black Sharpie, I am happy to do that. But this
is wrong. This is absolutely wrong, Mr. Secretary. This
discrimination still exists in this country. We need to be
affirmatively doing something about it and not making it more
difficult.
Mr. Carson. I would love to discuss it with you.
Senator Jones. Thank you. Anytime. My door is wide open.
Chairman Crapo. Senator Moran.
Senator Moran. Mr. Chairman, thank you.
Both HUD and Treasury proposals suggest that there be a
distinct separation between the borrowers that use FHA
financing and those that use GSE financing. How would this be
achieved, and how would this separation help home buyers? Dr.
Calabria?
Mr. Calabria. Thank you for the question, Senator. I think
the objective here which Dr. Carson talks about in his
testimony is to try to reduce that competition at the margin,
which has historically driven down credit standards. We
certainly saw before the crisis where the GSEs aggressively
tried to grab FHA market share and did so by reducing their
standards. And, of course, many of those loans unfortunately
turned out unsustainable and left homeowners in a position
where they lost their homes. So, again, trying to encourage
responsible, sustainable home ownership is the objective.
To echo what Dr. Carson again has said, traditionally FHA
has focused on the first-time home buyer, low-downpayment part
of the market. And I think, first of all, I want to emphasize
the objective here is not to have any gaps in the market, but
the objective is to reduce some of that competition which has
eroded standards in the past.
Senator Moran. So it seems to me that our goal is to have a
multiple guarantor system, and that is to boost the
accountability to taxpayers. I assume that you all could tell
me there are things that go on at the GSEs that deserve our
attention in regard to accountability to taxpayers. We want
financial innovation. We want greater consumer choice through
competition.
When we separate the GSE and the FHA, does that help
achieve those goals?
Mr. Carson. Who is that for?
Senator Moran. Whoever has the answer that is one I can
understand.
[Laughter.]
Senator Moran. And succinct.
Mr. Carson. Well, I can speak for the FHA, and what our
goals are and what our principal focus is in this
reorganization is so that we can concentrate on those first-
time home buyers, on minorities, on people who frequently do
not have access to traditional credit markets. And this plan
actually facilitates that rather than takes away from it.
Senator Moran. One of the things, it seems to me, that the
GSEs have been able to accumulate in this timeframe that we are
in is greater access to technology and information. So if we
have a new system, how do we force the sharing of the benefits
in data and technology that those already established in the
business have?
Mr. Carson. Well, I can tell you that the GSEs were able to
significantly upgrade their IT performance while they were in
conservatorship thanks to the taxpayer. Therefore, what they
have achieved in that area they should be willing to share, and
I think they recognize that, and I think Congress should
recognize that.
Senator Moran. So you would see an increased transparency
in sharing that GSE data and other information with the
industry. Could that be a precondition to release from the
conservatorship?
Mr. Mnuchin. I think that is really the question for the
FHFA, but I would agree with what you are alluding to, that
these are one of the issues that we should be looking at.
Senator Moran. Tell me where we are in regard to
capitalization and where we need to be. What level of
capitalization do you see is necessary--maybe this is for you,
Mr. Secretary--at the GSEs to operate efficiently and, most
importantly, to withstand any future significant financial
downturn?
Mr. Mnuchin. I think they need a lot of capital, let me
just say. You know, what we are looking at now, $3 billion in
each, is irresponsible in terms of the amount of capital that
they have, and there is no way they could operate if it were
not for the fact that they could draw on the Treasury lines,
which, in essence, act as a capital backstop today.
So we really see two things. One, retaining earnings, that
is one way we will accumulate capital. And then, two, we will
have to raise third-party capital. But, you know, again, if I
were to give you a range of a number, it is more like $100
billion than it is $6 billion.
Senator Moran. What is the capitalization today compared to
where we were before the crisis of 2007-08?
Mr. Mnuchin. It is minuscule today.
Senator Moran. So we are in worse shape going into any kind
of significant major economic downturn than we were when we had
the catastrophic consequences----
Mr. Mnuchin. The GSEs could not operate today if it were
not for the Treasury lines.
Senator Moran. Thank you.
Chairman Crapo. Senator Smith.
Senator Smith. Thank you, Mr. Chair and Ranking Member
Brown, and thank you all very much for being here today.
You know, my office has been doing a whole series of
meetings around housing all across Minnesota, small towns and
rural areas and big cities, too. And I want to just do a note
to Senator Rounds and Senator Tester for bringing up this issue
and how it affects rural areas, and especially tribal areas.
You know, what I have heard in these meetings is that if
you do not have a safe, affordable place to live, then nothing
else in your life works. Your job does not work. Your schooling
does not work. Your health does not work. Your companies do not
work because your employees do not have a place to live. So
that is the way that I am looking at these really complex
questions about what we do about the GSEs.
And so I want to start with this: Dr. Calabria, you and I
had a chance to talk some about this in July when you came to
visit my office, and in July, you indicated that you thought
that the Treasury report might be flexible enough to
accommodate the GSEs operating like a utility, with a regulated
rate of return. And you even thought that maybe that you would
be opening to considering that kind of a utility model rather
than a multi-guarantor model in order to make sure that we have
got the equity in all the places and for all the families that
we need equity for.
So my question is: After reviewing the Treasury plan, do
you think that a utility model would work?
Mr. Calabria. Senator, let me first say I think under
certain circumstances a utility model could work. I think it
would be helpful for members who want to see a utility model to
start fleshing that out.
What I take away when people suggest utility is they mean
regulated rate of return and, therefore, regulated pricing. As
you know, currently in conservatorship we do regulate the
pricing of the GSEs, and I just really would welcome having
such regulatory flexibility outside of conservatorship.
Senator Smith. Well, as Senator Brown said, as we have been
working on this and looking at this, this idea of a utility-
type model has emerged as something that there seems to be a
lot of consensus around, and so I would like to--I think it is
important that we continue that conversation, because what we
are seeking here is a way of making sure that we get at the
equity that we need in order to fulfill that dream that people
in this country can own a house.
Mr. Calabria. Absolutely.
Senator Smith. Secretary?
Mr. Mnuchin. I just want to comment on that as well, and we
have actually had very specific conversations with the Chairman
about this and with the Director and myself. We support working
with this Committee on what you may consider to be a utility
model. And, again, I would just say there are plenty of
utilities where the pricing of the utility is regulated. And we
do think that FHFA should maintain regulation and oversight of
the pricing of the guarantee. So we look forward to working
with this Committee on meeting objectives that go down that----
Senator Smith. Well, I would be interested in continuing
that conversation, and I think that is good.
Now, Secretary Mnuchin, I just have to take this
opportunity, since I have a chance to see you, I do not think
that you and I have had a chance to meet before. You know, I
just got back from Minnesota, spent August in Minnesota, and as
you probably know, in Minnesota agriculture is really the
bedrock of our economy. And as agriculture goes, so goes small
towns and rural areas. And I talked to a lot of farm families
at the State fair and in Hallock and East Grand Forks and all
over the place. And, you know, Minnesotans, we do not like
conflict. We are not quite like my colleague from Louisiana. We
are pretty low key. But Minnesota farmers are telling me that
they are devastated. That is their word. They are devastated by
the President's tariffs. His tariffs on China.
Gary Wertish, who is head of the Minnesota Farmers Union,
says it has already driven some farmers off the farm, which not
only hurts the farming community but it hurts rural small town
communities. It has been devastating to rural America.
So, Mr. Secretary, yesterday on Fox News, you talked about
the Chinese tariff war, and you said, ``We have not yet seen
any impact on the U.S. economy.'' And I just do not see how you
can say that. You know, in 2017, China imported a little over
$19 billion in U.S. ag products. That was in 2017. In 2018,
$9.2 billion, a 50-percent drop. And Minnesota farm families
are--they do not want to be told to be patient. They are afraid
they are going to lose their farms.
So my question is: Do you really believe that this tariff
war, the President's tariff war, has not had an effect on our
economy?
Mr. Mnuchin. First, let me say I look forward to coming and
spending time with you, so I will have my office reach out.
Senator Smith. Thank you.
Mr. Mnuchin. My comment was on a broad impact on a $22
trillion economy. I also went on to say that there clearly are
specific situations, some of which where we have given waivers.
And I want to acknowledge on the farm area, we spent a lot of
time even on trying to get an interim agreement to have China
buy agriculture. So I very much appreciate what is going on. I
never thought I would become an expert on soybeans and other
agricultural products. I have been accused at times of just
wanting to sell soybeans. That is not what we are trying to do.
But we want to make sure that China treats our farmers fairly
and does not retaliate against the farmers in an unfair way in
the way we have been doing it, and I can tell you that is top
of the agenda for the conversations we are having this month.
Senator Smith. Well, I think Minnesota farmers, the soybean
farmers in northwestern Minnesota have seen their sales drop by
75 percent. They do not have any place to store the beans
anymore. They feel like they are collateral damage in this
trade war, and I think it is urgent that we----
Mr. Mnuchin. I understand that, and I can also tell you
there were specific commitments made in the Oval Office from
the Chinese that they did not follow through on and that that
has been a grave concern on us for U.S. farmers.
Senator Smith. Thank you.
Chairman Crapo. Senator McSally.
Senator McSally. Thank you, Mr. Chairman. Thank you,
gentlemen, for your testimony.
I am from Arizona, and in the last housing crisis, I was
serving in the military, and I will just share with you that so
many of my neighbors lost their homes in a middle-class
neighborhood of hardworking families. And this crisis hit
Arizona really hard. The home costs, the home prices dropped
about 56 percent in the 6 years after 2006. In the 5 years
before that, home prices had, you know, nearly doubled.
What you are describing today sounds even more dangerous
than the conditions that we had prior to the last crisis. I
have not been here that long, thank God, but--sorry. I should
not have said that, but I am honored to serve Arizona. The
point is, you know, as I am in this new role looking at this,
people are expecting the Government to work for them. They are
expecting--when we had the last crisis, we had so many people
lose their homes--that modifications and changes would be made
in order to make sure that we prevent this from happening
again.
But what you are describing today, if we do nothing, if
none of the changes you are offering are what Congress needs to
do moves forward, if it is just the status quo, we are at a
similar or higher risk. I do not want to put words in your
mouths, but a similar crisis. So how is it that we did not
learn things from the last crisis that brought us to a better
place as far as how the Government is functioning to protect
home buyers and hardworking Arizonans? How did we get here? The
thousand to one capital ratio is scary.
Mr. Calabria. It absolutely is, and let me say first I very
much recognize Arizona was ground zero for the crisis, and we
certainly want to avoid that.
Let me also assure you I have begun internally a review of
servicing practices, and to me one of the real problems in the
last crisis, these things changed weekly. There was very little
guidance to borrowers. And so I am committed to making sure
that when we do have the next downturn, which, again, I hope is
a long ways away. But when we get there, I want to make sure
that borrowers, lenders, Government, that we all know the rules
of the game, that we know that people are going to be treated
fairly.
Perhaps I am a glass-half-full guy. I will say, having been
on the staff of this Committee before the crisis, if you were
in 2006, 2007, to even suggest housing prices might decline and
there would be problems, you were kind of laughed at.
So I think we have made progress. There is at last a broad
recognition I think across the Committee that we do not want to
repeat the crisis and that we can repeat the crisis if we do
not make positive efforts.
So having tried to do this once before, I feel like we are
at a better spot than we were then.
Senator McSally. Yeah, as opposed to trying to get through
a crisis, the point is preventing the crisis in the first
place. So it seems like we are in similar conditions. How is it
that reforms have not been made in order to prevent us being in
similar conditions? I mean, that is what my constituents would
be hoping the Government would be doing.
Mr. Calabria. I share that frustration. As noted, tomorrow
will mark 5 months for me. I am frustrated that we, 11 years
later, still have Fannie and Freddie in conservatorship, and
again a thousand to one leverage for Fannie. This is not a safe
situation to be in. I commit to you that we will be working as
fast as we can to try to turn this ship around.
Senator McSally. Any other--Secretary?
Mr. Carson. Yeah, I would just say, you know, at FHA our
substantial delinquency rates or early defaults are at the
lowest rate that they have been. So changes have been made. We
recognize what happened before with the manipulation of debt-
to-income ratios and credit-scoring possibilities.
And here is a key factor. You know, putting people in a
home that they cannot afford does not do them any favors. You
know, they lose the home, they lose their credit, they lose
their future possibilities. That is playing into what is going
on today.
For instance, in the minority community, particularly in
the African American community, we have fewer homeowners today
than we had before the crisis because their credit was ruined.
And in some of these cases, they were people who had good
credit before. We are looking at that to see how we can help
with that situation, but we want to make sure that we do learn
from those things, and we have made substantial progress.
Senator McSally. Great. Thanks. And I want to also share
that, you know, I took a tour to all 15 counties of Arizona in
my first 90 days, and affordable housing--I want to associate
myself with my colleagues as well. Affordable housing for the
workforce, whether that is rental is buying, is something that
is a real challenge for many communities in Arizona, to include
rural communities. And I know this is not all just a Federal
issue, but this is something that is really impacting the
people that I represent.
So I think breaking down as many barriers as we can to
provide better access is something that is really critical for
Arizonans.
Thank you.
Chairman Crapo. Senator Reed.
Senator Reed. Well, thank you.
Director Calabria, thank you for being here today along
with your colleagues. We have all talked about affordable
housing. In fact, this is the most, I think, unanimous sort of
sense of the criticality of affordable housing that I have
heard in this Committee. There are two programs that directly
aid affordable housing, and that is the Capital Magnet Fund and
the Housing Trust Fund. They are funded through assessments on
the agencies, not through the appropriations process. Will you
commit to ensure that these are fully funded and will continue
forward to support affordable housing?
Mr. Calabria. Within the constraints of the statute,
absolutely, yes.
Senator Reed. Thank you very much.
Now, I would like to direct a question to all the
panelists--three questions, and I will start first with the
Secretary of the Treasury. Secretary Mnuchin, you have done an
analysis of the impact of this program, I presume. So can I
just ask you to give a categorical sense or a general sense of
who will not be able to get a mortgage under your proposal?
Mr. Mnuchin. I do not think there is anybody who will not
get a mortgage other than there may be certain people today who
should not get mortgages because they really cannot afford
them. But affordable mortgages are what we want.
Senator Reed. So you have not identified any group of
individuals that would be disadvantaged by the proposal?
Mr. Mnuchin. The only thing is, as the Director has said,
he is looking at the GSEs, which is really his responsibility.
There may be certain high-risk loans that the GSEs are making
that they should not, but that is his responsibility and not--
--
Senator Reed. I will ask him. Thank you, Mr. Secretary.
Secretary Carson, from your analysis, do you know of any
groups that would be left out?
Mr. Carson. Yeah, well, certainly there are some people who
probably should not be mortgage holders. For the cases of very
disabled people, elderly people, people who are drug-addicted,
who may be at risk of not making their payments, we have other
programs for individuals like that.
Senator Reed. And, Dr. Calabria, your analysis?
Mr. Calabria. Well, Senator, I will note it is the
Administration's plan, and being an independent regulator, we
have not done an analysis of the Administration's plan.
Senator Reed. OK. Again, going back to kind of the analysis
underlying the proposal, will it cost more to get mortgages in
your analysis? Have you done some data runs to show that rates
will remain relatively constant?
Mr. Mnuchin. We do not think it will cost more. Again, on
the first question, what I was saying is there may be people
who have giant cash-out mortgages today that are creating big
risk to the GSEs that there should not be. That is what I was
implying when--if there are people who will not get mortgages?
Senator Reed. But it is a supposition; it is not an
analytical analysis?
Mr. Mnuchin. We would do an analytical analysis as part of
this, but, no, we have not done that part yet today.
Senator Reed. Dr. Carson, any comments on the cost?
Mr. Carson. We do not have any analysis to dictate or that
suggests that the prices will be raised. We are doing things to
try to lower the prices, working with the servicers and making
sure that they do the appropriate things, particularly before
foreclosures.
Mr. Calabria. Senator, if I could offer some commentary?
Senator Reed. Yes, please.
Mr. Calabria. I think it is important to keep in mind the
plan suggests, and I have called for as well, increased
competition. Again, it has been a few years since I was in grad
school, but the economics I learned is that competitive markets
provide lower cost and more access than monopolies and
duopolies. So it is just hard for me to believe that bringing
competition into this market will result in anything but lower
prices. Again, I think there is a strong amount of evidence of
that. Again, we look at other sectors across the economy.
Again, there is some pretty good evidence for that.
Senator Reed. Again, conceptually you make a point. If you
get that evidence in an analytical fashion, we would love to
have it. I certainly would. Thank you.
And then another question. How about community banks and
credit unions? Will they fare better or worse under this
arrangement, in your view or in your analysis?
Mr. Mnuchin. We would absolutely make sure that they did
not fare worse. We want them to be treated fairly, and that is
a very important part of any future plan.
Senator Reed. Dr. Carson?
Mr. Carson. They are absolutely key. We have been working
with them, and their ability particularly to provide education
to people about housing financial matters is essential.
Senator Reed. And, Dr. Calabria?
Mr. Calabria. Senator, it was mentioned earlier the control
over pricing, such as a utility model. One of the things we
have done in conservatorship is eliminate the volume discounts
that Fannie and Freddie gave to large lenders. As you know,
pre-crisis Countrywide paid a lower price than community banks.
Fannie and Freddie pre-crisis drove consolidation in the
origination side.
I think it is important post-conservatorship for me to have
the authority to limit Fannie and Freddie's ability to drive
consolidation.
Senator Reed. If I can just for a moment, there has been a
lot of discussion of the lack of capitalization of Fannie and
Freddie and the fact that they just rely upon the Treasury to
survive. It is interesting, though, because since--and I was
here and Senator Crapo was here--since this crisis began, I
think we have invested $191 billion in Fannie and Freddie, and
the Treasury has received about $400 billion, I believe--excuse
me? $300 billion in terms of dividends you have taken out. So
couldn't you correct this capital discrepancy by just relenting
on some of the dividends you are taking out?
Mr. Mnuchin. The taxpayers should be and have been
compensated for the risk that they have had historically and
the risk they have going forward. So had the taxpayers put the
money in the stock market, they would have earned multiples of
this. So the answer is this is not just about--if we took
away--tomorrow if we said we got our money back, we will just
rip up our guarantees, these entities could not exist. So as
long as taxpayers are at risk, we expect the taxpayers to be
compensated.
Senator Reed. But just a final point. Isn't your model
going forward to allow these individuals, these entities to
keep their capital, keep their dividends?
Mr. Mnuchin. Two different things. So from a cash-flow and
a capital standpoint, yes, our intent is they will keep the
cash and it will increase their capitalization. What we are
negotiating with the Director right now is in return for that,
we do expect that the taxpayers are compensated. One way may be
to increase our liquidation preference, maybe commitment fees,
but that is what we are discussing now.
Senator Reed. Thank you, Mr. Chairman.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you. First of all, let me just
thank the Chairman and Ranking Member. Affordable housing and
this discussion is key. This is something we have been talking
about, but it is a major issue that we need to address in this
country. In Nevada, it is, outside of the cost of health care,
the number one issue. So I appreciate, gentlemen, you being
here.
But let me just kind of also introduce you to Nevada,
because some of the discussion is not pertinent to what I am
hearing in the impact in Nevada when it comes to affordable
housing. I have had roundtable discussions on this issue for
the last 2 years in Nevada, in our urban and rural areas. If
you do not know anything about Nevada, of the 17 counties, 15
are rural. And I can tell you right now rent control is not
causing the affordable housing crisis in Nevada. In fact,
Nevada does not have any type of laws that mandate a type of
rent control, and it is my understanding there are actually
only five States that have rent control.
I would also like to point out that, yes, streamlining
State and local permitting and improving local zoning will
help, but it will not solve the problem, and it is not the main
impact to the affordable housing issue in our State. I can
promise you this: Around those affordable housing roundtables
that I have had, local and State government have been at the
table with our private sector, as well as so many other people,
and some of the folks that work for you as well. So please know
that. I am looking for answers, and I think we can come
together to address this issue if we work together.
But let me start, Secretary Carson, with you. I am curious.
Does HUD support the continuation of the Housing Trust Fund?
Mr. Carson. The purpose of the Housing Trust Fund, we
certainly support that.
Senator Cortez Masto. You do support it?
Mr. Carson. The purpose of----
Senator Cortez Masto. So you would support keeping the
Housing Trust Fund intact the way it is now?
Mr. Carson. I do not know if I wouldn't be happy with some
changes to it, but----
Senator Cortez Masto. What type of changes would you make?
Mr. Carson. Well, you know, we really want to take a more
comprehensive look when it comes to how do we get people into
affordable housing situations. That includes everybody in our
society, and I would like, you know, to be able to provide a
little more flexibility not only for the agency but for
localities.
Senator Cortez Masto. I am not sure what that means, but
let me ask you this: Right now, the changes you are making, how
will it affect the $3 million or more that all States receive
every year to address acute housing needs for extremely low-
income families?
Mr. Carson. Well, we may have better solutions for
extremely low-income people.
Senator Cortez Masto. Do you have those yet--or is that
something you are looking to work with Congress on those
solutions?
Mr. Carson. Of course, we want to work with Congress on
those solutions, but I just want to make it clear that,
traditionally, just throwing money at the problem has not
solved it. This has been going on for several decades, and we
want to look at some of the deeper issues that caused their
problems and address those.
Senator Cortez Masto. OK. I absolutely agree that this
needs to be addressed, but we have got to have substance. We
have to have details.
Mr. Carson. And we would be happy to----
Senator Cortez Masto. And that is what we are looking for.
Yes, Secretary Mnuchin?
Secretary Mnuchin. What I was going to comment on is one
thing that is clear today is there is bipartisan support on the
issue of affordable housing. There may be differences in views
in how we can get there. I just want to be clear in the report.
It may be there should be more money put for affordable
housing. So when we talk about the Housing Trust Fund, I would
say if there were a more efficient and accountable mechanism
and Congress wanted to put more money for affordable housing,
that is something the Administration would be very much open to
working with this Committee on.
Senator Cortez Masto. Right, and I agree there is
bipartisan support.
Secretary Mnuchin. The report does not imply less money for
affordable housing. That is what I wanted to make clear.
Senator Cortez Masto. Thank you. What is your definition of
``affordable housing''? How do you define it?
Mr. Mnuchin. It depends on the market. What is affordable
in one market is not affordable in a different market, and I
think there is both affordable housing both to own as well as
to rent.
Senator Cortez Masto. Right, but if you are setting
parameters about how the funding is going to go toward
affordable housing, how do you know where to send it if you do
not define it first?
Mr. Mnuchin. Well, we would have to work with this
Committee. So, I mean----
Senator Cortez Masto. So you have not defined it yet?
Mr. Carson. Well, there are traditional----
Senator Cortez Masto. What is the traditional?
Mr. Carson. Traditional is you should spend less than 30
percent of your household income on housing, and if you spend
more than 50 percent, then that is severely distressed.
Senator Cortez Masto. OK. And so that is a parameter that
you are looking at when you are deciding how you are going to
focus on the needs of those that fall within the affordable
housing definition that you just defined. Is that correct?
Mr. Carson. I think that is generally acceptable.
Senator Cortez Masto. Are there any other identifiers for
affordable housing? And I will open that up for all the panel.
Director?
Mr. Calabria. Well, you certainly have a number of
different formulas. I mean, CDBG has a different formula.
Personally, I would probably allocate it across States based on
poverty. Obviously, on one extreme, the low-income housing tax
credit is done on a per capita basis. That to me is probably
not well targeted. So, again, we have a number of formulas
across States. This is something certainly the Committee has
dealt with on multiple occasions.
Senator Cortez Masto. OK. Let me change--I have just got a
few minutes. Manufactured housing is very important to Nevada,
and particularly our rural communities. So, Secretary Carson,
let me ask you this: HUD includes manufactured housing in your
proposal without any specifics. What protections for
manufactured housing home buyers will you ensure remain in any
changed policy?
Mr. Carson. Well, thank you for bringing that up because
manufactured housing has changed dramatically, and almost 10
percent of single families are in manufactured housing. People
think about trailers and double-wides. We are talking about
tremendous technological progress that has been made in that
area. And what remains really is the removal of a lot of the
regulations. I know you do not think that regulations are
everything, but they have severely impeded the ability to
utilize this very excellent solution, and that is----
Senator Cortez Masto. Regulations at the Federal level?
Regulations at State and local?
Mr. Carson. Local. State and local levels.
Senator Cortez Masto. So if at the State and local level
they are willing to address those issues, which they are
working on in my State, to what extent are you looking at it
having an impact on manufactured housing as it comes to the
Federal role?
Mr. Carson. Well, you know, HUD obviously is the regulator
of the rules regarding manufactured housing, and we have now
taken manufactured housing and made it a separate entity with a
DAS designation. So we have paid a lot of attention to this.
This is an area where I think we can solve a lot of the
problem.
Senator Cortez Masto. Well, let me ask you this: Can you
agree to preserve the protections for manufactured housing as
we move through this process of looking at various changes?
Mr. Carson. We will preserve them and expand on them as
necessary.
Senator Cortez Masto. Thank you. I notice my time is up.
Thank you.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for being here.
Secretary Carson, I wanted to follow up on some of the
questions Senator Jones asked with respect to the proposed rule
that HUD put forward in August that would gut the ability of
people who are victims of housing discrimination to prove that
discrimination using a disparate impact analysis. In your
response to Senator Jones, you said that the purpose of this
rule was ``to bring the rule in alignment with the Supreme
Court decision.'' Is that your testimony?
Mr. Carson. That is correct.
Senator Van Hollen. So I am confused, Mr. Secretary,
because I have in my hand here an April 2017 filing where you
are the defendant in the case, HUD, is being sued in the U.S.
District Court for the Northern District of Illinois, Eastern
Division, and the plaintiff is alleging that the existing Rule
213 is not in compliance with the Supreme Court decision. And
in this pleading, you took the opposite position. I quote from
your own brief here stating, ``The Supreme Court's holding in
Inclusive Communities is entirely consistent with the rule's
reaffirmation of HUD's longstanding interpretation that the FHA
authorizes disparate impact claims.''
So which is it, Mr. Secretary? You have taken the position
in a court filing that Rule 213 as is is consistent with the
Supreme Court case, and your testimony today is just the
opposite.
Mr. Carson. No, it is not. We uphold the principles of
disparate impact, and, in fact, as I testified earlier today,
we have used that in a recent complaint against----
Senator Van Hollen. Mr. Secretary, let me just ask you
this: Does your testimony today remain, though, that Rule 213
is consistent with the Supreme Court's holding in Inclusive
Communities, which is the position that you took in this filing
in April 2017, is your position today on that question the same
as it was in 2017?
Mr. Carson. My position----
Senator Van Hollen. Yes or no? I mean, this is a pretty
simple question.
Mr. Carson. My position--I do not do yes or no. My position
is that we want to be consistent with the idea of the Supreme
Court, which is not to have this be so overly burdened that we
drag discrimination into virtually every case.
Senator Van Hollen. But, Mr. Secretary, you took the
position in this filing that the existing rule complied with
the Supreme Court decision in Inclusive Communities. Now, as I
understand what you are saying, you are just using that
decision as a pretext to rewrite the rule to make it much
harder to file a discrimination claim. Is that what you are
saying today?
Mr. Carson. No. What I am saying is that----
Senator Van Hollen. Well, then, why are you rewriting the
rule that you said was consistent with the earlier--with the
Supreme Court decision if your purpose was, as you testified
earlier today, to bring the rule in alignment with the Supreme
Court decision?
Mr. Carson. What I would like to do is actually talk about
solutions to problems----
Senator Van Hollen. Mr. Secretary, really, you say you do
not answer yes-or-no questions, but this is a pretty simple
question. You took a position--you as Secretary--took a
position in this court filing in 2017 that said the existing
rule, Rule 213, is compliant, is consistent with the Supreme
Court decision in Inclusive Communities.
Mr. Carson. Yes----
Senator Van Hollen. So I was surprised earlier today to
hear you say that the reason for your new proposed rule, which
you just filed in 2013, was because you wanted to bring it in
compliance with the Supreme Court decision which you earlier
stated it was already--the previous rule is compliant with. So
my question is: Which is it?
Mr. Carson. There are aspects of the rule that can be
reinterpreted in many different ways, and it depends on which
circumstance you are talking about. You know that.
Senator Van Hollen. Well, Mr. Secretary, you are clearly in
this latest proposed rule going way beyond what the Supreme
Court required in terms of proving discrimination. In fact, you
took the opposite position in 2017. And so it does----
Mr. Carson. We are not going----
Senator Van Hollen. So if I can show you a proposed rule
change that is consistent with the Supreme Court decision but
does not make it as difficult to file a discrimination case,
would you accept that change as part of your new rule?
Mr. Carson. What I would say is let us talk about what
makes sense and what is logical and what helps us to solve the
problem.
Senator Van Hollen. Well, what we are trying to do is allow
people to prove discrimination where it exists. The Supreme
Court----
Mr. Carson. And we are happy to do that.
Senator Van Hollen.----has upheld the disparate analysis
impact because they understand that discrimination can be
subtle. People do not jump up and say, ``Hey, I am denying you
this loan because of your race.''
Mr. Carson. Senator, I----
Senator Van Hollen. And so that is the whole purpose of
this, Mr. Secretary. You took a position in support of the
earlier rule in 2017. You appear to have flipped on it today. I
hope we can work together during this comment period----
Mr. Carson. I would be happy----
Senator Van Hollen.----to get to the bottom of this.
Mr. Carson. I would be happy to work together with you, and
I would ask you to look at our record in pursuing cases against
people who have discriminated against protected classes.
Senator Van Hollen. But you brought some of those cases
under the existing Rule 213, and now you are changing that
rule----
Mr. Carson. Some of the cases that have been brought----
Senator Van Hollen.----or you are proposing to change that
rule.
Mr. Carson.----with disparate impact, and I do not disagree
with disparate impact. It is the way that you interpret
disparate impact that is important.
Senator Van Hollen. OK. Well, let us interpret it in a way
that still allows people to be able to bring discrimination
cases where it exists.
Mr. Carson. And they still can, absolutely.
Senator Van Hollen. Thank you.
Chairman Crapo. Thank you. That concludes our questioning,
and before we conclude the hearing, Senator Brown has a
statement.
Senator Brown. A couple of brief comments. I followed with
interest Senator Cotton's comments about removing regulatory
barriers to fair and affordable housing, like zoning rules. I
was pleasantly surprised because several years ago he
cosponsored an appropriations amendment to end HUD's
Affirmatively Furthering Fair Housing (AFFH) rule because he
said it would give HUD too much say in local zoning. That
amendment failed. Secretary Carson has recently suspended that
rule. On his watch, AFFH would help communities identify and
remove those barriers, so I will later ask Senator Cotton to
join me in asking you, Secretary Carson, to reinstate that
rule.
The other comment, Mr. Chairman, I would like to make is,
Secretary Mnuchin and Director Calabria, thanks for your
comments on a utility model. I look forward to working with you
on this and really figuring out how we can flesh out details. I
will ask the staffs of both of you to provide technical
assistance on a utility model with a regulated rate of return.
Thanks, Mr. Chairman.
Chairman Crapo. Well, thank you.
That does conclude the hearing. For Senators wishing to
submit questions for the record, those questions are due in 1
week, on Tuesday, September 17th. As for the witnesses, we ask
as always that you respond to those questions as promptly as
you can.
Again, we want to thank all of you for being here today and
look forward to our continuing work together on this important
topic.
This hearing is adjourned.
[Whereupon, at 12:03 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today, we are joined by the leading voices within the
Administration on reforming and strengthening our housing finance
system: the Secretary of the Treasury and the Secretary of Housing and
Urban Development, both of whom have just submitted housing finance
reform proposals to the President, as well as the Director of the
Federal Housing Finance Agency, who serves as regulator and conservator
of Fannie and Freddie.
Thank you for making the time to join the Committee this morning.
Last Friday marked 11 years since the Government bailed out and put
Fannie Mae and Freddie Mac into conservatorship, where they remain
today.
Prior to 2008, the two Government-sponsored enterprises held just
45 cents in capital for every $100 in mortgages they guaranteed. Now
they hold just 19 cents, after a historic $200 billion bailout from
taxpayers.
Eleven years later, these systemically important companies continue
to be too-big-to-fail, are even more leveraged then they were before
the financial crisis, and taxpayers remain on the hook in the event of
the next market downturn.
In March, President Trump signed a presidential memorandum
directing the Department of the Treasury and the Department of Housing
and Urban Development to develop a plan for administrative and
legislative reform of the Federal housing finance system.
Many of the legislative recommendations in the plans that were
released on Thursday are consistent with my outline to fix our housing
finance system, including attracting private capital back into the
market; protecting taxpayers against future bailouts; and promoting
competition.
The recommendations also preserve certain incremental reforms that
have already taken place during the conservatorship era, including
robust transfer of credit risk; the single security and common
securitization platform; and loan pricing that does not vary based on a
lender's size.
The status quo is not, and has not been acceptable, and my strong
preference remains fixing it through comprehensive legislation.
Five years ago, this Committee demonstrated that it is possible to
come together and advance a comprehensive solution on this topic.
This year, I released my housing reform outline, which builds upon
many of the same principles from our previous efforts.
It sets out a blueprint for a permanent, sustainable new housing
finance system that protects taxpayers by reducing the systemic, too-
big-to-fail risk posed by the current mortgage guarantors.
It preserves the existing infrastructure in the housing finance
system that works well, while significantly increasing the role of
private capital.
It establishes several new layers of protection between mortgage
credit risk and taxpayers.
It ensures a level playing field for originators of all sizes and
types while also locking in uniform, responsible underwriting
standards.
And, it promotes broad accessibility to mortgage credit, including
in under-served markets.
Ultimately, only Congress has the tools necessary to provide
holistic, comprehensive reform to our system that will be durable
through any market cycle.
However, it is important for the Administration to begin moving
forward with incremental steps that move the system in the right
direction.
After 11 years of conservatorship limbo, it is long past time to
make the hard decisions and address this last unfinished business of
the financial crisis.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman, and thank you to all of our witnesses for
being here today.
We're going to hear from the Trump administration about the ``next
steps'' on housing finance reform, but it's clear from the plan they
put out last week what President Trump thinks those steps should be--
the Trump plan will make mortgages more expensive and harder to get.
We shouldn't have to tell the President that we have an affordable
housing crisis in this country. We all know it--we all see it.
I see it when I talk to residents of a manufactured housing
community on the verge of losing their home, because they can't afford
the rent increase imposed by wealthy private equity investors who just
bought their community.
I see it when I drive past the boarded up houses that belonged to
the victims of predatory lending in my neighborhood of Slavic Village,
and so many like it across the country.
I see it when I talk to young people in their twenties and thirties
who want to buy a home, but who are drowning in student loan debt and
can't save enough for a down payment or afford a mortgage.
These are the real crises facing real families all across Ohio and
around the country.
They're renters, they're homeowners, and they're former homeowners,
and they all have one thing in common--they can't afford a place to
call home.
We have had very productive hearings in this Committee where we
talked about what it would take for the housing finance system to
actually work for working families.
In March, we held two hearings with representatives from the Home
Builders, the Realtors, the Mortgage Bankers, the credit unions, the
civil rights community, and multifamily lenders.
We heard during those hearings that affordability and access aren't
just components of housing finance--they're the whole reason we have
housing finance system. They can't be an afterthought once we've
answered other questions about the structure of the housing finance
system--they have to be built into the system.
We need a housing system built on a mission to serve borrowers and
renters, no matter who they are, what kind of work they do, or where
they live.
That means we need policies that focus on increasing service for
underserved markets, like rural areas and manufactured homeowners, and
borrowers who have been locked out of the housing market over decades
of discrimination.
And we need a system that helps a wide variety of lenders and
borrowers participate, so that they can meet all families' needs,
particularly those who have been left behind for far too long.
In our March hearings and in the months since, we've heard housing
stakeholders coalescing around a few foundational principles for
reform. They've said that reform should:
Protect access to affordable 30-year fixed-rate mortgages;
Provide a catastrophic Government guarantee;
Structure loan guarantors like public utilities, providing
a regulated rate of
return;
Serve a broad, national market;
Serve lenders of all types and sizes equitably;
Maintain a duty to serve all markets and all borrowers;
Maintain affordable housing goals and metrics;
Expand investment in affordable housing; and
Maintain the GSEs' successful multifamily business models
and ensure continued or better access for financing of
affordable rental housing.
Yet unsurprisingly, President Trump and his Administration missed the
point.
Rather than create a system that addresses the needs of working
families, the Trump administration has put out half-baked proposals
that will make mortgages more expensive and harder to get.
In addition to increasing costs, the plan would make it harder for
small lenders to compete, and gut the existing tools we have to help
underserved families finally find an affordable apartment or own their
first home.
The President's plans would also roll back consumer protections and
investor disclosures put in place following the financial crisis, to
prevent predatory loans and toxic securities from building up in our
financial system.
So let's be clear: whether you're renting and want to buy a home,
or own a home and someday want to sell it, President Trump's plan hurts
you--all to funnel more money to the same Wall Street system that
wrecked the housing markets and wrecked families' lives in 2008.
I was encouraged when I saw that Treasury's plan had nine separate
proposals dedicated to ``leveling the playing field.''
I thought this might mean leveling the playing field for
communities of color, young households trapped by student debt, or
renters who can't afford to save for a down payment.
So you can imagine my disappointment when I saw that all nine
proposals--every last one--were about ``leveling the playing field''
for Wall Street, which is looking to make money off of working
families' mortgages.
Really?
Of course we shouldn't be surprised. Ultimately this plan is the
same as every other Trump administration plan--it's about making it
easier for Wall Street to profit off hardworking families.
These plans come in the midst of a flurry of other troubling
Administration proposals to weaken fair housing and fair lending
protections, and gut a bedrock civil rights law, the Community
Reinvestment Act.
Taken together, the President has once again decided to side with
Wall Street wealth over the dignity of work.
We don't need to make it easier for Wall Street to get richer. To
quote Secretary Carson, ``news flash, rich people are going to get
richer anyway.''
We need to make it easier for every family to find an affordable
place to call home.
Housing isn't optional. Housing is a basic need, and no one should
go without it in this country.
Thank you.
______
PREPARED STATEMENT OF STEVEN T. MNUCHIN
Secretary, Department of the Treasury
September 10, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
I am pleased to be with you today to discuss the Treasury Department's
Housing Finance Reform Plan that will protect taxpayers and foster
competition in the market.
I would like to thank Chairman Crapo and the Committee for your
work on this important issue. The outline you released in February was
a productive step toward ensuring the safety and stability of our
housing finance system.
In September 2008, the Government-sponsored enterprises (``GSEs'')
Fannie Mae and Freddie Mac were placed into conservatorship by the
Federal Housing Finance Agency (``FHFA''). Treasury has provided the
GSEs with over $190 billion in taxpayer assistance.
Eleven years later, the GSEs remain in conservatorship and continue
to be
supported by a Treasury commitment to keep them solvent. The continued
conservatorships of the GSEs have perpetuated far-reaching Government
influence over the housing finance sector. The lack of reform has left
taxpayers exposed to future bailouts.
Treasury's Housing Reform Plan includes almost 50 recommended
actions. These measures would reduce the role of the Federal
Government, enhance taxpayer protections against future bailouts, and
increase private sector competition in the housing finance system.
As required by President Trump's directive, Treasury's plan shows
that the GSEs can and should be reformed to ensure their safety and
soundness. Although no law prescribes a specific end point for the
conservatorships, no conservatorship is meant to be permanent, and that
includes FHFA's management of the GSEs. This plan provides a roadmap to
release them from conservatorship.
Treasury's reform plan takes great care to preserve what works in
the current system. Each of Treasury's recommended reforms is
incremental, realistic, and balanced. In particular, Treasury's plan
would preserve the longstanding Government support of the 30-year
fixed-rate mortgage loan. That support, however, should be explicitly
defined, tailored, and paid-for. Treasury recommends that Congress
authorize an explicit, paid-for guarantee backed by the full faith and
credit of the Federal Government that is limited to the timely payment
of principal and interest on qualifying mortgage-backed securities. To
foster competition, this guarantee should be available to the GSEs, and
also to any other FHFA-approved competitors.
Moreover, the regulatory environment should be harmonized so that
the GSEs and private sector competitors operate on a level playing
field. For example, the GSEs currently have a competitive advantage
over other market participants under the so-called ``QM patch'' to the
Consumer Financial Protection Bureau's (``CFPB'') ability-to-repay
rule. In July 2019, the CFPB announced that the QM patch would expire
in January 2021 or after a short extension. Treasury supports the
CFPB's planned expiration of the QM patch, and it also supports further
revisions to the ability-to-repay rule to ensure that mortgage lenders
continue to have a bright-line safe harbor after the QM patch expires.
Finally, I must emphasize, and our recommendations make it clear,
that the Administration's preference is to work with Congress to enact
comprehensive housing finance reform legislation. Legislation could
achieve lasting structural reform that tailors explicit Government
support of the secondary market, and repeals the GSEs' congressional
charters and other statutory privileges that give them a competitive
advantage over private sector competition. At the same time, we believe
that reform can and should proceed administratively. Pending
legislation, Treasury will continue to support FHFA's administrative
actions to enhance the regulation of the GSEs, promote private sector
competition, and satisfy the preconditions set forth in the plan for
ending the GSEs' conservatorships.
Under the leadership of President Trump, I am proud of all of the
work we have done to create conditions for greater economic growth,
more and better opportunities for working families, and higher wages
for all Americans. Today I look forward to discussing with you the
critical issue of housing finance reform. I hope that the Committee
will work with us on passing bipartisan legislation. Thank you very
much, and I look forward to answering your questions.
______
PREPARED STATEMENT OF BENJAMIN S. CARSON, SR., M.D.
Secretary, Housing and Urban Development
September 10, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to appear before you today to discuss how
the U.S. Department of Housing and Urban Development (HUD) will support
this Administration's effort to reform the Nation's housing finance
system.
In the years since the financial crisis, the Federal Government has
continued to play an outsized role in the Nation's housing finance
system, and it is imperative Congress acts with the Administration to
refocus Federal agencies insuring and guaranteeing mortgages to their
core role of supporting equity and wealth building through sustainable
home ownership and ensuring these Government programs do not overlap
with, and crowd out, fully private capital in the conventional mortgage
market.
To this end, I am pleased to present an overview of HUD's housing
finance reform (HFR) plan that was submitted to the President on
September 5, 2019. Housing finance reform is a key priority of this
Administration, and as recognized in the March 27, 2019, Presidential
Memorandum on Federal Housing Finance Reform (Presidential Memorandum),
it is crucial to advance reforms that acknowledge the integral role HUD
plays in the Nation's housing finance system.
HUD supports millions with affordable housing opportunities through
its rental assistance and manufactured housing programs, and the
Federal Housing Administration (FHA) and Government National Mortgage
Association (GNMA) provide credit access and liquidity in the mortgage
market. FHA provides credit enhancement and regulatory oversight for a
portfolio exceeding $1.4 trillion, and importantly serves as a
countercyclical buffer during times of stress, and GNMA guarantees more
than $2 trillion in mortgage-backed securities (MBS) with the full
faith and credit of the United States of America, facilitating
liquidity in the housing market and contributing to the availability of
mortgage credit for qualified borrowers.
During the financial crisis, and because of the policies of the
previous Administration, FHA's and GNMA's balance sheets swelled,
growing by approximately 350 percent and 400 percent, respectively,
between fiscal years (FY) 2007 and 2018. Federal policymakers should
take steps to enable both FHA and GNMA to refocus on their core
missions and make sure both agencies have the tools needed to manage
their significant portfolios, strengthening their ability to support
the housing market and minimizing the likelihood of any future taxpayer
funded bailout.
Reform will reduce the Federal Government's outsized role in
housing finance and prevent its activities from crowding out the
private sector. Congress must work with the Administration to: refocus
FHA to its core mission of serving low- and moderate-income families,
including first-time home buyers (FTHBs), that cannot be fulfilled
through traditional underwriting; protect American taxpayers from
bailouts; provide FHA and GNMA with the tools they need to manage risk
of their oversized portfolios; and provide liquidity to the housing
finance system.
Pillar I: Refocus FHA to its Core Mission
Targeting Programs to Borrowers Not Served by Traditional Underwriting
The Presidential Memorandum directed HUD to recommend reforms that
would allow FHA to best target its programs to borrowers not served by
traditional underwriting. Historically, this has been FHA's most
important contribution to the American housing market: facilitating
earlier entry points into home ownership for these families,
particularly FTHBs, than conventional mortgage loans with higher
downpayment requirements. Without FHA mortgage insurance, many of the
low- and moderate-income, minority, and FTHBs supported through the
agency's programs would lack access to affordable mortgage credit. In
recent years, in the aftermath of the financial crisis, the share of
FHA-insured purchase mortgage activity for FTHBs has ranged between 75
percent and 83 percent of total annual purchase loan endorsements.
Refocusing on the core mission will strengthen FHA's ability to
help creditworthy borrowers build equity, avoid foreclosure, and
protect taxpayers. The benchmark for success of FHA's programs should
be ensuring that borrowers are receiving financing that is appropriate,
sustainable, and optimized for long-term home ownership. To this end,
HUD has proposed the implementation of a ``Homebuyer Sustainability
Scorecard'' (Scorecard) that would be used by FHA to measure the
performance of loans to low- and moderate-income borrowers and FTHBs.
The Scorecard will track the percent of mission borrowers who default,
return to renting, refinance out of an FHA loan, remain in an original
FHA-financed home, and monitor the risk associated with secondary
financing (i.e., downpayment assistance (DPA)). Moreover, FHA will use
the Scorecard to evaluate additional underwriting criteria to ensure
that new lending within its single-family portfolio remains consistent
with FHA's mission. With the Scorecard, FHA will change the measure of
success by no longer touting the number of loans it insures and
instead, as with other HUD programs, tracking whether its borrower
participants are improving with FHA support.
It is also important FHA support sustainable home ownership; which
FHA can support in part through mortgage products that carry terms that
accelerate equity accumulation. After all, faster accumulation of
equity benefits borrowers. To achieve this objective, HUD's plan
recommends FHA undertake the following reforms: 1) conduct rulemaking
to clarify the statutory prohibitions on DPA providers that financially
benefit from a mortgage transaction; 2) examine incentives to make
shorter-term mortgages that accelerate equity accumulation more
attractive to FHA's mission borrowers; 3) ensure the agency's programs
and policies do not incentivize negative borrower behavior such as
equity stripping via cash-out refinances; and 4) examine the overall
impact of repeat borrowers on the Mutual Mortgage Insurance Fund (MMIF)
and ensure these loans are consistent with the agency's mission.
Define Roles for Government-Supported Programs through Better
Coordination
A central principle of the Administration's HFR plan is that
Federal mortgage credit policies should be better coordinated in order
to allow qualified borrowers to access responsible and affordable
options. Coordination ensures that there is not unhealthy and
irresponsible competition between Government-supported programs, which
can lead to lower underwriting standards, increase risk to taxpayers,
and threaten the long-term availability of credit to qualified
borrowers. The Government-sponsored enterprises (GSE), which back a
substantial portion of the Nation's mortgage debt, should not be able
to selectively choose from the FHA portfolio and leave taxpayers with
the riskiest borrowers.
Uncoordinated policies create incentives that encourage entities to
work at cross-purposes, resulting in little or no change in overall
access to credit while increasing taxpayer exposure to uncompensated
risk. As discussed in HUD's plan, the FHA program is primarily utilized
by FTHBs who cannot be served through traditional underwriting, as it
generally accepts more risk and provides low-downpayment borrowers
greater leverage than allowable in GSE programs while also offering
Government-subsidized pricing.
As proposed in our plan, FHA and FHFA will coordinate to ensure
that the GSEs and FHA serve defined roles within the marketplace. HUD
and FHFA should develop and implement a specific understanding as to
the appropriate roles and overlap between the GSEs and FHA, for
example, with respect to cash-out refinances, conventional-to-FHA
refinances, and loans to FHA repeat borrowers. Moreover, HUD has
recommended that Congress establish FHA, the Department of Veterans
Affairs (VA), and the Department of Agriculture (USDA)--the Government-
insured mortgage loan programs--as the sole source of low-downpayment
financing for borrowers not served by the conventional mortgage market.
Provide Regulatory Certainty to FHA Lenders
FHA strives to be clear in its guidance on compliance and legal
enforcement matters and will not tolerate violations of its program--
those who seek to defraud borrowers and taxpayers, as well as those who
make routine (and often material) errors that put strain on the
agency's resources. Additionally, FHA makes it a top priority to adhere
to the rule of law, and this means the agency's view of materiality
should be clearly communicated.
FHA participants and advocacy groups have called for clarification
of the process by which HUD and the Department of Justice (DOJ)
consider whether severe financial penalties through the pursuit of
False Claims Act (FCA) remedies is appropriate for minor and putatively
immaterial errors. HUD will prioritize improving certifications to
which lenders attest for each FHA-insured loan, as well as lenders'
annual certifications. These certifications, along with updates to
FHA's defect taxonomy in order to clearly align the severity of loan
underwriting defects with proposed remedies, will provide the needed
certainty and clarity on FHA's requirements. HUD also will ensure its
views of materiality with respect to potential violations of the FCA
are clearly shared through formal consultation with DOJ.
Pillar II: Protect American Taxpayers
Strengthen FHA Risk Management Systems and Governance
With mortgage insurance on loans over $1.4 trillion in unpaid
principal balance (UPB) and more than $2 trillion in MBS guaranteed by
taxpayers, FHA and GNMA, respectively, must ensure their business and
operational practices protect American taxpayers. Meeting this duty
also is essential to both agency's respective missions, and if either
does not operate in a fiscally responsible manner, HUD's ability to
provide affordable and sustainable mortgage credit for borrowers is
severely jeopardized. FHA must maintain an appropriate level of capital
reserves in the MMIF, and it is unacceptable for the agency to ever
again require a draw on taxpayer funds to sustain its book of business,
as it did in the previous Administration. Thus, FHA should strengthen
its governance and build its capital ratio well above the statutory 2
percent minimum safeguarding the agency against episodes of market
distress.
To ensure protection of the American taxpayer, modernizing FHA risk
management capabilities is critical. As the size of FHA's portfolio has
not returned to pre-crisis levels and taxpayers continue to bear
increased risk, now is an appropriate time to develop and implement a
framework that will better allow the agency to monitor current,
emerging, and future risks across credit cycles.
To accomplish these risk management objectives, HUD has proposed
the following key reforms: a sound risk-based capital regime framework,
credit-risk sharing capability, in addition to inter-agency
coordination on credit policy and counterparty information exchange.
First, HUD's plan recommends that Congress direct the Department to
formally evaluate options, feasibility, and the economics of a credit-
risk transfer (CRT) program similar to those recently implemented by
the GSEs--these programs could be effective ways for FHA to reduce the
overall risk to taxpayers in FHA's mortgage insurance programs while
still serving HUD's mission borrowers. Second, HUD proposes that
Congress also direct FHA to more effectively manage lender counterparty
risk in future books by authorizing such additional remedies as
appropriate. HUD has further proposed FHA adopt sound risk-based
capital regimes for both the MMIF and the General Insurance/Special
Risk Insurance (GI/SRI) Fund, managing risk exposure to defined
stressed scenarios and ensure that FHA does not inappropriately compete
with the GSEs or private capital. Last, HUD recommends FHA pursue an
inter-agency agreement with other Government agencies (including GNMA
and FHFA) involved in mortgage insurance and mortgage securitization on
counterparty risks.
Improve Financial Viability of the Home Equity Conversion Mortgage
(HECM) Program
The HECM program, which has supported millions of American seniors
to ``age in place,'' has suffered significant financial distress in
recent years. At the end of fiscal year 8, FHA's HECM portfolio had an
economic net worth of negative $13.63 billion and a standalone capital
ratio of negative 18.83 percent. Financial volatility within the HECM
program remains a constant challenge for FHA, despite changes to the
program's principal limit factors and insurance premiums in 2017, and
the implementation of an appraisal inflation risk mitigation policy in
2018, both of which have been directionally positive on the program's
fiscal solvency.
To continue shoring up the HECM program and best ensure these
mortgage products remain a viable option for America's seniors that
desire to ``age in place,'' HUD has proposed several key reforms.
First, HUD recommends Congress reform the loan limit structure in the
HECM program to reflect variation in local housing markets and regional
economies across the U.S. instead of the current national loan limit
set to the level of high-cost markets in the forward program ($726,525
for calendar year 2019). Second, HUD proposes Congress set a separate
HECM capital reserve ratio and remove HECMs as obligations to the
MMIF--reforms that would provide for a more transparent accounting of
the program costs and decrease the cross-subsidization that occurs with
mission borrowers in the forward mortgage portfolio. Third, HUD
proposes FHA eliminate HECM-to-HECM refinances as these loan
transactions result in greater appraisal inflation, increasing program
costs, and negatively impacting GNMA-guaranteed HECM MBS (HMBS) due to
quick ``churn'' in pool participations.
Eliminating Regulatory Barriers to Affordable Housing Including
Manufactured Housing
Home ownership is a vehicle for many families to put down roots,
become active in their communities, and build wealth for future
generations. However, over-regulation of housing construction has been
a key factor in supply failing to keep pace with growing demand,
resulting in many creditworthy FTHBs unable to afford the purchase of
entry-level housing. On June 25, 2019, the President continued his
historic deregulation campaign by signing an Executive Order
establishing the White House Council on Eliminating Regulatory Barriers
to Affordable Housing (Council). As the Chairman of this Council, I
will build on the President's commitment to hardworking Americans by
reducing overly burdensome regulations that artificially raise the cost
of housing development that directly lead to the undersupply of
affordable housing and will engage with State, local, and tribal
partners to help them do the same.
Manufactured housing comprises 9.5 percent of the total single-
family housing stock and, along with other innovative housing
solutions, plays a vital role in meeting the Nation's affordable
housing needs. Policies that exclude or disincentivize the utilization
of innovative housing construction homes can exacerbate housing
affordability challenges because this kind of housing potentially
offers a more affordable alternative to traditional site-built housing
without compromising building safety and quality.
HUD will elevate the Office of Manufactured Housing Programs and
appoint a Deputy Assistant Secretary to lead it and other innovations
in housing. FHA also will consider innovative proposals to modify
single-family housing mortgage finance underwriting to further
stimulate additional supply of entry-level housing, including
manufactured housing. To encourage innovation in manufactured housing,
HUD will create a formal framework for identifying and evaluating new
building, construction, and design developments and ensuring that HUD's
regulations do not unnecessarily impede their adoption.
Pillar III: Provide FHA and GNMA the Tools to Appropriately Manage Risk
Today, FHA is responsible for managing a $1.4 trillion mortgage
insurance portfolio with a fiduciary duty to protect taxpayers from
costly bailouts. To fulfill this duty to taxpayers and ensure it
continues to provide affordable access to mortgage credit for mission-
focused borrowers, FHA needs some independence from broader HUD
protocols that govern staffing, procurement and information technology
(IT). To this end, HUD recommends that Congress enact legislation that
would restructure FHA as an autonomous Government-owned corporation
within HUD. Moreover, to the extent administrative reforms are
insufficient to address the procurement challenges at FHA (and GNMA),
HUD proposes that Congress provide new statutory acquisition
authorities for the Department, particularly to address instances where
material underperformance of contracting vendors results in substantial
quality deficiencies and costs.
FHA also continues to operate on antiquated technology platforms
that inhibit the agency's ability to appropriately manage risk and
fulfill its fiduciary duty to taxpayers. FHA has already developed a
detailed technology roadmap that will guide the development of a single
platform and baseline architecture to cover all aspects of the mortgage
process, from loan origination, through endorsement, servicing, claims,
and, as required, disposition. Overall, the investment in the new
single platform structure will allow FHA to better adapt to changing
industry, regulatory, and statutory requirements; the modernized
systems will be data-driven, and ultimately allow FHA to fully digitize
the mortgage process, opening doors to significantly more refined risk
analysis and management. To this end, HUD has recommended that FHA
explore agreements to share technology with GNMA and other Government-
supported mortgage programs, including the GSEs, when feasible.
Additionally, HUD recommends that Congress appropriate sufficient funds
for FHA to complete its multi-year, single-family IT modernization
effort.
Pillar IV: Provide Liquidity to the Housing Finance System
Following the financial crisis, GNMA's outstanding MBS guaranty
portfolio swelled nearly fourfold to over $2 trillion. This substantial
growth in GNMA's guaranty portfolio has been concurrent with the
increase in the combined mortgage insurance and guaranty programs of
FHA and VA. Then, as now, GNMA has been able to effectuate its mission
because of the full faith and credit guaranty of the Federal
Government.
The GNMA guaranty provides for the timely payment of pass-through
income (generally principal and interest) to security holders of GNMA-
guaranteed MBS backed by pools of mortgages insured or guaranteed by
Federal agencies, including FHA, VA, and USDA. The ``last position''
guaranty in mortgage securitization that GNMA covers in its MBS
guaranty program is an important element of potential reform of the
broader housing finance system. As described in the U.S. Department of
the Treasury's HFR report, and also pursuant to the Presidential
Memorandum, GNMA could--if authorized by Congress--extend its explicit
guaranty to MBS backed by conventional single family and multifamily
housing mortgages, as it has already gained the experience of
administering, and managing the growth of, its MBS-guaranty portfolios.
In addition to this potential future role for GNMA in the Nation's
housing finance system, HUD has recommended that Congress pass
legislation granting the agency the authority to administratively
adjust its guaranty fee within a narrow, permissible range. This
guaranty fee provides the funds from which losses would be paid if GNMA
needed to step in to remit funds to security-holders as the result of
an issuer's failure to do so. GNMA believes that the authority to
administratively adjust its guaranty fee within a narrow, permissible
range, would ensure that such fees are adequate for the risks in the
program and sufficient for GNMA to meets its statutory obligations
under extreme circumstances.
Conclusion
The Presidential Memorandum provides an opportunity for Congress
and the Administration to ensure FHA and GNMA serve their important
missions effectively, responsibly, and sustainably while taking care to
minimize overlap in the Nation's housing finance system. FHA should
focus on helping its core mission borrowers become sustainable
homeowners while minimizing risk to the taxpayer to the greatest extent
possible and providing a path for borrowers to graduate from
Government-supported programs. HUD continues to work on administrative
reforms absent legislation so that FHA and GNMA better serve low- and
moderate-income borrowers unable to access conventional financing, but
Congress must join efforts in improving these agencies' service of this
critical segment of the market. For too long FHA and GNMA have operated
somewhat isolated from the rest of the housing finance system and I
welcome Congress's participation as this Administration reforms the
agencies to better fulfill their responsibilities to borrowers and the
American taxpayers.
______
PREPARED STATEMENT OF MARK A. CALABRIA, Ph.D.
Director, Federal Housing Finance Agency
September 10, 2019
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee, thank you for the invitation to appear at this morning's
hearing. I can think of few issues in our financial system more in need
of our attention.
Our Nation's housing finance system is in urgent need of reform.
The status quo poses significant risk to taxpayers, homeowners,
renters, and the entire financial system.
I want to thank Secretary Mnuchin and Secretary Carson for their
efforts to develop comprehensive housing finance reform plans. They lay
out a responsible roadmap to build a more resilient housing finance
system that protects taxpayers and mortgage access. I also thank
Secretary Mnuchin for the opportunity to have offered commentary on
Treasury's plan during its development.
These plans are broadly consistent with my top priorities, which
are to cement FHFA as a world-class regulator and to restore Fannie Mae
and Freddie Mac (``the Enterprises'') to safe and sound condition by
building capital to match their risk profiles. Building capital would
also begin the process to end the Enterprise conservatorships, which
have lasted more than 11 years, far longer than any other
conservatorship.
A root cause of the 2008 financial crisis was imprudent mortgage
credit risk backed by insufficient capital. This fundamental problem
remains unresolved today. While borrower average credit scores have
modestly improved, the Enterprises' shares of low-downpayment and high
debt-to-income mortgages are back to 2004 levels. Fueling rapidly
rising home prices with easy mortgage credit from under-capitalized
entities is a mistake. We should not repeat it.
In their current financial condition, the Enterprises are not
equipped to withstand a downturn in the housing market. The Enterprises
own or guarantee a combined $5.5 trillion in single and multifamily
mortgages out of a $12 trillion combined
market. Yet with just $6 billion in allowable capital reserves, the
Enterprises' combined leverage ratio is nearly a thousand to one.
In comparison, the Nation's largest financial institutions have an
average leverage ratio of roughly ten to one. See Exhibit 1.
Exhibit 1\1\
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\1\ Large U.S. banks and the Enterprises are subject to separate
leverage ratio requirements that use differing components, both in
terms of what each firm can use to meet its respective requirements and
which balance sheet measures the requirements are based on. To provide
a simplified version of the actual requirements for the purposes of
comparison, this graph uses Stockholders' Equity for the banks and
Total Consolidated Assets (Total Capital) for the Enterprises.
The 2019 Dodd-Frank Act Stress Test (DFAST) demonstrated the
consequences of inaction. In the last crisis, from the market peak in
the summer of 2006 to the bottom in 2012, housing prices declined by 27
percent. The 2019 DFAST modeled a scenario where residential real
estate prices decline by 25 percent. Under such conditions, the
Enterprises forecasted combined total losses of $43.3 billion during
the stress-test period.
Given that housing supply appears to have become more inelastic
since the crisis, we should expect greater price volatility going
forward.
Our housing finance system also undercuts sustainable home
ownership. The Enterprises have expanded with the economy recently yet
maintained risk and capital levels that ensure they will fail in a
downturn. This pro-cyclical pattern harms low-income borrowers, making
it easier to buy homes beyond their means when the economy is strong
and harder to keep those homes when the economy is weak.
Our housing finance system is supposed to serve homeowners and
renters while protecting taxpayers. Currently, it fails on both counts.
The Administration's plans aim to address these problems.
Only Congress, however, can enact the structural reforms needed to
fix today's broken model.
Compared to the duopoly of the Enterprises, a fair and competitive
secondary mortgage market would better serve borrowers and renters and
promote long-term stability by ensuring that inefficient firms do not
survive and that no institution is ``too big to fail.'' We have
witnessed in one industry after another that the best guarantee for
delivering lower prices to consumers is an open, competitive market,
not a monopoly or duopoly.
Some argue reform should wait for a crisis. This shortsighted
thinking fueled the last housing market collapse. As we learned then,
it is impossible to solve complex problems in the middle of a crisis.
To paraphrase President Kennedy, the time to repair the roof is
when the sun is shining. Now is the time for bold reforms because our
economy and housing market are strong. This will not always be the
case.
I am not forecasting a downturn. Rather, as a prudential regulator,
I believe my job is to hope for the best and prepare for the worst.
Therefore, I intend, fulfilling my statutory duties, to strengthen
FHFA, enable the Enterprises to build capital to match their risk
profiles, and end the Enterprise conservatorships.
These reforms are critical to building a resilient mortgage finance
system that protects taxpayers and delivers a diverse range of housing
options at market-affordable prices. In the interim, modest reforms can
improve FHFA's ability to do its job.
For example, in June, I asked Congress for the authority, similar
to other financial regulators, to develop capital standards for the
Enterprises and to charter new enterprises. This commonsense proposal
need not wait for broader reform.
In far too many areas of our Nation, we face a housing
affordability crisis. Too often this has been the result of misguided
local land-use and building regulations. In other areas, housing supply
remains limited due to a lack of construction labor. For the
Enterprises to play an important role in addressing this crisis, they
themselves must be fixed. Adding more weight to an already cracked
foundation is to invite collapse.
Thank you again for the opportunity to testify today. I look
forward to answering your questions.
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM STEVEN T.
MNUCHIN
Q.1. During the hearing, you indicated that as part of your
external engagement in designing the Treasury Housing Reform
Plan, you sought out and obtained input from a diverse variety
of stakeholders. Can you provide a specific list of parties
that were consulted?
A.1. Consistent with its approach to preparing its reports on
Core Principles for Regulating the U.S. Financial System and
other recent reports, Treasury met with a wide range of market
participants, affordable housing advocates, think tanks, and
other stakeholders and interested parties in advance of
preparing the Treasury Housing Reform Plan. The purposes of
these outreach meetings were to foster Treasury's understanding
of the key priorities of stakeholders, solicit stakeholders'
views on recent developments related to housing finance reform,
and discuss stakeholders' perspectives or housing finance
reform more generally.
In advance of preparing the Treasury Housing Reform Plan,
Treasury met with the following stakeholders, among others:
LAmerican Bankers Association
LAmerican Enterprise Institute
LAmerican Land Title Association
LAnnaly Capital Management
LBank of America
LBlackRock
LBNP Paribas
LCapital Magnet Fund Coalition
LCato Institute
LCBRE Group
LCenter for Responsible Lending
LCitibank
LCommercial Real Estate Finance Council
LCommunity Home Lenders Association
LCommunity Mortgage Lenders Association
LConsumer Federation of America
LCredit Suisse
LCredit Union National Association
LGoldman Sachs
LHeritage Foundation
LHousing Assistance Council
LHousing Policy Council
LIndependent Community Bankers Association
LJPMorgan
LManufactured Housing Institute
LMilken Institute
LMorgan Stanley
LMortgage Bankers Association
LMr. Cooper
LNational Association of Affordable Housing Lenders
LNational Association of Federally Insured Credit
Unions
LNational Association of Home Builders
LNational Association of Real Estate Investment
Trusts
LNational Association of Realtors
LNational Community Reinvestment Coalition
LNational Congress of American Indians
LNational Council of State Housing Agencies
LNational Housing Council
LNational Low Income Housing Coalition
LNational Multifamily Housing Council
LNational Urban League
LNomura
LOpportunity Finance Network
LPennyMac
LPIMCO
LPNC
LPrudential/PGIM
LQuicken Loans
LR Street Institute
LSecurities Industry and Financial Markets
Association
LStructured Finance Association
LSunTrust
LU.S. Mortgage Insurers
LUnidosUS
LUrban Institute
LVanguard
LWalker & Dunlop
LWellington Management
LWells Fargo
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM STEVEN T.
MNUCHIN
Affordable Housing Goals, Duty to Serve, and the Housing Trust Fund/
Capital Magnet Fund
Q.1. Secretary Mnuchin, in your testimony you told me that you
``very much support the duty to serve, as well as affordable
housing goals.'' You went on to say that your ``priority is to
make sure that we maintain affordable housing and duty to
serve.''
But in the Treasury Department's plan, you state that the
GSEs' ``statutory mandates should be reformed'' and that ``the
GSEs' statutory affordable housing goals should be
replaced.''\1\ You also cite a dissenting argument from the
Financial Crisis Inquiry Commission report that asserts that
the goals were used to ``degrade the GSEs' mortgage
underwriting standards,''\2\ when in fact the Commission
concluded that the GSEs would have met their affordable housing
goals in the years leading up to the crisis without purchasing
any subprime or Alt-A securities, and that Fannie did not
submit any of these securities for goals credit in 2004.\3\
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\1\ See U.S. Department of Treasury Housing Reform Plan pg. 23.
\2\ See Financial Crisis Inquiry Report, Dissent of Peter J.
Wallison, January 2011, pg. 502, available at https://fcic-
static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_
full.pdf.
\3\ Id. at pg. 123.
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Instead of comprehensive programs to serve underserved
borrowers and markets with tailored products, your report
states that the affordable housing goals should be replaced
with another mechanism like a stream of funds sent to the
Department of Housing and Urban Development (HUD).
Where in your plan do you state or make proposals
demonstrating that you ``support the duty to serve, as well as
the affordable housing goals?''
A.1. Treasury supports the GSEs' longstanding role in promoting
access to affordable mortgage credit, including access by low-
and moderate-income, rural, and other historically underserved
borrowers. Relevant statements in Treasury's Housing Reform
Plan include:
L``The GSEs should also continue to support
affordable housing for low- and moderate-income, rural,
and other similar borrowers.''\4\
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\4\ Treasury, Housing Reform Plan, at 3.
L``Consistent with its charter, each GSE's role
should be to perform activities relating to mortgages
on housing for low- and moderate-income families
involving a reasonable economic return that may be less
than the return earned on other activities.''\5\
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\5\ Id. at 3; see also id. at 25.
L``Pending legislation, FHFA should focus on
increasing the efficiency of the means employed by the
GSEs to achieve the statutory affordable housing
goals.''\6\
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\6\ Id. at 24.
L``In addition to operating a cash window, single-
family guarantors generally should be required to offer
to acquire mortgage loans from across the Nation. A
nationwide service requirement will foster equitable
secondary market access, diversified Government-
guaranteed MBS, and also affordable access to mortgage
credit by underserved borrowers.''\7\
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\7\ Id. at 42.
L``Pending legislation, Treasury and FHFA should
amend each PSPA to require each GSE to maintain a
nationwide cash window for small lenders . . . ''\8\
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\8\ Id. at 43.
Q.2. Your plan proposes to reform the GSEs' ``statutory
mandates.'' The current ``statutory mandates'' are the
affordable housing goals, the Duty to Serve underserved housing
markets, and contributions to the Housing Trust Fund and
Capital Magnet Fund. Do you intend to reform all three of these
mandates? If so, how? Please address each of the three
---------------------------------------------------------------------------
elements.
A.2. Treasury does not propose, and indeed opposes, reducing or
eliminating the GSEs' longstanding support for affordable
housing. Indeed, comprehensive housing finance reform
legislation could preserve and improve support for low- and
moderate-income and other historically underserved borrowers
and renters.
With respect to the statutory affordability mandates
enumerated in the Treasury Housing Reform Plan,\9\ Treasury's
recommended reforms are focused primarily on the statutory
affordable housing goals for the GSEs' acquisitions of mortgage
loans to low- and moderate-income borrowers and mortgage loans
to borrowers in low-income areas.\10\ In particular, Treasury
recommends that ``Congress should replace the GSEs' statutory
affordable housing goals with a more efficient, transparent,
and accountable mechanism for delivering tailored support to
first-time home buyers and low- and moderate-income, rural, and
other historically underserved borrowers, with a portion of the
associated funding potentially transferred to HUD to expand its
affordable housing activities.''\11\
---------------------------------------------------------------------------
\9\ Id. at 23.
\10\ 12 U.S.C. 4562-63.
\11\ Treasury, Housing Reform Plan, at 24.
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Except to suggest that reforms could ``more effectively
target support for affordable housing,'' the Treasury Housing
Reform Plan did not include specific recommendations to alter
the duty to serve specified underserved markets or the periodic
contributions to the Housing Trust Fund and Capital Magnet
Fund.
Q.3. Absent legislation, your plan states that ``FHFA should
consider more efficient mechanisms for the GSEs to achieve the
statutory affordable housing goals.''\12\ What are those more
efficient mechanisms? How do you expect that these changes
would impact the way that the GSEs currently serve very low-,
low-, and moderate-income homeowners and renters?
---------------------------------------------------------------------------
\12\ Treasury, Housing Reform Plan, at 24.
A.3. The Treasury Housing Reform Plan notes that the GSEs'
``mission-related cross-subsidization in large part occurs
where the GSEs collect above-cost guarantee fees from lower
credit risk borrowers to subsidize below-cost guarantee fees
collected from higher credit risk borrowers.''\13\ Because
``[c]redit risk is not necessarily a good proxy for borrower
income,'' Treasury has suggested ``that alternatives to credit
risk-based cross-subsidy could provide more efficient
mechanisms for the GSEs to deliver well-targeted support to
low- and moderate-income borrowers and achieve their statutory
affordable housing goals.''\14\ FHFA will determine whether to
adopt any particular recommendation set forth in the Treasury
Housing Reform Plan. One approach that FHFA might wish to
consider could be to focus support on borrowers that have been
identified as very low-, low-, or moderate-income, or another
type of historically underserved borrower.
---------------------------------------------------------------------------
\13\ Ibid.
\14\ Ibid.
Q.4. Secretary Mnuchin, during your testimony you stated that
there is bipartisan support on the issue of affordable housing,
and it ``may be that there should be more money put for
affordable housing.'' As you know the Housing Trust Fund and
Capital Magnet Fund are currently funded through a 4.2 basis
point assessment on the GSEs' volume. The Administration
proposes limiting the footprint of the GSEs' multifamily
business and suggests a number of limitations on the single-
family business that would likely reduce the GSEs' overall
guarantee volume.
If the Administration limits the GSEs' volume or eliminates
certain product lines, what impact would you expect that to
have on the amount of funds allocated to the Housing Trust Fund
and Capital Magnet Fund in future years?
A.4. The Treasury Housing Reform Plan does not include specific
recommendations to alter the periodic contributions to the
Housing Trust Fund and Capital Magnet Fund. More broadly,
Treasury does not propose, and indeed opposes, reducing or
eliminating the GSEs' longstanding support for affordable
housing. Indeed, comprehensive housing finance reform
legislation that establishes a more efficient, transparent, and
accountable mechanism for delivering tailored support could
preserve and improve support for low- and moderate-income and
other historically underserved borrowers and renters.
Affordability
Q.5. Secretary Mnuchin, during the hearing and in the Treasury
Department's Housing Finance Reform plan you expressed support
for affordable housing.
How would you define affordable housing? Please address
affordability in the context of home ownership, rental housing,
and explicit subsidies.
A.5. As stated in the Treasury Housing Reform Plan, ``[a]ccess
to affordable housing is far too difficult for many Americans,
with rising housing costs forcing many families to dedicate
larger shares of their income to housing.''\15\ Consistent with
the Presidential Memorandum on Federal Housing Finance Reform
dated March 27, 2019, sustainable home ownership for American
families should be a benchmark for success for housing finance
reform. Affordable housing policy should, among other things,
contemplate efficient, transparent, and accountable mechanisms
for delivering targeted support to facilitate access to
affordable housing for borrowers and renters.
---------------------------------------------------------------------------
\15\ Id. at 21.
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National Market
Q.6. Secretary Mnuchin, in your testimony you stated that
Treasury supported ``the national concept.'' But in the
Treasury Department's plan, you also state that ``[c]areful
attention should be
devoted to the drafting of the nationwide service requirement
so as to not confer on FHFA the authority to in effect dictate
underwriting or pricing terms for single-family guarantors--for
example, the authority to require a single-family guarantor to
acquire mortgage loans from a geographic area that the single-
family guarantor has determined to have home prices that are
not supported by market fundamentals.''\16\
---------------------------------------------------------------------------
\16\ Id. at pg. 42.
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Why might a guarantor decide not to serve a given market?
A.6. The Treasury Housing Reform Plan states that ``single-
family guarantors generally should be required to offer to
acquire mortgage loans from across the Nation. A nationwide
service requirement will foster equitable secondary market
access, diversified Government-guaranteed MBS, and also
affordable access to mortgage credit by underserved
borrowers.''\17\ Congress may consider exceptions to this
requirement to prevent circumstances in which a regulator is in
effect dictating underwriting terms to a guarantor. Treasury's
preference and recommendation is that Congress enact
comprehensive housing finance reform legislation. The
legislation should specify the parameters for maintaining a
nationwide service requirement, in particular to ensure that
all markets are served by the housing finance system.
---------------------------------------------------------------------------
\17\ Id. at 42.
Q.7. Under the Treasury Department's plan, would a guarantor be
required to explain to FHFA why it would not serve a market on
---------------------------------------------------------------------------
equitable terms before it could exclude that market?
A.7. Treasury's preference and recommendation is that Congress
enact comprehensive housing finance reform legislation. The
legislation should specify the parameters for maintaining a
nationwide service requirement, in particular to ensure that
all markets are served by the housing finance system. The
Treasury Housing Reform Plan recommends a framework for
comprehensive housing finance reform, but Congress should enact
legislation addressing these specific considerations. Treasury
looks forward to working with Congress on passing bipartisan
legislation.
Q.8. If FHFA cannot enforce the requirement for a guarantor to
serve all markets, how would Treasury maintain a truly national
market?
A.8. Treasury's preference and recommendation is that Congress
enact comprehensive housing finance reform legislation. The
legislation should specify a mechanism for enforcing the
nationwide service requirement, in particular to ensure that
all markets are served by the housing finance system. Treasury
looks forward to working with Congress on passing bipartisan
legislation.
Q.9. Please describe the impact for borrowers and prospective
homeowners and renters if a guarantor or guarantors decide not
to serve a given market.
A.9. There should be no disruption to the market as a result of
Treasury's recommended reforms. Treasury's reform plan takes
great care to preserve what works in the current system.
Treasury's preference and recommendation is that Congress enact
comprehensive housing finance reform legislation. The
legislation should specify the parameters for maintaining a
nationwide service requirement, in particular to ensure that
all markets are served by the housing finance system. The
Treasury Housing Reform Plan recommends a framework for
comprehensive housing finance reform, but Congress should enact
legislation addressing these specific considerations. Treasury
looks forward to working with Congress on passing bipartisan
legislation.
30-year fixed-rate mortgage
Q.10. Secretary Mnuchin, in your testimony you stated that you
do not believe that the 30-year fixed-rate mortgage could exist
without Government backing. But the Treasury Report states that
it ``is possible that the 30-year fixed-rate mortgage loan
could remain widely available and at similar prices under a
market structure that does not depend on Government
support.''\18\ Treasury further states that it ``does not
believe a Government guarantee is required'' for a functioning
mortgage market.\19\
---------------------------------------------------------------------------
\18\ Id. at pg. 12.
\19\ Id. at pg. 2.
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To clarify, is it the position of the Trump administration
and the Treasury Department that a Government guarantee is
necessary to preserve widespread availability of the 30-year
fixed-rate mortgage? Please specify whether you are referring
to an implicit, limited explicit, or unlimited explicit
guarantee.
A.10. As stated in the Treasury Housing Reform Plan, the GSEs
have fostered the widespread availability of the 30-year fixed-
rate mortgage loan. Any proposal to fundamentally change the
housing finance system should take careful account of the risks
posed by the transition. Stability in the housing finance
system is crucial, and generally counsels in favor of
preserving what works in the current system, including the
longstanding support of the 30-year fixed-rate mortgage loan.
This existing Government support should, however, be made
clearer and better tailored.
Treasury does not believe an explicit guarantee, backed by
the full faith and credit of the Federal Government, is
required for the GSEs to continue to support the widespread
availability of the 30-year fixed-rate mortgage. However, to
preserve stability in the housing finance system pending
comprehensive housing finance reform legislation, Treasury
expects that it will be necessary to maintain limited and
tailored Government support for the GSEs by leaving the PSPA
commitment in place after the conservatorships. The capital
support provided through the PSPA commitment continues to
provide confidence to investors that the GSEs will meet their
financial obligations.
Further, Treasury would support legislation that authorizes
an explicit, paid-for guarantee backed by the full faith and
credit of the Federal Government that is limited to the timely
payment of principal and interest on qualifying mortgage-backed
securities (MBS). That explicit Government guarantee should be
available not only to the GSEs but also to any other potential
guarantors that would be chartered by FHFA.
Multifamily
Q.11. Secretary Mnuchin, during your oral testimony you stated
that Treasury believes the GSEs' current level of involvement
in the multifamily housing market is ``fine'' and that you were
not looking to reduce it. But in the Administration's plan, the
Treasury Department stated that ``FHFA should revisit FHFA's
efforts in 2012 and 2013 to restrict the GSEs' multifamily
footprint.''\20\ The plan further states that FHFA should
``limit support of each GSE's multifamily business to its
underlying affordability mission.''
---------------------------------------------------------------------------
\20\ Id. at pg. 21.
---------------------------------------------------------------------------
As you know, the GSEs play a critical role in providing
liquidity for multifamily housing in secondary and tertiary
markets that are less likely to attract capital from other
sources. While these deals may not be designated as affordable,
they, too, serve a critical unmet need.
Does the Administration recommend restricting the GSEs'
multifamily footprint and limiting its activities as stated in
the Treasury Department's Housing Finance Reform plan? If so,
please explain what limitations Treasury would recommend. If
not, please explain the meaning of the quotes above.
A.11. The GSEs continue to provide liquidity to the multifamily
lending market, in particular to support the availability of
rental units that are affordable to low- and moderate-income
and other historically underserved renters. The Treasury
Housing Reform Plan recommends that Congress authorize an
explicit, paid-for guarantee of qualifying MBS collateralized
by eligible multifamily mortgage loans. The funding advantage
conferred by an explicit guarantee could risk crowding out
existing private sector funding of multifamily loans. As such,
Treasury recommends that Congress and FHFA revisit the
framework for ensuring that the Federal Government's support of
the multifamily secondary market is tailored to an
affordability mission. FHFA recently announced changes to the
restrictions on GSE multifamily loan purchases. Treasury
believes these changes are consistent with the recommendations
in the Treasury Housing Reform Plan.
Cross-Subsidy
Q.12. Secretary Mnuchin, the Administration's plan proposes to
reduce business lines for which the GSEs charge higher
guarantee fees.
Does the Administration intend to maintain at least the
same level of cross-subsidy in the system, which directly
impacts low- and moderate-income prospective homeowners and
renters in harder to serve markets? If so, how will the GSEs
generate sufficient funds to maintain affordable access to
mortgage credit for moderate-income borrowers and in less
lucrative markets, like rural areas?
A.12. The Treasury Housing Reform Plan recommends that
``Congress should restrict the permissible activities of
guarantors to the business of securitizing Government-
guaranteed MBS,'' and that ``[p]ending legislation, FHFA should
assess whether each of the current products, services, and
other single-family activities of each GSE is consistent with
its statutory mission . . . ''\21\ Treasury supports
appropriate review of GSEs business activities to ensure that
there is a clear rationale for them given the Government's
existing and recommended future support.
---------------------------------------------------------------------------
\21\ Id. at 18.
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Treasury does not propose, and indeed opposes, reducing or
eliminating the GSEs' longstanding support for affordable
housing. Indeed, comprehensive housing finance reform
legislation that establishes ``a more efficient, transparent,
and accountable mechanism for delivering tailored support to
first-time home buyers and low- and moderate-income, rural, and
other historically underserved borrowers'' could improve
support for affordable housing.\22\ Any legislative reforms
should also preserve and improve support for low- and moderate-
income and other historically underserved renters.\23\
---------------------------------------------------------------------------
\22\ Id. at 24.
\23\ Id. at 14, 19-21.
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Regulated Rate of Return
Q.13. Secretary Mnuchin, in your oral testimony you stated that
the Trump administration believes that FHFA should maintain
regulation and oversight of the pricing of any guarantee. While
regulation of pricing is important to avoid unhealthy
competition for market share, I am also concerned about the
returns that investors in guarantors might demand. As the
Financial Crisis Inquiry Commission's report noted, ``risky
practices of Fannie Mae,'' which was the case study for the two
Enterprises, ``led to its fall: practices undertaken to meet
Wall Street's expectations for growth, to regain market share,
and to ensure generous compensation for its employees.''\24\
---------------------------------------------------------------------------
\24\ Financial Crisis Inquiry Report, pg. 323.
---------------------------------------------------------------------------
To address the problematic incentives in place before the
crisis, we must also address investor expectations.
In addition to supporting regulation of the guarantee fee,
does the Trump administration also support a regulated rate of
return for shareholders in any guarantor?
A.13. Treasury believes any subsidy provided to the GSEs should
be passed through to borrowers, not passed through to
shareholders or employees. While the Treasury Housing Reform
Plan recommends a framework for comprehensive housing finance
reform, Treasury's preference and recommendation is that
Congress enact legislation to address these specific
considerations. Treasury looks forward to working with Congress
on passing bipartisan legislation.
Q.14. Secretary Mnuchin, you stated that FHFA should maintain
``regulation and oversight of the pricing of the guarantee''
for mortgage-backed securities. But in the Treasury
Department's plan, you also state that ``[c]areful attention
should be devoted to the drafting of the nationwide service
requirement so as to not confer on FHFA the authority to in
effect dictate underwriting or pricing terms for single-family
guarantors--for example, the authority to require a single-
family guarantor to acquire mortgage loans from a geographic
area that the single-family guarantor has determined to have
home prices that are not supported by market
fundamentals.''\25\
---------------------------------------------------------------------------
\25\ Treasury Housing Reform Plan, pg. 42.
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How do you distinguish between regulation and oversight of
pricing for the guarantee and the pricing terms for a single-
family guarantee? Under the Treasury Department's plan, what
pricing would FHFA establish and what pricing would be left to
the discretion of the guarantor?
A.14. Treasury supports preserving a national service
requirement to ensure that all markets are served by the
housing finance system. Comprehensive housing finance reform
legislation should specify the parameters for maintaining such
a nationwide requirement and any limited exceptions to such a
requirement to address potential safety and soundness
considerations for a guarantor or with regard to achieving a
competitive secondary market.
While the Treasury Housing Reform Plan recommends a
framework for comprehensive housing finance reform, Treasury's
preference and recommendation is that Congress enact
legislation to address these specific considerations. Treasury
looks forward to working with Congress on passing bipartisan
legislation.
QM
Q.15. Secretary Mnuchin, your plan calls on the Consumer
Financial Protection Bureau to amend its rules put in place
after the crisis to hold lenders accountable for making
predatory loans based on little or no documentation. You also
say that the GSEs will be limited to guaranteeing only some
portion of the loans that the Bureau believes are so safe that
lenders are given a complete safe harbor from legal liability.
Please describe what loans you believe are so safe that
consumers shouldn't need the right to hold their lender
accountable, but that are too risky for the GSEs to guarantee.
A.15. The Treasury Housing Reform Plan recommends that
``Congress amend the Truth in Lending Act to establish a clear
bright line safe harbor for compliance with the required
ability-to-repay determination,'' and that ``[p]ending
legislation, the QM patch should expire.''\26\ Treasury
recommends that FHFA review GSE purchase guidelines in light of
any revisions to the QM standard, as determined by the Consumer
Financial Protection Bureau (CFPB), in order to manage risks to
the safety and soundness of the GSEs or additional guarantors,
and to ensure that GSE activities have a close nexus to the
underlying rationale for Government support.
---------------------------------------------------------------------------
\26\ Id. at 38.
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G-Fees
Q.16. Secretary Mnuchin, your plan suggests that FHFA could
charge different guarantors different amounts for the same
Government guarantee to help new entrants compete with Fannie
Mae and Freddie Mac.\27\
---------------------------------------------------------------------------
\27\ Id. at pg. 41.
---------------------------------------------------------------------------
Who would you imagine would pay those higher costs for a
guarantee, and what impact might these higher costs have on
access to credit?
A.16. Treasury recommends legislative reforms that would
encourage a more competitive secondary mortgage market,
including granting FHFA the authority to charter additional
competitor guarantors to the GSEs. Having multiple guarantors
could reduce the systemic importance of any single guarantor,
increase market discipline, better protect taxpayers, and
encourage the transmission of any subsidy to borrowers.
However, additional entrants may face significant barriers to
entry. Treasury's Housing Reform Plan recommends that Congress
grant FHFA ``appropriate authorities to foster competition with
the re-chartered GSEs.''\28\ These authorities may include
giving FHFA the ability to adjust the fees it charges in
association with administering a mortgage insurance fund. The
Treasury Housing Reform Plan contemplates that certain
requirements for new guarantor entrants be phased in to foster
the development of a competitive market. These recommended
authorities would not be expected to have a negative effect on
borrower access to credit. The establishment of a full faith
and credit Government guarantee by Congress on eligible MBS
could support continued broad access to mortgage credit by
providing confidence to MBS investors regardless of prevailing
market conditions.
---------------------------------------------------------------------------
\28\ Id. at 42.
---------------------------------------------------------------------------
TBA Market
Q.17. The Administration proposes a number of limitations on
the GSEs' single-family business that would likely reduce the
GSEs' overall guarantee volume, including product restrictions.
How would any reduction in the size of the GSEs' footprint
impact liquidity in the to-be-announced (TBA) market? How would
changes in liquidity in the TBA market ultimately impact
mortgage pricing for consumers?
A.17. There should be no disruption to the market as a result
of Treasury's recommended reforms. Treasury's reform plan takes
great care to preserve what works in the current system,
including preservation of the TBA market, to which the GSEs and
Ginnie Mae have unique access and through which global capital
supports the availability of the 30-year fixed-rate mortgage.
Duplication of Support
Q.18. Secretary Mnuchin, both the Treasury and HUD plans
express concern about ``duplicating support'' for families who
might be eligible for both FHA-insured and GSE-guaranteed
loans. But, as you know, FHA's insurance and the GSEs'
guarantee provide two different functions, and most borrowers
participate in just one of these programs at a time.
How is a borrower being eligible for an FHA-insured loan
and a GSE-guaranteed loan duplicating support? How does a
borrower having the option to choose an FHA or conventional
loan hurt the programs?
A.18. The Presidential Memorandum on Federal Housing Finance
Reform dated March 27, 2019, directed Treasury to define the
GSEs' role in promoting affordable housing without duplicating
support provided by the Federal Housing Administration (FHA) or
other Federal programs. Consistent with its charter, each GSE's
role should be to perform activities relating to mortgages on
housing for low- and moderate-income families involving a
reasonable economic return that may be less than the return
earned on other activities. Consistent with the Presidential
Memorandum, FHA and Ginnie Mae have primary responsibility for
providing housing finance support to low- and moderate-income
families that cannot be fulfilled through traditional
underwriting. Treasury acknowledges that there will be some
incidental overlap between the GSEs' and FHA's support for
affordable housing, but the duplication of support for
affordable housing has unnecessarily increased during the GSEs'
conservatorships. Treasury believes FHFA and HUD should better
define the respective roles, including their overlap, between
the GSEs and FHA to avoid duplicating sizable Federal support
to the housing system.
PLS
Q.19. Secretary Mnuchin, your plan makes a number of
suggestions to try to resuscitate the private-label securities
(PLS) market. In its latest paper on reviving the PLS market,
the Structured Finance Association said that ``[i]nvestors have
indicated that a mechanism to solve issues related to
representations and warranties is a prerequisite to returning
to the market.''\29\
---------------------------------------------------------------------------
\29\ ``RMBS 3.0: A Comprehensive Set of Proposed Industry Standards
to Promote Growth in the Private Label Securities Market,'' SFIG,
November 9, 2017, available at https://structuredfinance.org/wp-
content/uploads/2019/05/RMBS-3.0-Sixth-Edition-Final-1109.pdf.
---------------------------------------------------------------------------
Has the market fixed the remaining distrust between
investors and issuers? If this hasn't been fixed, why would we
think that investors would come back?
A.19. PLS issuance has not returned to levels seen in the
decade before the financial crisis. Residual investor concerns
with how losses are managed and allocated to different parties
to a private label securitization (PLS) transaction, and how
conflicts between those interests are resolved, continue to be
raised as one challenge limiting PLS issuance. Other issues
likely also contribute to the relatively limited issuance,
including challenges for issuers to comply with onerous asset-
level disclosure requirements for registered issuances; passive
investor concerns with their potential assignee liability under
Federal law; risk retention rules for residential mortgage
securitizations; and GSE activities crowding out private risk
capital. The Treasury Housing Reform Plan has as one of its
main pillars leveling the playing field across market
participants, so that innovation and competitive market forces
drive volume, as opposed to statutory and regulatory barriers.
Treasury supports efforts by regulators to review existing
rules to address areas where recalibration is warranted to
support a competitive secondary mortgage market.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM STEVEN T.
MNUCHIN
Q.1. First-time home buyers have traditionally been the driving
force of the housing market and these borrowers traditionally
rely on low-downpayment mortgages to purchase their homes. In
fact, over the past several years, nearly 80 percent of first-
time home buyers with mortgages purchased homes using low-
downpayment products. With rising rents, high home price
appreciation numbers, and student debt, it is critical that
younger buyers have access to affordable low-downpayment
options that will allow them to attain the American Dream of
home ownership.
Can you please speak to how your agencies' recommendations
will ensure that borrowers can access affordable, prudent low-
downpayment mortgage options?
A.1. Treasury supports the GSEs' longstanding role in promoting
access to affordable mortgage credit, including access by low-
and moderate-income, rural, and other historically underserved
borrowers. As stated in the Treasury Housing Reform Plan,
``[a]ccess to affordable housing is far too difficult for many
Americans, with rising housing costs forcing many families to
dedicate larger shares of their income to housing.''\1\
Consistent with the Presidential Memorandum, sustainable home
ownership for American families should be a benchmark for
success for housing finance reform. Affordable housing policy
should contemplate efficient, transparent, and accountable
mechanisms for delivering targeted support for affordable
ownership and rental opportunities.
---------------------------------------------------------------------------
\1\ Id. at 21.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM STEVEN T.
MNUCHIN
Q.1. Treasury's report states that Treasury and FHFA should
amend each PSPA to require each GSE to maintain a nationwide
cash window for small lenders and to prohibit volume-based
pricing discounts or other similar incentives. I think this is
a critical issue to ensure that small banks can compete in the
mortgage business and that rural America can have access to
mortgage credit.
How will you operationalize enforcement, particularly if
more guarantors enter the market? How will the window function
in a crisis without the implicit guarantee of debt financing?
A.1. Treasury believes housing finance reform should foster a
competitive primary mortgage market in part by protecting equal
access for lenders of all sizes to the secondary mortgage
market, including operating a cash window for small lenders.
While cash acquisitions account for a sizable share of GSE
business acquisition volumes, because the GSEs have access to
the Agency MBS market to package and securitize their cash
acquisitions, the size of the balance sheet needed to fund
these activities is relatively small. Treasury expects that
much of the funding needs currently supported by unsecured
corporate debt of the GSEs will be covered by the equity
financing eventually required by FHFA's final capital rule.
Q.2. Both Treasury and HUD have been heavily involved in the
implementation of my Opportunity Zone initiative and I
appreciate your hard work. Thus far Opportunity Zones have
proven to be instrumental in fostering community development,
job creation, and economic development across our Nation.
Needless to say, Opportunity Zones have also been extremely
impactful in terms of the topics we've covered today.
As you know, Opportunity Zones have been a catalyst for new
investment into our Nation's most economically distressed
neighborhoods. Of course, Treasury's work in providing
implementing regulations has been a huge part of making this
initiative--and these projects--possible. In light of that,
when do you expect that we will see the Opportunity Zone
regulations finalized?
A.2. On December 19, 2019, the Treasury Department and IRS
issued a final set of regulations on Opportunity Zones.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM STEVEN T.
MNUCHIN
Q.1. Our housing finance system faces a number of profound
challenges. In most parts of the country, prices for starter
homes are skyrocketing as much as 10 percent per year.\1\
Millions of Americans are cost burdened, paying more than 30
percent of their income on rent, mortgages or other housing
costs. Perhaps most perniciously, the legacy of decades of
racist Federal housing policy is still too apparent today. The
average Black family has about \1/10\th the wealth of the
average white family,\2\ and while the Black families made some
gains in the healthy housing markets of the 1990s and early
2000s, that progress was wiped out in the subprime crisis.
Today, the homeownership gap between Black and white families
is as large as it was when housing discrimination was legal.\3\
---------------------------------------------------------------------------
\1\ Marketwatch ``One big reason it's so hard for first-time buyers
to find the right starter home.'' Jacob Passy, March 21, 2018, https://
www.marketwatch.com/story/another-hurdle-for-first-time-home-buyers-
there-are-barely any-starter-homes-for-sale-2018-03-21.
\2\ Brookings, ``A conversation about the racial wealth gap--and
how to address it,'' Michaela Broyles, June 18, 2019, https://
www.brookings.edu/blog/brookings-now/2019/06/18/a-conversation-about-
the-racial-wealth-gap-and-how-to-address-it/.
\3\ Census Bureau, ``Quarterly Residential Vacancies and
Homeownership, Second Quarter 2019,'' July 25, 2019, https://
www.census.gov/housing/hvs/files/currenthvspress.pdf; National Bureaus
of Economic Research Working Paper Series, ``Race and Home Ownership,
1900 to 1990,'' William J. Collins and Robert Margo, August 1999,
https://www.nber.org/papers/w7277.pdf.
---------------------------------------------------------------------------
Any proposal for housing finance reform must confront these
problems. After all, as the U.S. Department of Treasury Housing
Reform Plan (``Treasury Report'') points out, ``[e]ach GSE's is
unique in that its congressional charter endows the GSE with a
public mission.'' These public missions make it clear that the
GSEs exist to ``promote access to mortgage credit throughout
the Nation (including central cities, rural areas, and
underserved areas)'' and to perform ``activities relating to
mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than
the return earned on other activities.''\4\
---------------------------------------------------------------------------
\4\ U.S. Department of the Treasury, ``U.S. Department of the
Treasury Housing Reform Plan,'' September 2019, file:///C:/Users/
js42247/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/
LTYNPN67/Treasury-Housing-Finance-Reform-Plan.pdf.
---------------------------------------------------------------------------
I have carefully reviewed the Treasury Report and the
Department of Housing and Urban Development's Housing Finance
Reform Plan (``HUD Report''). Both appear to eliminate many of
the mechanisms in the current system that support sustainable
home ownership among low- and moderate-income and middle-income
borrowers, especially in communities of color. The following
questions seek more information about the analysis that
Treasury, HUD and the Federal Housing Finance Agency (FHFA)
undertook to determine the effects of their various proposals
on housing prices, access to home ownership for first-time home
buyers, and the racial homeownership gap.
The Treasury Report recommends that ``Congress should
restrict the permissible activities of guarantors to the
business of securitizing Government-guaranteed MBS,'' including
``cash-out refinancings, investor loans, vacation home loans,
higher principal balance loans [in high-cost areas], or other
subsets of GSE-acquired mortgage loans,'' and in the absence of
legislation ``FHFA should assess whether each of the current
products, services, and other single-family activities of each
GSE is consistent with its statutory mission.''\5\
---------------------------------------------------------------------------
\5\ Ibid.
Did Treasury analyze the effects of limiting the activities
of the guarantors on home prices, especially in high-cost
---------------------------------------------------------------------------
areas? If so, please provide the analysis.
A.1. Treasury recommends that activities that benefit from
Government support should be assessed to ensure they align with
a clear rationale warranting such support. Treasury took great
care to formulate its recommendations in ways that would not
disrupt the market or raise borrowing costs. Treasury believes
any changes to GSE business activities should be carefully
calibrated to this objective.
Q.2. Did Treasury analyze the effects limiting the activities
of the guarantors on access to home ownership for low-,
moderate-, and middle-income borrowers and first-time home
buyers, especially in high-cost areas? If so, please provide
the analysis.
A.2. Treasury took great care to formulate its recommendations
in ways that would not disrupt the market, limit access to
credit, or raise borrowing costs. Critically, the legislative
reforms Treasury recommends in Treasury's Housing Reform Plan
should preserve and improve support for low- and moderate-
income and other historically underserved groups.\6\
---------------------------------------------------------------------------
\6\ Id. at 14, 19-21.
Q.3. Did Treasury analyze the effects of limiting the
activities of the guarantors on access to sustainable home
ownership in communities of color? If so, please provide the
---------------------------------------------------------------------------
analysis.
A.3. See previous answer.
Q.4. The Treasury report recommends getting rid of the
affordable housing goals. As an alternative, the Report
suggests, ``collect[ing] a periodic assessment from guarantors
that Congress would make available through an appropriation to
administer on-budget affordable housing.''
Did Treasury analyze the effects of getting rid of the
affordable housing goals on home prices? If so, please provide
the analysis.
A.4. While the Treasury Housing Reform Plan recommends a
framework for comprehensive housing finance reform, Treasury's
preference and recommendation is that Congress enact
legislation to address these specific considerations. Treasury
looks forward to working with Congress on passing bipartisan
legislation. Given the critical importance of the housing
market to the U.S. economy, Treasury supports careful review of
proposed reforms, as they are developed in potential
legislation, to ensure that they do not
disrupt the market, limit access to credit for creditworthy
borrowers, or raise borrowing costs.
Q.5. Did Treasury analyze the effects of getting rid of the
affordable housing goals on access to home ownership low-,
moderate-, and middle-income borrowers and first-time home
buyers? If so, please provide the analysis.
A.5. See previous answer.
Q.6. Did Treasury analyze the effects of getting rid of the
affordable housing goals on access to sustainable home
ownership in communities of color? If so, please provide the
analysis.
A.6. See previous answer.
Q.7. The Treasury report recommends that ``FHFA and HUD should
develop and implement a specific understanding as to the
appropriate roles and overlap between the GSEs and FHA, for
example, with respect to the GSEs' acquisitions of high LTV and
high DTI loans and FHA's underwriting of cash-out,
conventional-to-FHA, and other refinancing loans and loans to
repeat FHA borrowers.''
Did Treasury analyze the effects of limiting the footprint
of the GSEs and FHA on home prices? If so, please provide the
analysis.
A.7. The Presidential Memorandum directed Treasury to define
the GSEs' role in promoting affordable housing without
duplicating support provided by the FHA or other Federal
programs. Consistent with its charter, each GSE's role should
be to perform activities relating to mortgages on housing for
low- and moderate-income families involving a reasonable
economic return that may be less than the return earned on
other activities. Consistent with the Presidential Memorandum,
FHA and Ginnie Mae have primary responsibility for providing
housing finance support to low- and moderate-income families
that cannot be fulfilled through traditional underwriting.
Treasury acknowledges that there will be some incidental
overlap between the GSEs and FHA's support for affordable
housing, but the duplication of support for affordable housing
has unnecessarily increased during the conservatorships.
Treasury believes FHFA and HUD should better define the
respective roles, including their overlap, between the GSEs and
FHA to avoid duplicating sizable Federal support to the housing
system. Treasury took great care in formulating its
recommendations in ways that would not disrupt the market,
raise borrowing costs, or limit access to credit for
creditworthy borrowers to achieve sustainable home ownership.
Q.8. Did Treasury analyze the effects of limiting the footprint
of the GSEs and FHA on access to home ownership for low-,
moderate-, and middle-income borrowers and first-time home
buyers? If so, please provide the analysis.
A.8. See previous answer.
Q.9. Did Treasury analyze the effects of limiting the footprint
of the GSEs and FHA on access to sustainable home ownership in
communities of color? If so, please provide the analysis.
A.9. See previous answer.
Q.10. The Treasury Report recommends that ``FHFA's eventual
regulatory capital requirements should require that each
guarantor, or each GSE pending legislation, be appropriately
capitalized by maintaining capital sufficient to remain viable
as a going concern after a severe economic downturn and also to
ensure that shareholders and unsecured creditors, rather than
taxpayers, bear losses.'' These higher capital requirements
would be similar to bank capital requirements, well above the
status quo and the proposed FHFA rule.
Did Treasury analyze the effects of higher capital
requirements on home prices? If so, please provide the
analysis.
A.10. Treasury stated in Treasury's Housing Reform Plan that
``[t]o foster a level playing field with private sector
competition, similar credit risks generally should have similar
credit risk capital charges across market participants.''\7\
The Treasury Housing Reform Plan is not prescriptive as to the
level of capital the GSEs or additional competitor guarantors
would be required to hold. Treasury took great care in
formulating its recommendations in ways that would not disrupt
the market or raise borrowing costs. On November 19, 2019, FHFA
announced it would re-propose its capital regulation applicable
to the enterprises.\8\ Any assessment of the impact of
potential GSE capital requirements would be premature pending
the development of those requirements.
---------------------------------------------------------------------------
\7\ Id. at 28.
\8\ Federal Housing Finance Agency. FHFA Will Re-propose Enterprise
Capital Rule in 2020 (Nov. 19, 2019), available at: https://
www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Will-Re-propose-Enterprise-
Capital-Rule-in-2020.aspx.
Q.11. Did Treasury analyze the effects of higher capital
requirements on access to home ownership for low-, moderate-,
and middle-income borrowers and first-time home buyers? If so,
---------------------------------------------------------------------------
please provide the analysis.
A.11. See previous answer.
Q.12. Did Treasury analyze the effects of higher capital
requirements on access to sustainable home ownership in
communities of color? If so, please provide the analysis.
A.12. See previous answer.
Q.13. According to the Treasury report, ``Treasury supports the
contemplated expiration of the QM patch.''
Did Treasury analyze the effects of letting the QM patch
expire on home prices? If so, please provide the analysis.
A.13. The CFPB is currently engaged in a review of the ability-
to-repay rule, following its advance notice of proposed
rulemaking in July 2019. As noted in Treasury's Housing Reform
Plan, Treasury recommends that FHFA and the CFPB continue to
coordinate their efforts to avoid market disruption in
connection with the expiration of the QM patch and the
implementation of any amendments to the CFPB's ability-to-repay
rule.\9\ Treasury took great care in formulating its
recommendations in ways that would not disrupt the market,
raise borrowing costs, or limit access to credit for
creditworthy borrowers to achieve sustainable home ownership.
---------------------------------------------------------------------------
\9\ Treasury, Housing Reform Plan at 38.
Q.14. Did Treasury analyze the effects of letting the QM patch
expire on access to home ownership for low-, moderate-, and
middle-income borrowers and first-time home buyers? If so,
---------------------------------------------------------------------------
please provide the analysis.
A.14. See previous answer.
Q.15. Did Treasury analyze the effects of letting the QM patch
expire on access to sustainable home ownership in communities
of color? If so, please provide the analysis.
A.15. See previous answer.
Q.16. The Treasury report recommends that ``[f]ollowing any
change to the CFPB's ability-to-repay rule, FHFA should revisit
the determination as to which single-family mortgage loans
should be eligible for acquisition by the GSEs (with
appropriate amendments to the PSPAs) or, following legislation,
should be eligible to secure Government-guaranteed MBS.''
Did Treasury analyze the effects of further limiting the
footprint of the GSEs on home prices? If so, please provide the
analysis.
A.16. Treasury recommends that FHFA review GSE purchase
guidelines in light of any revisions to the QM standard, as
determined by the CFPB, in order to manage risks to the safety
and soundness of the GSEs or additional guarantors, and to
ensure that GSE and guarantor activities maintain a close nexus
to with Government support for their MBS. Treasury took great
care in formulating its recommendations in ways that would not
disrupt the market, raise borrowing costs, or limit access to
credit for creditworthy borrowers to achieve sustainable home
ownership.
Q.17. Did Treasury analyze the effects of further limiting the
footprint on access to home ownership for low-, moderate-, and
middle-income borrowers and first-time home buyers? If so,
please provide the analysis.
A.17. See previous answer.
Q.18. Did Treasury analyze the effects of further limiting the
footprint of the GSEs on access to sustainable home ownership
in communities of color? If so, please provide the analysis.
A.18. See previous answer.
Q.19. The Treasury Report is silent about the Housing Trust
Fund and the Capital Magnet Fund. Both programs make important
contributions to mitigating the affordable rental-housing
crisis. Nearly every county in the United States lacks a
sufficient stock of available and affordable rental units for
residents who make 30 percent of area median income or below--
the population targeted by the Housing Trust Fund.\10\ Nearly
half of renters are cost burdened, meaning that they pay more
than 30 percent of their income in rent.\11\ The private sector
cannot and will not the fix this gap on its own. How does
Treasury recommend funding the Housing Trust Fund and the
Capital Magnet Fund and at what level?
---------------------------------------------------------------------------
\10\ National Low Income Housing Coalition, ``New Report Concludes
that Nearly Every U.S. County Lacks an Adequate Supply of Affordable
and Available Homes for Low Income Renters,'' June 20, 2019, https://
nlihc.org/news/new-report-concludes-nearly every-us-county-lacks-
adequate-supply affordable-and-available.
\11\ Housing Wire, ``Apartment List: Nearly 50 percent of renters
are cost burdened,'' Jeremiah Jensen, September 25, 2018, https://
www.housingwire.com/articles/46924-apartment-list-nearly-50-of-renters-
are-cost-burdened.
A.19. The Treasury Housing Reform Plan does not include
specific recommendations to alter the periodic contributions to
the Housing Trust Fund and Capital Magnet Fund. More broadly,
Treasury does not propose, and indeed opposes, reducing or
eliminating the GSEs' longstanding support for affordable
housing. Indeed, comprehensive housing finance reform
legislation that establishes a more efficient, transparent, and
accountable mechanism for delivering tailored support could
preserve and improve support for low- and moderate-income and
other historically underserved borrowers and renters.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM STEVEN T.
MNUCHIN
Q.1. Treasury's report on reforming the GSEs mentioned that
it's possible for the 30-year fixed-rate mortgage to still be
widely available under similar prices in market structures that
don't depend on Government support. An alternative system that
Treasury discussed was one in which mechanisms like covered
bonds mimic our GSEs' separation of credit risk and interest
rate risk. Banks in Denmark, where government has a less
central role in housing finance and the use of covered bonds is
widespread, have recently been offering 30-year fixed-rate
mortgages at interest rates of just 0.5 percent.
I understand that monetary policy in Europe plays a role in
such an ultra-low rate, but the fact that this kind of a
mortgage product is so widely available in a small country like
Denmark suggests that there are indeed other options to the
American status quo.
Would such an alternative financing model that doesn't have
Government support as its centerpiece be feasible in the United
States?
A.1. As stated in the Treasury Housing Reform Plan, the GSEs
have fostered the widespread availability of the 30-year fixed-
rate mortgage loan. Any proposal to fundamentally change the
housing finance system should take careful account of the risks
posed by the transition. Stability in the housing finance
system is crucial, and generally counsels in favor of
preserving what works in the current system, including the
longstanding support of the 30-year fixed-rate mortgage loan.
This existing Government support should, however, be made
clearer and better tailored. Treasury, therefore, would support
replacing the commitment in the senior preferred stock purchase
agreements with an explicit, paid-for guarantee backed by the
full faith and credit of the Federal Government that is limited
to the timely payment of principal and interest on qualifying
MBS. That explicit Government guarantee should be available not
only to the GSEs but also to any other guarantors chartered by
FHFA.
Treasury supports a level playing field for diverse forms
of capital participating in the mortgage finance market to
support widespread access to mortgage credit at the lowest cost
to borrowers. Diverse forms of capital competing to support
creditworthy borrowers are more likely to facilitate a dynamic
housing finance
system where efficiency, innovation, and service drive business
and funding decisions.
Q.2. In January 2016, the FHFA released a rule on Federal Home
Loan Bank (FHLB) membership that restricted private capital
investors' support of our housing market through their captive
insurance companies. This rule was set to become fully
effective 5 years after it was made final. Companies whose
membership sunsets in February 2021 have already started
pulling meaningful private capital from the housing market.
Given that it will take time for the Administration to
review the January 2016 rule and FHLB membership, what interim
steps is the Administration planning on taking to promote the
ability of impacted housing finance-focused companies to
continue providing liquidity?
A.2. In light of the continued evolution of the housing finance
system, including lending outside of traditional depositories,
Treasury recommends that Congress and FHFA revisit the FHLBank
membership eligibility to consider whether captive insurers and
other types of financial institutions should be eligible for
FHLBank membership. Pending legislation, FHFA will determine
whether to adopt any particular recommendation set forth in the
Treasury Housing Reform Plan.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM STEVEN T.
MNUCHIN
Q.1. I was pleased to see that you believe that FHFA and
Congress should revisit FHLBank membership eligibility to
reflect the evolution of the housing finance system. Can you
discuss the role you would see mREITs playing in the housing
finance system and how that would increase liquidity and
durability to housing finance?
A.1. Treasury supports diverse forms of capital participating
in the mortgage finance market to support widespread access to
mortgage credit. Diverse forms of capital and associated
private market participants competing to support creditworthy
borrowers are more likely to reduce the systemic importance of
any single intermediary, increase market discipline, and pass
benefits through to borrowers. Treasury believes it is critical
that housing finance reform further level the playing field
across market participants so that efficiency, innovation, and
service drive business and funding decisions.
In light of the continued evolution of the housing finance
system, including lending outside of traditional depositories,
Treasury recommends that Congress and FHFA should revisit the
FHLBank membership eligibility to consider whether captive
insurers and other types of financial institutions should be
eligible for FHLBank membership.
Q.2. Given the impending expiration of captive insurance
membership and the resultant withdrawal of private capital
occurring now, would you be willing to sit down with the FHLBs
and mission-aligned captive insurance companies to discuss a
path forward?
A.2. Treasury supports Congress and FHFA revisiting the FHLBank
membership eligibility to consider whether captive insurers and
other types of financial institutions should be eligible for
FHLBank membership. Treasury stands ready to provide technical
assistance to Congress on this and other issues and otherwise
support legislative reform efforts. Pending legislation, FHFA
will determine whether to adopt any particular recommendation
set forth in the Treasury Housing Reform Plan.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM STEVEN T.
MNUCHIN
Q.1. What risk and prudential controls would you want to see in
place at the FHFA as the regulator of the GSEs to whom you
provide a line of credit? Director Calabria has noted that he
must be ``100 percent'' confident in the supervisory framework
at the FHFA, and that FHFA is prepared for proper oversight and
regulation of the GSEs as private entities, before he agrees to
release the GSEs from conservatorship. What does this framework
require in your opinion?
A.1. Pending legislation to end the conservatorships, each GSE
should remain in conservatorship until FHFA determines that
that the particular GSE can operate safely and soundly and
without posing an undue systemic risk. Treasury believes that
FHFA should consider a number of preconditions prior to
releasing a GSE from conservatorship. These include
finalization of regulatory capital requirements; approval and
subsequent completion of capital restoration plans by each GSE;
amendments to the senior preferred stock purchase agreements to
compensate the Federal Government for its support, among other
potential amendments; and any other conditions that FHFA
determines are necessary to ensure that the GSE would operate
in a safe and sound manner after conservatorship.
Q.2. The Treasury report detailed recommendations to support a
level playing field for new participants in the housing finance
system. These regulatory requirements touch on items like
capital relief, data standardization, and third-party credit
risk transfers; however, the report does not address the
technological infrastructure that the enterprises have built up
over the past decade while in conservatorship. Post
conservatorship, how do we limit the competitive advantage
Fannie & Freddie would have over new competitors due to the
technological infrastructure they have accrued over the past
decade on the taxpayers' dime?
A.2. In addition to granting FHFA the authority to charter
competitor guarantors to the GSEs, the Treasury Housing Reform
Plan recommends that Congress ``give FHFA appropriate
authorities to foster competition with re-chartered GSEs.''\1\
Such authority may include the ability to set variable
guarantor-specific fees for access to the Federal guarantee on
MBS or to make the GSEs' ``loan-level and appraisal data and
the source code for the GSEs' automated underwriting system[s]
available to new entrants.''\2\
---------------------------------------------------------------------------
\1\ Id. at 42.
\2\ Id. at 41.
Q.3. In the report from the U.S. Department of the Treasury,
recommendation #6 is that ``pending legislation, each GSE
should be recapitalized so that private capital takes the
first-loss position on the GSE's exposure to risk and loss.''
To best protect taxpayers from mortgage related credit risk, do
you agree that the entities taking the first-loss risk should
be dedicated to the housing finance system, highly regulated,
---------------------------------------------------------------------------
and available during all market cycles?
A.3. Yes.
Q.4. I appreciate that the report recognized the impact to
housing affordability that local jurisdictions are causing
through myriad barriers such regulations, land use and rent
control. What impact can the GSEs, through direction from FHFA,
have on breaking down these barriers or incenting localities to
modify their rent control initiatives?
A.4. One of the objectives in the GSEs' 2020 Conservatorship
Scorecard, as prescribed by FHFA, is to ``assess opportunities
to support and encourage State and local policies that enable
the housing market to function more efficiently by (1) reducing
the cost of housing production and/or (2) lowering the cost or
risk of providing mortgage financing.''\3\ Treasury supports
FHFA's efforts to explore ways to address the critical shortage
of affordable housing. Additionally, Treasury continues to
participate in efforts to address the critical shortage of
affordable housing through its participation on the White House
Council on Eliminating Regulatory Barriers to Affordable
Housing, established under Executive Order 13878.\4\
---------------------------------------------------------------------------
\3\ Federal Housing Finance Agency. 2020 Scorecard for Fannie Mae,
Freddie Mac, And Common Securitization Solutions, available at: https:/
/www.fhfa.gov/AboutUs/Reports/Report
Documents/2020-Scorecard-10282019.pdf.
\4\ Executive Order 13878 of June 25, 2019, Establishing a White
House Council on Eliminating Regulatory Barriers to Affordable Housing.
See 84 FR 30853.
Q.5. The report mentions the deleterious effect that rent
control policies can have on housing affordability--why not be
more explicit about what FHFA should do about underwriting
loans eligible for the GSEs to purchase from jurisdictions that
---------------------------------------------------------------------------
have enacted rent-control laws and regulations?
A.5. The Treasury Housing Reform Plan recommends that FHFA
revisit the GSEs' underwriting criteria for multifamily
properties in jurisdictions that adopt rent-control laws. In
certain markets, drastic changes to rent control laws may have
credit implications for underwriting, and the GSEs should
account for those risks when underwriting loans in those
jurisdictions. FHFA will determine whether to adopt any
particular recommendation set forth in the Treasury Housing
Reform Plan.
Q.6. The report identifies that housing affordability is a
major concern but then calls for contracting the GSEs'
multifamily footprints and reducing liquidity in the market.
What measures does Treasury propose to create more supply of
multifamily assets to put downward pressure on rents?
A.6. Treasury acknowledges the critical challenge of
insufficient affordable housing across the country. Pursuant to
Executive Order 13878, Treasury is actively supporting the
White House Council on Eliminating Regulatory Barriers to
Affordable Housing in its
efforts to identify practices and strategies that reduce
regulatory and other barriers. Successful remediation of these
challenges should help create additional housing supply that
benefits both borrowers and renters.
FHFA recently announced changes to the restrictions on GSE
multifamily loan purchases.\5\ Treasury believes these changes
are consistent with the recommendations in the Treasury Housing
Reform Plan. As a part of comprehensive housing finance reform
legislation, Treasury recommends that Congress revisit the
framework for ensuring that the Federal Government's support of
the multifamily secondary market is tailored to an
affordability mission.\6\
---------------------------------------------------------------------------
\5\ See FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae
and Freddie Mac. September 13, 2019, available at: https://
www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Revises-MultifamilyLoan-
Purchase-Caps-for-Fannie-Mae-and-Freddie-Mac.aspx.
\6\ Treasury, Housing Reform Plan, at 21.
---------------------------------------------------------------------------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
STEVEN T. MNUCHIN
Q.1. Does Treasury's plan propose eliminating the requirement
that Fannie Mae and Freddie Mac--or additional guarantors
envisioned by your proposal--have a duty-to-preserve affordable
housing?
A.1. Treasury recommends that guarantors continue to have a
national service requirement to foster access for small, rural,
and other mortgage lenders to the secondary market. Each GSE
also has a statutory duty to serve underserved markets
requirement to provide leadership in developing products to
facilitate a secondary market for mortgages in three specific
markets: rural housing, manufactured housing, and preservation
of affordable housing. Except to suggest that reforms could
``more effectively target support for affordable housing,'' the
Treasury Housing Reform Plan did not include specific
recommendations to alter this duty to serve requirement.
Q.2. Under the current affordable housing goals regime, there
is no budgetary limit to Fannie and Freddie's ability to reach
out and serve low- and middle-income and low-wealth borrowers.
There would be such a cap under your proposal.
How would you propose to allocate the funds you would raise
in your proposal?
A.2. The Treasury Housing Reform Plan recommended reforms
focused primarily on the statutory affordable housing goals for
the GSEs' acquisitions of mortgage loans to low- and moderate-
income borrowers and mortgage loans to borrowers in low-income
areas. In particular, Treasury recommends that ``Congress
should replace the GSEs' statutory affordable housing goals
with a more efficient, transparent, and accountable mechanism
for delivering tailored support to first-time home buyers and
low- and moderate-income, rural, and other historically
underserved borrowers, with a portion of the associated funding
potentially transferred to HUD to expand its affordable housing
activities.''\1\
---------------------------------------------------------------------------
\1\ Treasury, Housing Reform Plan, at 24.
---------------------------------------------------------------------------
While the Treasury Housing Reform Plan recommends a
framework for comprehensive housing finance reform, Treasury's
preference and recommendation is that Congress enact
legislation to address these specific considerations. Treasury
looks forward to working with Congress on passing bipartisan
legislation.
Q.3. What populations would be served under Treasury's plan?
A.3. The Treasury Housing Reform Plan recommends ``a more
efficient, transparent, and accountable mechanism for
delivering tailored support to first-time home buyers and low-
and moderate-income, rural, and other historically underserved
borrowers.''\2\ Any legislative reforms should also preserve
and improve support for low- and moderate-income and other
historically underserved renters. While the Treasury Housing
Reform Plan recommends a framework for comprehensive housing
finance reform, Treasury's preference and recommendation is
that Congress enact legislation to address these specific
considerations. Treasury looks forward to working with Congress
on passing bipartisan legislation.
---------------------------------------------------------------------------
\2\ Ibid.
Q.4. How would diverting money to HUD not simply substitute for
other appropriated funds instead of providing new resources for
---------------------------------------------------------------------------
desperately needed affordable housing?
A.4. Treasury recommends that ``Congress should replace the
GSEs' statutory affordable housing goals with a more efficient,
transparent, and accountable mechanism for delivering tailored
support to first-time home buyers and low- and moderate-income,
rural, and other historically underserved borrowers, with a
portion of the associated funding potentially transferred to
HUD to expand its affordable housing activities.''\3\ The
Treasury Housing Reform Plan offers HUD's administration of
these funds as one potential option for Congress to consider.
---------------------------------------------------------------------------
\3\ Ibid.
Q.5. The Treasury paper recommends administrative consideration
of other means of reaching the objectives now served by the
affordable housing goals besides ``cross-subsidy and credit-
expanding tools.'' Could you please elaborate on this
recommendation? What other sorts of incentives or requirements
---------------------------------------------------------------------------
do you have in mind?
A.5. The Treasury Housing Reform Plan notes that the GSEs'
``mission-related cross-subsidization in large part occurs
where the GSEs collect above-cost guarantee fees from lower
credit risk borrowers to subsidize below-cost guarantee fees
collected from higher credit risk borrowers.''\4\ Because
``[c]redit risk is not necessarily a good proxy for borrower
income,'' Treasury suggested ``that alternatives to credit
risk-based cross-subsidy could provide more efficient
mechanisms for the GSEs to deliver well-targeted support to
low- and moderate-income borrowers and achieve their statutory
affordable housing goals.''\5\ FHFA will determine whether to
adopt any particular recommendation set forth in the Treasury
Housing Reform Plan. One approach that FHFA might wish to
consider could be to focus support on borrowers that have been
identified as very low-, low-, or moderate-income, or another
type of historically underserved borrower.
---------------------------------------------------------------------------
\4\ Ibid.
\5\ Ibid.
Q.6. Is there an assessment of what will happen to the projects
currently in the pipeline if the Housing Trust Fund and Capital
Magnet Fund are eliminated? How many developments will not be
built if the Housing Trust Fund is eliminated or substantially
---------------------------------------------------------------------------
changed?
A.6. The Treasury Housing Reform Plan does not include specific
recommendations to alter the periodic contributions to the
Housing Trust Fund and Capital Magnet Fund. More broadly,
Treasury does not propose, and indeed opposes, reducing or
eliminating the GSEs' longstanding support for affordable
housing. Treasury believes that reforms should more effectively
target this support for affordable housing. Indeed,
comprehensive housing finance reform legislation that
establishes ``a more efficient, transparent, and accountable
mechanism for delivering tailored support''\6\ could preserve
and improve support for low- and moderate-income and other
historically underserved borrowers and renters.
---------------------------------------------------------------------------
\6\ Ibid.
---------------------------------------------------------------------------
Under current law, the GSEs have a statutory requirement to
contribute an amount equal to 4.2 basis points of their annual
production to the Housing Trust Fund and the Capital Magnet
Fund. The statute also enumerates certain circumstances where
annual contributions would be temporarily suspended. Treasury's
strong preference is to work with Congress to enact
comprehensive housing finance reform. In the absence of
comprehensive reform legislation, Treasury supports appropriate
review of the GSE contributions under the statutory framework
to ensure that contributions are not diverting funds away from
the GSEs in a way that is causing the GSE to become
undercapitalized or preventing the completion of a capital
restoration plan.
Q.7. The Treasury report recommends restricting multifamily
lending in jurisdictions with rent controls. As I mentioned,
rent control only exists in cities in four States and
Washington, DC, In addition, GSE underwriting already factors
in the effects of rent control.
What additional restrictions do you have in mind?
A.7. The Treasury Housing Reform Plan recommends that FHFA
revisit the GSEs' underwriting criteria for multifamily
properties in jurisdictions that adopt rent-control laws. In
certain markets, drastic changes to rent control laws may have
credit implications for underwriting, and the GSEs should
account for those risks when underwriting loans in those
jurisdictions. FHFA will determine whether to adopt any
particular recommendation set forth in the Treasury Housing
Reform Plan.
Q.8. Did you consider similar recommendations to restrict or
constrain single-family home lending in jurisdictions that have
restrictive zoning, or that fail to adopt inclusionary zoning
to encourage more development in high opportunity communities?
A.8. Treasury supports efforts underway in response to
Presidential Executive Order 13878 to increase the available
supply of affordable housing by addressing, reducing, and
removing the multitude of burdensome regulatory barriers that
artificially raise the cost of housing development and help
cause the lack of housing supply. Pursuant to that Executive
Order, the White House Council on Eliminating Regulatory
Barriers to Affordable Housing is
engaging with stakeholders to explore policy solutions to
address the critical shortage in affordable housing in the
United States.
Q.9. Nevada is home to many small banks and credit unions. They
tell me that Fannie Mae and Freddie Mac work efficiently for
them. They know the system and have good relationships with
both. However, your proposal requires creating new entities.
In your ideal model, what are your preferences for
recapitalizing Fannie and Freddie?
A.9. Regular, nondiscriminatory, and reliable access to the
secondary market is critical for small, rural, and other
mortgage lenders. These lenders often play a particularly vital
role in serving rural and other historically underserved
borrowers. Treasury believes housing finance reform should
foster a competitive primary mortgage market in part by
protecting equal access for lenders of all sizes to the
secondary mortgage market.
Treasury's preference and recommendation is that Congress
enact comprehensive housing finance reform legislation. Pending
legislation, FHFA should exercise its authority as conservator
to begin the process to end each GSE's conservatorship. As a
part of this process, Treasury and FHFA should develop a
recapitalization plan for each GSE after identifying and
assessing the full range of strategic options. Among other
preconditions for exiting the conservatorships, Treasury
believes each GSE should remain in conservatorship until it has
retained or raised sufficient capital or other loss-absorbing
capacity to operate in a safe and sound manner.
Q.10. Who will these new guarantors be?
A.10. Treasury recommends that ``Congress should authorize FHFA
to charter competitor guarantors to the GSEs . . . ''\7\ As
Treasury further states, ``the likelihood of achieving a
competitive secondary market . . . will depend in part on the
specifics of any legislation.''\8\ While the Treasury Housing
Reform Plan recommends a framework for comprehensive housing
finance reform, Treasury's preference and recommendation is
that Congress enact legislation to address these specific
considerations. Treasury looks forward to working with Congress
on passing bipartisan legislation.
---------------------------------------------------------------------------
\7\ Id. at 41.
\8\ Ibid.
Q.11. How many guarantors would there be? Who should invest in
---------------------------------------------------------------------------
a guarantor?
A.11. The benefits of a competitive market are such that
Treasury supports Congress establishing a framework where
interested private parties could apply for a charter to become
a guarantor. To encourage private sector entrants, Congress
could supplement FHFA's chartering authority with additional
authorities to foster a competitive secondary market,
including, but not limited to, ``authorizing FHFA to set
variable guarantor-specific fees for the Government guarantee
of a particular guarantor's MBS or authorizing FHFA to lower
barriers to entry by making the GSEs' loan-level and appraisal
data and the source code for the GSEs' automated underwriting
system available to new entrants.''\9\
---------------------------------------------------------------------------
\9\ Ibid.
Q.12. Will guarantors be allowed to serve a countercyclical
---------------------------------------------------------------------------
role, particularly for multifamily loans? If so, how?
A.12. Treasury supports legislation that authorizes an
explicit, paid-for guarantee backed by the full faith and
credit of the Federal Government that is limited to the timely
payment of principal and interest on qualifying mortgage-backed
securities. Critically, this guarantee should be available for
both MBS collateralized by eligible conventional mortgage loans
and eligible multifamily mortgage loans. Such a guarantee would
provide certainty to MBS investors in all market conditions.
Q.13. Smaller financial institutions are concerned with the
staff costs of establishing new relationships with many more
secondary market entities than Fannie Mae and Freddie mac. How
are you computing the costs to financial institutions to learn
to work with new entities?
A.13. A competitive secondary market would allow lending
institutions to pursue a range of execution options for the
sale of their loans. Treasury's Housing Reform Plan recommends
that housing finance reform legislation include protections for
small lenders by requiring each single-family guarantor to
operate a cash window for small lenders, prohibiting volume-
based pricing discounts, and requiring guarantors to maintain a
nationwide presence. Nothing in Treasury's Housing Reform Plan
would require smaller lenders to build relationships with
additional secondary market guarantors.
Q.14. Currently, housing credit is available and affordable in
rural Nevada, Reno and other parts of the country. How will
your plan ensure consistent national pricing?
A.14. The Treasury Housing Reform Plan states that ``single-
family guarantors generally should be required to offer to
acquire mortgage loans from across the Nation. A nationwide
service requirement will foster equitable secondary market
access, diversified Government-guaranteed MBS, and also
affordable access to mortgage credit by underserved
borrowers.\10\
---------------------------------------------------------------------------
\10\ Id. at 42.
Q.15. The proposal makes many changes to the housing market
which is not serving African American and Latino borrowers
well. We have the largest homeownership gap between whites and
African Americans since before the passage of the Fair Housing
Act.
What will be the impact on African American and Latino home
ownership if the Qualified Mortgage (QM) patch is eliminated?
A.15. The QM patch, which offers a bright line safe harbor for
loans eligible to be purchased by the GSEs, creates an unlevel
playing field between the GSEs and other market participants,
which, to achieve a safe harbor, must comply with a strict
maximum 43 percent borrower debt-to-income ratio as documented
by outdated requirements under Appendix Q of the ability-to-
repay rule.\11\ Treasury supports the contemplated expiration
of the QM patch. Treasury also supports further revisions to
the ability-to-repay rule to ensure that mortgage lenders
continue to have a bright-line safe harbor after the expiration
of the QM patch.
---------------------------------------------------------------------------
\11\ 12 C.F.R. 1026.35; 12 C.F.R. part 1026, appendix Q.
---------------------------------------------------------------------------
The CFPB is engaged in a review of the rule, following its
advance notice of proposed rulemaking (ANPR) in July 2019. The
CFPB will determine whether to adopt any particular
recommendation set forth in the Treasury Housing Reform Plan
regarding the ability-to-repay rule, and the impact, if any, on
loan origination volume will depend on the specifics of the
CFPB's rulemaking.
Q.16. Will elimination of the QM patch increase or decrease
African American and Latino homeownership rates? If so, by how
much?
A.16. The CFPB is responsible for implementing and
administering the ability-to-repay requirement and determining
the standards for what constitutes a Qualified Mortgage loan.
The CFPB is engaged in a review of the existing rule, as noted
in its July ANPR, which committed to addressing the temporary
nature of the QM patch. The Treasury Housing Reform Plan
supports the expiration of the patch and the establishment of a
bright-line safe harbor for compliance with required ability-
to-repay standards.
Q.17. What will be the impact on African American and Latino
home ownership if FHA loans are restricted to primarily first-
time home buyers?
Will limiting FHA to first-time home buyers increase or
decrease African American and Latino homeownership rates? If
so, by how much?
A.17. The Treasury Housing Reform Plan does not make
recommendations specific to the FHA program, which is the
purview of HUD. However, the Treasury Housing Reform Plan
recommends that ``FHFA and HUD should develop and implement a
specific understanding as to the appropriate roles and overlap
between the GSEs and FHA, for example, with respect to the
GSEs' acquisitions of high loan-to-value (LTV) and high debt-
to-income (DTI) loans and FHA's underwriting of cash-out,
conventional-to-FHA, and other refinancing loans, and loans to
repeat FHA borrowers.''\12\
---------------------------------------------------------------------------
\12\ Id. at 25.
Q.18. Has Treasury modeled the potential costs of the housing
finance system you envision for homeowners and renters across
---------------------------------------------------------------------------
the income and wealth spectrum? If so, what have you found?
A.18. Treasury took great care to formulate its recommendations
in ways that would not disrupt the market or raise borrowing
costs. Treasury believes any changes to GSE business activities
should be carefully calibrated to this objective. While the
Treasury Housing Reform Plan recommends a framework for
comprehensive housing finance reform, Treasury's preference and
recommendation is that Congress enact legislation to address
these specific considerations. Treasury looks forward to
working with Congress on passing bipartisan legislation.
Q.19. The Treasury report mentions the Common Securitization
Platform as part of reviewing FHFA's accomplishments during
conservatorship. This platform has significantly reduced
liquidity differences in the companies' mortgage-backed
securities. Both companies now issue a single security under
close supervision and guidance of FHFA. But your report says
nothing about how this major development should influence the
possible shape of a post-conservatorship regime. Please explain
how you propose to incorporate the Common Securitization
Platform into any legislative option as outlined in your paper.
A.19. Treasury believes the Common Securitization Platform has
made progress toward separating the GSEs' credit guarantee
function from their operational function of securitizing MBS--
an important enhancement to the pre-conservatorship business
model. In the Treasury Housing Reform Plan, Treasury recommends
that Congress authorize an explicit, paid-for guarantee by
Ginnie Mae of qualifying MBS. As a part of that, ``FHFA and
Ginnie Mae should identify and assess the operational and other
issues posed by authorizing Ginnie Mae to guarantee the timely
payment of MBS, including necessary enhancements to existing
securitization and bond administration infrastructure.''\13\
While the Treasury Housing Reform Plan recommends a framework
for comprehensive housing finance reform, Treasury's preference
and recommendation is that Congress enact legislation to
address these specific considerations. Treasury looks forward
to working with Congress on passing bipartisan legislation.
---------------------------------------------------------------------------
\13\ Treasury, Housing Reform Plan, 15.
Q.20. Why shouldn't Congress consider making the CSS a publicly
owned utility platform, and compensate Fannie and Freddie for
its development that could become the basis of a system built
on clear separation of the securitization and credit
enhancement functions, as some proposals have suggested? Did
Treasury consider this option? If so, what are the reasons you
---------------------------------------------------------------------------
did not recommend or discuss it in your paper?
A.20. While the Treasury Housing Reform Plan recommends a
framework for comprehensive housing finance reform, Treasury's
preference and recommendation is that Congress enact
legislation to address these specific considerations. Treasury
looks forward to working with Congress on passing bipartisan
legislation.
Q.21. What is the Department of Treasury doing to incentivize
affordable housing developments via Opportunity Zones? What
specific actions has Treasury taken to ensure that Opportunity
Zones are being used to expand affordable housing, and not
luxury apartments or hotels? Last, what constitutes
``affordable housing'' under Treasury's measure?
A.21. To incentivize affordable housing developments via
Opportunity Zones, Treasury actively participates in the
outreach efforts of the White House Opportunity and
Revitalization Council. Also, in drafting guidance (including
proposed regulations) to implement the Opportunity Zones
statute, Treasury's Office of Tax Policy and the Internal
Revenue Service (IRS) made sure that there are no regulatory
impediments to combining the Opportunity Zone tax benefits with
eligibility for low-income housing tax credits (LIHTCs).
Opportunity Zone guidance does not present a barrier to
simultaneous eligibility for both LIHTCs and the several tax
benefits that flow from investing in a qualifying zone.
Moreover, nothing in the Opportunity Zone statute or guidance
interferes with local land-use and development requirements
that contain inclusionary provisions or other rules addressing
the need for affordable housing. A basic principle of the
Opportunity Zone statute, however, is that taxpayers should
have incentives to pour new capital into Opportunity Zones.
Beyond that geographic focus, there should be almost no other
Opportunity-Zone-specific Federal interference with free-market
incentives regarding how that new capital is deployed. The
relevant tax guidance seeks to be faithful to that statutory
flexibility.
Because there are no Opportunity-Zone-specific incentives
for affordable housing, there is no definition of ``affordable
housing'' for Opportunity Zone purposes. However, Treasury does
administer the Federal Government's largest subsidy for the
construction and rehabilitation of affordable housing--LIHTCs.
To be eligible for these credits (which are received annually
over a 10-year period), a residential rental project must in
general satisfy one of the three following set-asides:
LNo fewer than 20 percent of the units are rent-
restricted and occupied by tenants whose income does
not exceed 50 percent of area median income.
LNo fewer than 40 percent of the units are rent-
restricted and occupied by tenants whose income does
not exceed 60 percent of area median income.
LNo fewer than 40 percent of the units are rent-
restricted and occupied by tenants whose average income
does not exceed 60 percent of area median income and
none of whom has income over 80 percent of area median
income.
For this purpose, rent restriction means that gross rent for a
unit does not exceed 30 percent of the income limit for that
unit, and area median income is determined in the same way that
HUD determines it for purposes of its rental assistance
programs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM STEVEN T.
MNUCHIN
Q.1. What kind of gaps in affordability do you anticipate as
private sector funding of multifamily loans ramps up and
funding from Fannie Mae and Freddie Mac winds down? Was a gap
in funding during transition, and its effects on affordability,
considered in the FHFA's recent decision to revise Fannie Mae
and Freddie Mac's lending caps?
A.1. FHFA, as conservator, recently announced changes to the
restrictions on GSE multifamily loan purchases.\1\ Treasury
believes these changes are consistent with the recommendations
in the Treasury Housing Reform Plan. Furthermore, Treasury
recommends that comprehensive housing finance reform
legislation ensure that the Federal Government's support of the
multifamily secondary market is tailored to an affordability
mission.\2\
---------------------------------------------------------------------------
\1\ See FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae
and Freddie Mac.
\2\ Treasury, Housing Reform Plan, 21.
Q.2. How do you know the private sector has the capacity to
fully serve the multifamily market? Do you believe this
capacity will remain sufficient during an economic downturn,
and if not, will FHFA allow Fannie Mae and Freddie Mac some
flexibility to compensate for a lack of private capital during
---------------------------------------------------------------------------
economic downturns?
A.2. FHFA recently announced changes to the restrictions on GSE
multifamily loan purchases.\3\ Treasury believes these changes
are consistent with the recommendations in the Treasury Housing
Reform Plan.
---------------------------------------------------------------------------
\3\ See FHFA Revises Multifamily Loan Purchase Caps for Fannie Mae
and Freddie Mac.
Q.3. Our Nation faces a serious multifamily housing shortage.
According to the National Multifamily Housing Council, the U.S.
will need to build an average of 328,000 units per year by 2030
to meet growing demand. As private capital becomes a growing
source for multifamily assets, what measures will the FHFA and
Department of the Treasury take to ensure a greater supply of
---------------------------------------------------------------------------
affordable multifamily housing units?
A.3. In Treasury's Housing Reform Plan, Treasury acknowledges
the critical challenge of insufficient affordable housing.
Pursuant to Executive Order 13878, Treasury is actively
supporting the White House Council on Eliminating Regulatory
Barriers to Affordable Housing in its efforts to identify
practices and strategies that reduce regulatory and other
barriers. Successful remediation of these challenges should
help create additional housing supply that benefits both
borrowers and renters.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR BROWN FROM BENJAMIN S.
CARSON, SR., M.D.
Affordability
Q.1. Secretary Carson, during the hearing you expressed support
for affordable housing.
How would you define affordable housing? Please address
affordability in the context of home ownership, rental housing,
and explicit subsidies.
A.1. The standard measure of housing affordability--and the
definition applied for the purposes of HUD programs--is based
on the share of a household's income consumed by housing costs,
including utilities. In other words, the combination of housing
costs and household incomes informs whether housing is
affordable.
Several HUD subsidies help lower-income families afford
housing. For example, HUD's largest rental subsidy program, the
Housing Choice Voucher Program, provides portable rental
assistance subsidies that are typically the difference between
30 percent of a very low-income household's adjusted income and
the payment standard, which is based off fair market rental
costs for each area.
Regulations play a role in limiting affordable housing
supply by restricting land use and density, driving up
development costs, and delaying construction. The President's
Executive Order on Eliminating Regulatory Barriers to
Affordable Housing aims to reduce regulatory barriers to the
production and preservation of affordable housing.
FHA Structural Reforms
Q.2.a. Secretary Carson, HUD's plan proposes to make FHA a
separate corporation within HUD. The proposal is silent on the
treatment of FHA's receipts, which are currently used to pay
for other HUD spending on housing assistance and community
development programs.
Does HUD believe that FHA should retain all of its receipts
if it becomes a separate corporation?
A.2.a. No. HUD's Housing Reform Plan does not contemplate FHA
retaining all or even a portion of its receipts to fund its
operations.
Q.2.b. Please provide a detailed explanation of what additional
flexibilities and authorities HUD believes are necessary for
FHA and how each of those would be achieved through corporation
status.
A.2.b. As highlighted in the housing finance reform plan,
Congress should re-charter the FHA as an autonomous Government
corporation within HUD. HUD's existing procurement and hiring
processes inhibit FHA's ability to make appropriate decisions
to mitigate risks and respond rapidly to constantly changing
market fundamentals.
As the mortgage markets have grown and commoditized over
the decades, so has the sophistication and complexity of
managing the credit risk in FHA's Mutual Mortgage Insurance
Fund. FHA faces challenges in hiring and retaining sufficient
staff with the necessary expertise in mortgage finance and
asset management. Like GNMA, FHA will explore the targeted use
of pay flexibilities available under current law (e.g.,
Critical Pay) to improve hiring and retention of key positions
requiring specialized technical skills. If existing authorities
are insufficient to address its human capital challenges, FHA
may request new authorities.
Similarly, HUD's procurement process is burdensome and
protracted, and HUD has experienced difficulties obtaining
qualified contractors to perform critical duties. FHA needs the
ability to adopt a streamlined procurement process to ensure
awards are able to be made based on expertise and competency.
To the extent administrative reforms are insufficient to
address procurement challenges, new statutory acquisition
authorities may be necessary to address instances where
material underperformance of contracting vendors results in
substantial quality deficiencies and costs.
FHA Default Rates
Q.3. Secretary Carson, HUD's Housing Finance Reform plan states
that since the financial crisis, ``the risk profile of FHA's
portfolio has increased steadily, endangering FHA's ability to
support access to affordable mortgage credit for first-time
home buyers.''\1\ Throughout the report, you compare FHA's
current portfolio with its portfolios in 2009, 2010, and 2011,
and your graphics on single-family mortgage credit quality
begin in 2010 or 2011.
---------------------------------------------------------------------------
\1\ U.S. Department of Housing and Urban Development Housing
Finance Reform Plan pg. 1.
---------------------------------------------------------------------------
As you know, FHA took on a countercyclical role during and
immediately following the financial crisis. With the
conventional mortgage market frozen, FHA served borrowers with
credit characteristics that would normally allow them to access
conventional mortgage financing. Further, as you stated in your
oral testimony, at FHA ``substantial delinquency rates or early
defaults are at the lowest rate that they have been. So changes
have been made.''
Q.3.a. Please provide an updated graphic for figure 2 in HUD's
Housing Finance Reform plan, which in the plan begins in 2010,
to show FHA credit characteristics beginning in 1999 or earlier
and continuing through 2019.
A.3.a. See graph for 2005 through 2019. Data for 1999-2004 was
not included because FHA did not collect credit scores on
Single Family mortgages prior to 2004 and the information
collected prior to 2004 is incomplete.
Q.3.b. If FHA has historically low default rates and changes
have been made, why is HUD proposing ``tiered pricing?''\2\ How
does HUD propose to establish which borrowers should be in
which tiers?
---------------------------------------------------------------------------
\2\ Id. at pg. 20.
A.3.b. In a dynamic marketplace, FHA may require a mechanism to
quickly react to any deterioration in credit quality and
protect the MMIF from excessive exposure to riskier loans.
Adjusting premiums is a relatively quick way to do so. HUD is
not planning to implement tiered pricing or otherwise adjust
---------------------------------------------------------------------------
FHA's Single Family premiums in the near term.
Q.3.c. How would tiered pricing as described in the answer
above effect different populations of FHA borrowers?
A.3.c. Prior to moving forward with tiered pricing, the
Department will perform an analysis to determine the impact on
FHA borrowers.
Duplication of Support
Q.4. Secretary Carson, both the HUD and Treasury plans express
concern about ``duplicating support'' for families who might be
eligible for both FHA-insured and GSE-guaranteed loans.
But, as you know, FHA's insurance and the GSEs' guarantee
provide two different functions, and most borrowers participate
in just one of these programs at a time.
How is a borrower being eligible for an FHA-insured loan
and a GSE-guaranteed loan duplicating support? How does a
borrower having the option to choose an FHA or conventional
loan hurt the programs?
A.4. A central principle of the Administration's housing
finance reform plan is that Federal mortgage credit policies
should be better coordinated in order to allow qualified
borrowers to access responsible and affordable borrowing
options and choices. Coordination ensures that there is not
unhealthy and irresponsible competition between Government-
supported programs, which can lead to lower underwriting
standards, increase risk to taxpayers, and threaten the long-
term availability of credit to qualified borrowers. The GSEs
should not be able to selectively choose from the FHA portfolio
and leave taxpayers with the riskiest borrowers. Uncoordinated
policies create incentives that encourage entities to work at
cross-purposes, resulting in little or no change in overall
access to credit while increasing taxpayer exposure to
uncompensated risk. In recent years, the market overlaps might
have increased to the extent that the GSEs expanded credit
guidelines to ``stretch'' into the FHA market.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM
BENJAMIN S. CARSON, SR., M.D.
Q.1. The Bipartisan Budget Act of 2018, which provided Puerto
Rico with $18.5 billion in CDBG for Disaster Recovery funding
was signed into law nearly 19 months ago. Furthermore, HUD is
required by law (P.L. 116-20) to publish all Federal register
notices for CDBG-DR mitigation funding for eligible grantees,
including $8.4 billion for Puerto Rico, within 90 days. That
term expired 6 days before this hearing took place. According
to HUD's latest grant financial report, Puerto Rico has only
been allowed access to $1.5 billion out of which only $236,000
have reached the island.
Secretary Carson, what is HUD doing to stop slow walking
access to much needed relief funding for Puerto Rico nearly 2
years after Hurricane Maria?
A.1. Puerto Rico has more than $1.5 billion available to them
and, as of November 1, has drawn down less than $3 million. On
average, it takes a DR grantee 1.5-2 years to spend $1.5
billion. Additionally, HUD has approved Puerto Rico's action
plan for another $8.2 billion and is working with the Puerto
Rico Department of Housing (Vivienda) to finalize the grant
agreements in place for those funds.
Q.2. First-time home buyers have traditionally been the driving
force of the housing market and these borrowers traditionally
rely on low-downpayment mortgages to purchase their homes. In
fact, over the past several years, nearly 80 percent of first-
time home buyers with mortgages purchased homes using low-
downpayment products. With rising rents, high home price
appreciation numbers, and student debt, it is critical that
younger buyers have access to affordable low-downpayment
options that will allow them to attain the American Dream of
home ownership.
Can you please speak to how your agencies' recommendations
will ensure that borrowers can access affordable, prudent low-
downpayment mortgage options?
A.2. A central principle of the Administration's housing
finance reform plan is that Federal mortgage credit policies
should be better coordinated in order to allow qualified
borrowers to access responsible and affordable borrowing
options and choices. Coordination ensures that there is not
unhealthy and irresponsible competition between Government-
supported programs, which can lead to lower underwriting
standards, increase risk to taxpayers, and threaten the long-
term availability of credit to qualified borrowers.
FHFA and FHA should coordinate to ensure that the GSEs and
FHA serve defined roles within the marketplace. Ideally,
coordinated policies would bring out the best that each entity
has to offer. Consistent with their charters, each GSE's role
should be to perform ``activities relating to mortgages on
housing for low- and moderate-income families involving a
reasonable economic return that may be less than the return
earned on other activities.'' Similarly, and consistent with
the Presidential Memorandum, FHA should focus on low- and
moderate-income families who cannot be served through
traditional underwriting.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM BENJAMIN
S. CARSON, SR., M.D.
Q.1.a. Secretary Carson, can you describe the steps you are
taking to carry out the $5 million carbon monoxide detectors
and alarms installation grant that you announced on May 20,
2019? How many applications have you received for the grants
and how many recipients do you anticipate HUD being able to
support through it?
A.1.a. The May 20, 2019, announcement set in motion the process
to deploy these funds. On August 19, 2019, HUD published the
revised Emergency Safety and Security Notice (PIH Notice 2019-
22) which modified its grant program to include carbon monoxide
detectors as an eligible expense. A week later, on August 27,
2019, HUD notified Public Housing Authorities (PHAs) that the
funding round had opened and that the due date for applications
was October 25, 2019.
HUD received 140 applications meeting eligibility
requirements by the October 25, 2019, application deadline. The
total amount of grant funds requested across these 140
applications is $12.3 million. Under the framework established
for Emergency Safety and Security grant funding, HUD will
conduct a lottery to select awardees to receive the full amount
of the $5 million in available funding. Given that PIH Notice
2019-22 established a maximum PHA grant award of $250,000, HUD
expects to announce at least 20 grant awards in the coming
weeks.
Q.1.b. Additionally, would legislation, such as the CO ALERTS
Act, help expedite the rulemaking process to mandate the
presence of carbon monoxide detectors and alarms during the
inspections process?
A.1.b. Yes. By bypassing the rulemaking process, the CO ALERTS
Act would allow HUD to more quickly implement the bill's
requirements. It puts into statute requirements for PHAs and
private owners of most HUD-assisted housing to use the
standards described in chapters 9 and 11 of the 2018 IFC.
Should the Department decide to go beyond the 2018 IFC, it
would publish a notice in the Federal Register.
Q.2. Given tools like Credit Score Competition, FHFA benefits
from access to more technologically advanced modeling tools and
resources. It is a well-known fact, however, that FHA is still
largely a paper-based operation. Congress provided $20 million
in IT funding to better assist FHA in getting to an advanced IT
infrastructure.
In HUD's reform plan, the Administration proposes re-
chartering FHA as an autonomous Government corporation within
HUD and to pursue inter-agency agreements. How would FHA's
potential role as an autonomous agency allow it to better
utilize modeling resources and tools, like those at FHFA and
the credit-scoring program, to increase access to home
ownership? And better adapt to technological changes in the
marketplace?
A.2. FHA's ability to both measure and manage its credit risk
in the MMI and GI/SRI Funds is limited because of its
antiquated IT systems. More independence would allow FHA
greater flexibility to procure the appropriate resources and
tools to manage its portfolio. Through a better understanding
of risk within its portfolio, FHA could enhance its ability to
facilitate sustainable home ownership and to keep pace with the
changing credit environment.
Q.3. How would changing the designation of manufactured housing
to be an option for affordable housing affect the shortage of
affordable homes as well as Americans seeking home ownership?
A.3. As detailed in HUD's housing finance reform plan, the
Department believes manufactured housing is an important option
to increase housing opportunities throughout the United States.
Policies that exclude or disincentivize the utilization of
manufactured homes can exacerbate housing affordability
challenges because manufactured housing potentially offers a
more affordable alternative.
Q.4. Both Treasury and HUD have been heavily involved in the
implementation of my Opportunity Zone initiative and I
appreciate your hard work. Thus far Opportunity Zones have
proven to be instrumental in fostering community development,
job creation, and economic development across our Nation.
Needless to say, Opportunity Zones have also been extremely
impactful in terms of the topics we've covered today.
As you've toured the Nation's opportunity zones, can you
highlight some of the benefits to these communities and
individuals that you've personally witnessed?
A.4. Throughout their travels to Opportunity Zones, HUD
officials have seen firsthand the benefits of this tax
incentive to distressed communities. One of the most
significant aspects of Opportunity Zone investments has been
the construction of affordable multifamily housing. In
Opportunity Zones where more housing is needed and
affordability is a concern, these investments are crucial.
Beyond housing, the decentralized nature of the Opportunity
Zones incentive has allowed for many kinds of investments to be
made through Qualified Opportunity Funds. Thus, local
communities can plan for investments uniquely suited to their
needs.
A few examples of projects that have made an impact across
the country include:
LPR Mallory (Indianapolis, IN)--This building sat
vacant for more than two decades. Now, thanks to its
Opportunity Zone designation, it will become home to
two affordable housing developments for seniors,
including Indiana's first net positive energy
residential development, as well as two charter
schools.
LLife Sciences Corridor (Salt Lake City, UT)--
Spanning across the city, construction has begun on a
``life sciences corridor.'' One of the projects was a
200,000-square-foot mixed-use development that will
include apartments, the majority of which are
affordable, an employment training center for people
with disabilities, and commercial space.
LBirmingham Inclusive Growth Partnership
(Birmingham, AL)--This partnership identifies local
projects that both enhance the lives of residents and
provide sound returns for investors, facilitating
public-private partnerships. One of the most exciting
aspects of Birmingham's Opportunity Zones strategy is
the training of 500 individual residents on Opportunity
Zones, which will go a long way toward guiding
investments in their neighborhoods.
LErie Homecoming Weekend (Erie, PA)--In August 2019,
Erie hosted an event called Erie Homecoming 2019-
Unlocking Capital in Legacy Cities, which showcased
investment opportunities to people from across the
Nation. In the poorest zip code in the entire United
States, Opportunity Zones have brought markets to life.
The Erie Downtown Development Corporation was founded
in 2017 and has a mission of attracting businesses,
residents, and investments to the city. Today, a total
of $60 million in investment in Erie Opportunity Zones
is forthcoming.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM BENJAMIN
S. CARSON, SR., M.D.
Q.1. Our housing finance system faces a number of profound
challenges. In most parts of the country, prices for starter
homes are skyrocketing as much as 10 percent per year.\1\
Millions of Americans are cost burdened, paying more than 30
percent of their income on rent, mortgages or other housing
costs. Perhaps most perniciously, the legacy of decades of
racist Federal housing policy is still too apparent today. The
average Black family has about \1/10\th the wealth of the
average white family,\2\ and while the Black families made some
gains in the healthy housing markets of the 1990s and early
2000s, that progress was wiped out in the subprime crisis.
Today, the homeownership gap between Black and white families
is as large as it was when housing discrimination was legal.\3\
---------------------------------------------------------------------------
\1\ Marketwatch ``One big reason it's so hard for first-time buyers
to find the right starter home.'' Jacob Passy, March 21, 2018, https://
www.marketwatch.com/story/another-hurdle-for-first-time-home-buyers-
there-are-barely any-starter-homes-for-sale-2018-03-21.
\2\ Brookings, ``A conversation about the racial wealth gap-and how
to address it,'' Michaela Broyles, June 18, 2019, https://
www.brookings.edu/blog/brookings-now/2019/06/18/a-conversation-about-
the-racial-wealth-gap-and-how-to-address-it/.
\3\ Census Bureau, ``Quarterly Residential Vacancies and
Homeownership, Second Quarter 2019,'' July 25, 2019, https://
www.census.gov/housing/hvs/files/currenthvspress.pdf; National Bureaus
of Economic Research Working Paper Series, ``Race and Home Ownership,
1900 to 1990,'' William J. Collins and Robert Margo, August 1999,
https://www.nber.org/papers/w7277.pdf.
---------------------------------------------------------------------------
Any proposal for housing finance reform must confront these
problems. After all, as the U.S. Department of Treasury Housing
Reform Plan (``Treasury Report'') points out, ``[e]ach GSE's is
unique in that its congressional charter endows the GSE with a
public mission.'' These public missions make it clear that the
GSEs exist to ``promote access to mortgage credit throughout
the Nation (including central cities, rural areas, and
underserved areas)'' and to perform ``activities relating to
mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than
the return earned on other activities.''\4\
---------------------------------------------------------------------------
\4\ U.S. Department of the Treasury, ``U.S. Department of the
Treasury Housing Reform Plan,'' September 2019, file:///C:/Users/
js42247/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/
LTYNPN67/Treasury-Housing-Finance-Reform-Plan.pdf.
---------------------------------------------------------------------------
I have carefully reviewed the Treasury Report and the
Department of Housing and Urban Development's Housing Finance
Reform Plan (``HUD Report''). Both appear to eliminate many of
the mechanisms in the current system that support sustainable
home ownership among low- and moderate-income and middle-income
borrowers, especially in communities of color. The following
questions seek more information about the analysis that
Treasury, HUD and the Federal Housing Finance Agency (FHFA)
undertook to determine the effects of their various proposals
on housing prices, access to home ownership for first-time home
buyers, and the racial homeownership gap.
The Treasury report recommends getting rid of the
affordable housing goals, and, as an alternative, suggests,
``collect[ing] a periodic assessment from guarantors that
Congress would make available through an appropriation to
administer on-budget affordable housing.'' The Trump
administration budget request for fiscal year 2020 asks
Congress to zero out or deeply cut existing appropriated
programs that provide access to home ownership to low- and
moderate-income Americans including the HOME Investment
Partnerships Program, the Self-Help Homeownership Opportunity
Program, the Housing Trust Fund, and Native American Housing
Block Grants.\5\
---------------------------------------------------------------------------
\5\ National Low Income Housing Coalition, ``FY20 Budget Chart for
Selected HUD and USDA Programs,'' May 22, 2019, https://nlihc.org/
sites/default/files/NLIH_HUD-USDA_Budget-Chart.pdf.
LDoes HUD agree with this recommendation? Will it be
---------------------------------------------------------------------------
implemented?
LDid HUD analyze the effects of getting rid of the
affordable housing goals on home prices? If so, please
provide the analysis.
LDid HUD analyze the effects of getting rid of the
afford-
able housing goals on access to home ownership for low-
,
moderate-, and middle-income borrowers and first-time
home buyers? If so, please provide the analysis.
LDid HUD analyze the effects of getting rid of the
affordable housing goals on access to sustainable home
ownership in communities of color? If so, please
provide the analysis.
LPlease provide the funding levels that HUD will
propose for existing programs in the absence of the GSE
affordable housing goals.
LPlease describe additional homeownership programs
that HUD will propose if the affordable housing goals
are abolished, the funding levels HUD will propose, and
their expected effects.
A.1. Questions related to the Treasury Report and the GSE
affordable housing goals should be directed to the Department
of the Treasury. HUD supports its 2020 Budget requests.
Q.2. The Treasury report recommends that ``FHFA and HUD should
develop and implement a specific understanding as to the
appropriate roles and overlap between the GSEs and FHA, for
example, with respect to . . . [the] FHA's underwriting of
cash-out, conventional-to-FHA, and other refinancing loans and
loans to repeat FHA borrowers.''
LDoes HUD agree with this recommendation? Will it be
implemented?
LDid HUD analyze the effects of limiting the
footprint of the GSEs and FHA on home prices? If so,
please provide the analysis.
LDid HUD analyze the effects of limiting the
footprint of the GSEs and FHA on access to home
ownership for low-, moderate-, and middle-income
borrowers and first-time home buyers? If so, please
provide the analysis.
LDid HUD analyze the effects of limiting the
footprint of the GSEs and FHA on access to sustainable
home ownership in communities of color? If so, please
provide the analysis.
A.2. HUD supports all recommendations in the Treasury and HUD
Housing Finance Reform reports. Questions about the GSEs'
footprint should be directed to the Department of the Treasury.
With respect to FHA, the HUD Housing Finance Reform report does
not target a specific footprint. The goals are to mitigate
taxpayer risk, refocus FHA on its core mission and minimize
overlap with the GSEs.
Q.3. The HUD Report recommends that ``FHA should seek to build
its capital ratio well above the statutory 2 percent minimum to
ensure that it is able to weather stress events without
requiring a taxpayer bailout.''
LDid HUD analyze the effects of higher capital
requirements on home prices? If so, please provide the
analysis.
LDid HUD analyze the effects of higher capital
requirements on access to home ownership for low-,
moderate-, and middle-income and first-time home
buyers? If so, please provide the analysis.
LDid HUD analyze the effects of higher capital
requirements on access to sustainable home ownership in
communities of color? If so, please provide the
analysis.
A.3. By statute, the minimum capital reserve ratio for the MMIF
is 2 percent. While 2 percent is a minimum, it may not reflect
an appropriate buffer to pay expected claims, particularly
during countercyclical periods. In 2013, inadequate capital
reserves required FHA to take a $1.7 billion draw from the U.S.
Treasury. By building a larger capital buffer, FHA could
weather stress events more successfully, which, ultimately,
means that FHA can continue to offer sustainable mortgage
credit for borrowers not served by the private market. In a
stress event, inadequate capital could require FHA to implement
policy changes that would restrict its ability to serve mission
borrowers. It is important to note that building capital would
not necessarily entail any changes to the current mortgage
insurance premium structure.
Q.4. The HUD report recommends that ``FHA should assess repeat
FHA borrowers to ensure these mortgage loans are consistent
with FHA's mission.''
LDid HUD analyze the effects of disqualifying repeat
FHA borrowers on home prices? If so, please provide the
analysis.
LDid HUD analyze the effects of disqualifying repeat
FHA borrowers on access to home ownership for low-,
moderate-, and middle-income and first-time home
buyers? If so, please provide the analysis.
LDid HUD analyze the effects of disqualifying repeat
FHA borrowers on access to sustainable home ownership
in communities of color? If so, please provide the
analysis.
A.4. HUD's housing finance reform plan recommends that FHA
should assess repeat FHA borrowers to ensure these mortgage
loans are consistent with FHA's mission. It does not recommend
disqualifying repeat FHA borrowers. Any further analysis would
occur as part of the assessment recommended in the plan. This
recommendation was made within the context of the increasing
number of borrowers who have used the FHA program to extract
equity from their homes. The fiscal year 2018 cash-out
refinance volume of 150,883 loans was the highest reported
since 2009 and represented 63.31 percent of all FHA refinance
transactions. Additionally, by definition, this recommendation
would have no effect on first-time home buyers.
Q.5. The HUD report recommends that ``FHA should examine
incentives to make shorter-term mortgages that accelerate
equity accumulation more attractive to FHA's mission
borrowers.''
Q.5.a. Did HUD analyze the effects of shortening the term of
mortgages on home prices? If so, please provide the analysis.
Q.5.b. Did HUD analyze the effects of shortening the term of
mortgages on access to home ownership for low-, moderate-, and
middle-income and first-time home buyers? If so, please provide
the analysis.
Q.5.c. Did HUD analyze the effects of shortening the term of
mortgages on access to sustainable home ownership in
communities of color? If so, please provide the analysis.
A.5.a.-c. HUD's housing finance reform plan does not
contemplate eliminating access to FHA's 30-year fixed-rate
mortgage product. Rather, the report recommends that FHA
examine incentives to make shorter-term mortgages that
accelerate equity accumulation more attractive to FHA's mission
borrowers. The HUD report recommends that ``[t]o ensure that
FHA and taxpayers are properly compensated for riskier loans,
FHA should implement a tiered pricing framework to protect the
MMIF [Mutual Mortgage Insurance Fund] from excessive exposure
to riskier loans.''
Q.5.d. Did HUD analyze the effects of risk-based pricing for
mortgage insurance on home prices? If so, please provide the
analysis.
Q.5.e. Did HUD analyze the effects of risk-based pricing on
access to home ownership for low-, moderate-, and middle-income
and first-time home buyers? If so, please provide the analysis.
Q.5.f. Did HUD analyze the effects of risk-based pricing for
mortgage insurance on access to sustainable home ownership in
communities of color? If so, please provide the analysis.
A.5.d.-f. In a dynamic marketplace, FHA may require a mechanism
to quickly react to any deterioration in credit quality and
protect the MMIF from excessive exposure to riskier loans.
Adjusting premiums is a relatively quick way to do so. HUD is
not planning to implement tiered pricing or otherwise adjust
FHA's Single Family premiums in the near term.
Q.6. The Treasury Report is silent about the Housing Trust Fund
and the Capital Magnet Fund. Both programs make important
contributions to mitigating the affordable rental-housing
crisis. Nearly every county in the United States lacks a
sufficient stock of available and affordable rental units for
residents who make 30 percent of area median income or below--
the population targeted by the Housing Trust Fund.\6\ Nearly
half of renters are cost burdened, meaning that they pay more
than 30 percent of their income in rent.\7\ The private sector
cannot and will not fix this gap on its own. How does Treasury
recommend funding the Housing Trust Fund and the Capital Magnet
Fund and at what level?
---------------------------------------------------------------------------
\6\ National Low Income Housing Coalition, ``New Report Concludes
that Nearly Every U.S. County Lacks an Adequate Supply of Affordable
and Available Homes for Low Income Renters,'' June 20, 2019, https://
nlihc.org/news/new-report-concludes-nearly every-us-county-lacks-
adequate-supply affordable-and-available.
\7\ Housing Wire, ``Apartment List: Nearly 50 percent of renters
are cost burdened,'' Jeremiah Jensen, September 25, 2018, https://
www.housingwire.com/articles/46924-apartment-list-nearly-50-of-renters-
are-cost-burdened.
A.6. Questions related to the Treasury Report should be
directed to the Department of the Treasury. HUD's 2020 Budget
proposes to eliminate the Housing Trust Fund, as it recognizes
a greater role for State and local governments and the private
sector in addressing affordable housing needs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
BENJAMIN S. CARSON, SR., M.D.
Q.1. What will be the impact of your proposal to limit FHA's
investment in multi-family housing? Has HUD modeled the
potential costs of the housing finance system you envision for
multi-family investments across the income and wealth spectrum?
If so, what will the impact be on renters?
A.1. HUD's housing finance reform plan does not propose
limiting FHA's insurance of multi-family housing.
Q.2. Why does HUD propose to limit FHA to only first-time home
buyers? How do you respond to critics who note that such a
limitation would harm African American and Latino home buyers
who have had difficulty accessing loans in the private market?
Has HUD modeled the potential costs of the housing finance
system limiting FHA to first-time home buyers across the income
and wealth spectrum? If so, what will the impact be on current
homeowners and potential homeowners? What would the impact of
such a limitation be on the ability of all homeowners to sell
their homes?
A.2. HUD's housing finance reform plan does not propose
limiting FHA insurance to first-time home buyers. The plan
recommends that FHA examine the impact of repeat borrowers on
the MMIF and ensure these loans are consistent with its
mission.
Q.3.a. You stated that HUD plans to address some of the
``deeper issues'' causing the acute housing needs of extremely
low-income families and that ``just throwing money at the
problem has not solved it.'' Please elaborate with details on
this and HUD's plan to ensure that the acute housing needs of
extremely low-income families are addressed by your plan.
How many new families received housing assistance from HUD
in 2016, 2017, and 2018?
A.3.a. HUD's Picture of Subsidized Households reports annual
housing assistance levels for HUD programs. The following chart
summarizes the number of households subsidized and the number
of people served by HUD's Public Housing, Housing Choice
Vouchers, Project-Based Rental Assistance, and Housing for the
Elderly and Persons with Disabilities, and other HUD subsidies
in 2016, 2017, and 2018.
The programs combined have between 11 percent and 12
percent turnover each year, allowing approximately 500,000 new
households to be served each year. Combined over the 3 years,
approximately 1.5 million households have moved off housing
assistance allowing a similar number to receive housing
assistance.
Programs such as Indian Housing, HOME and Community
Development Block Grants are excluded from these counts, as are
households served by the U.S. Department of Agriculture's Rural
Housing Service or other State or local programs, unless such
households also receive subsidies through a HUD program
mentioned above.
Q.3.b. How many individuals, families or households qualify for
HUD assistance but are unable to receive any housing
assistance?
A.3.b. Tabulations from the American Housing Survey estimate
that about 1 in 4 very low-income households receive housing
assistance. Among very low-income renters in 2015, 25 percent
of households received rental assistance and an additional 43
percent had worst case housing needs due to severe cost burden
or unit quality deficiencies. About a third of very low-income
renters--32 percent--avoided severe housing problems in the
unassisted private rental market in 2015.
Q.4. You recently announced a major policy initiative to help
reduce local barriers to development of affordable housing. Are
you proposing to limit access to funds like CDBG and HOME in
jurisdictions with rent control? Are you considering limiting
their use in communities that do not affirmatively encourage
affordable housing through inclusionary and high-density
zoning?
A.4. No. The White House Council on Eliminating Regulatory
Barriers to Affordable Housing, chaired by Secretary Carson, is
engaging with Federal agencies that serve on the Council and
stakeholder groups who have offered to share their ideas on
program regulations, policies or practices that, with
modifications, may reduce the cost of market-rate and
subsidized housing and expand affordable housing options for
all Americans. Per the President's Executive Order creating the
Council, member agencies are directed to identify
administrative rules and processes that may restrict supply or
pose unnecessary barriers to new construction of affordable
housing, and submit recommendations for how HUD can encourage
communities that want to increase the supply of affordable
housing and/or preserve valuable affordable housing stock.
Q.5. Could you please elaborate on this statement: ``Congress
should establish FHA, VA, and USDA . . . as the sole source of
low-downpayment financing for borrowers not served by the
conventional mortgage market.''? Are you suggesting that Fannie
Mae and Freddie Mac should not provide support for responsible,
sustainable low-downpayment mortgages originated by private
sector lenders in the primary market? What conventional
mortgage market are you referring to in this statement?
A.5. A central principle of the Administration's housing
finance reform plan is that Federal mortgage credit policies
should be better coordinated in order to allow qualified
borrowers to access responsible and affordable borrowing
options and choices. Coordination ensures that there is not
unhealthy and irresponsible competition between Government-
supported programs, which can lead to lower underwriting
standards, increase risk to taxpayers, and threaten the long-
term availability of credit to qualified borrowers. The GSEs
should not be able to selectively choose from the FHA portfolio
and leave taxpayers with the riskiest borrowers. Uncoordinated
policies create incentives that encourage entities to work at
cross-purposes, resulting in little or no change in overall
access to credit while increasing taxpayer exposure to
uncompensated risk. In recent years, the market overlaps might
have increased to the extent that the GSEs expanded credit
guidelines to ``stretch'' into the FHA market.
Q.6. The Treasury paper suggests legislative action to
authorize Ginnie Mae to provide the full faith and credit
guarantee for Fannie, Freddie and possibly other credit
enhancing guarantors. Can you please elaborate on what steps,
roughly how much funding would be necessary, and a timeline for
when you think Ginnie Mae could be made operational for this
task?
A.6. Operationalizing the Treasury Plan's proposal (to extend,
via Ginnie Mae, a Federal guarantee of timely payment of
principal and interest on qualified Mortgage Backed Securities)
can be seen as having three phases:
LPhase One would be to comply with the Treasury
Plan's Recommendation 7, which calls for FHFA and
Ginnie Mae to ``identify and assess the operational and
other issues'' involved in the proposal. HUD estimates
this would take approximately 6 months.
LAssuming that Congress passed legislation
implementing the plan, Phase Two would consist of
mobilizing and deploying resources in pursuit of all
aspects of the Phase One plan that do not require
changes to the current-state operations or material
system development. HUD estimates this phase would take
approximately 12 months in conjunction with FHFA,
Treasury and other stakeholders, including Congress.
LPhase Three, if authorized, would consist of full
implementation of operational changes, as per the
preparatory work done in the preceding phases. Making
projections about this phase, without having the
benefit of knowing the outcome of the first two phases,
is a highly uncertain exercise, but HUD's current
estimate is that this phase would at a minimum be a 12-
24 month project. This timing does not account for any
feedback from stakeholders on the impact such a change
would have on the industry, and any needed transition
time.
Projecting the investment needed to bring about the extended
guaranty is similarly uncertain. Our current best estimate is
that the funding needed would be minimal for the commencement
of Phase One, but a more significant amount may be needed over
the course of in Phase Two (though still just a fraction of
Ginnie Mae's annual S&E budget).
Q.7. How will you ensure that Ginnie Mae, which today has no
responsibility for assessing the credit quality of the assets
in its bonds or the solvency of the primary mortgage guarantor
protecting it and taxpayers, is ready to take on such a big
role?
A.7. While the expansion of Ginnie Mae's responsibilities in
the Treasury Plan is significant, the exact nature is yet to be
decided, and will drive the activities Ginnie Mae will need to
perform. We expect that all of the expanded responsibilities
derive from, and
relate to, functions Ginnie Mae already performs in connection
with approximately $2 trillion in risk associated with Ginnie
Mae's security. It would be a somewhat larger, and reorganized,
agency, but the subject matter encompassed would not be
materially different from operations conducted over recent
years. With respect to the credit quality of security assets
backed by individual mortgages, under the Treasury Plan this
would primarily be the responsibility of the guarantors, as
regulated (including in terms of credit enhancement pricing) by
FHFA, not Ginnie Mae.
Q.8. What is the risk of this added responsibility to FHA, VA
and USDA, which are currently Ginnie Mae's clients?
A.8. The proposal for an extended Ginnie Mae MBS guaranty
should be understood as something that would be effected while
separately maintaining the legacy Ginnie Mae MBS program and
platform.
Q.9. What is the status of HUD's proposed rule change to allow
homeless shelter operators to consider an individual's sex to
determine whether an accommodation or admission will be offered
at the operator's facility?
A.9. The draft proposed rule, ``Revised Requirements Under
Community Planning and Development Housing Programs'' (FR-
6152), is currently undergoing review by the Office of
Information and Regulatory Affairs.
Q.10. The new Fair Market Rents considers regional variables.
What resources did HUD use to establish the recently released
FMRs? Do these resources consider the fast market growth in
particular places, like Nevada, where rental rates continue to
skyrocket quarterly?
A.10. HUD estimates Fair Market Rents (FMRs) for approximately
600 metropolitan areas and 2,000 nonmetropolitan counties in
the United States which are used by local agencies to set
housing assistance payment limits for public programs that
address the housing needs of low-income families. HUD's
calculation of the FY2020 FMRs includes utilizing CPI data at
the metropolitan level for 22 CPI areas (containing 69 FMR
areas) where data was available, and regional data for all
other FMR areas to inflate gross rent estimates for 1 year
beyond the American Community Survey data which serves as the
basis for most FMR calculations. HUD's
research efforts in a 2019 report titled, Deriving Local Trend
Factors for Fair Market Rent Estimation, helped to inform HUD's
approach to the utilization of more localized data inputs in
the trend factor component of the FY2020 FMRs. HUD computed 26
trend factors for the FY2020 FMRs (22 CPI-based metropolitan
areas and 4 regional CPI areas). The 22 CPI areas where local
CPI forecasts are calculated include: Boston, New York,
Philadelphia, Chicago, Detroit, Washington, Baltimore, Miami,
Atlanta, Dallas, Los Angeles, San Francisco, Seattle,
Minneapolis, St. Louis, Tampa, Houston, Phoenix, Denver, San
Diego, Urban Hawaii, and Urban Alaska. Regional trend factors
are applied to all other FMR areas for the North, South,
Midwest, and West.
As a result of this method change the trend factor applied
to counties and metropolitan areas in Nevada increased from
1.055 to 1.061, reflecting a faster rent growth in the West
relative to other regions of the country.
Q.11. When jurisdictions contest Fair Market Rents, what
assistance is available from HUD to local housing authorities
to provide rental data?
A.11. HUD provides a questionnaire that can be used for
conducting a survey of rents and a spreadsheet for compiling
survey responses.
HUD also researches the rental market for an area that
would like to have its FMRs reevaluated to determine how large
of a survey must be conducted to meet appropriate statistically
significant standards. HUD encourages jurisdictions to consider
the following when submitting a reevaluation of FMRs:
LNo fewer than 100 qualified survey results are
considered for an FMR reevaluation.
LAreas with fewer than 10,000 rental units would
have difficulty getting 100 qualified results and are
encouraged to work with adjacent FMR area(s) of similar
economic and demographic factors to conduct such a
survey.
LMetropolitan areas are required to get 100-200
qualified survey results for acceptance of their
reevaluation. HUD determines the exact number based on
their rental population and consistent with other
surveys conducted by PHAs.
LLarge metropolitan areas are required to get 200
qualified survey results.
LQualified survey results are 1-, 2-, and in some
cases 3-bedroom units that were not built in the past 2
years; where the resident lives year-round; where unit
is not owned by a relative; where there is no work done
for the landlord; where the rent is the same each month
over a 12-month period; where income of the resident is
not verified each year; where tenant does not
participate in a housing program; and where the tenant
does not have a voucher. HUD lists these conditions in
its acceptance of the reevaluation.
Last, when a PHA conducts a local survey, the information may
be used until more current data becomes available. Depending on
when the survey data is collected, a local survey will be used
for a minimum of 2 FMR years, but are typically used for 3 FMR
years because of the age of the data. This is based on
statutory language that FMRs must be calculated using ``the
most recent available data.'' As an example, local surveys
conducted to reevaluate the FY2019 FMRs were typically
conducted between October and December of 2018. These surveys
were used to reevaluate the FY2019 FMRs and were used as the
basis for the FY2020 FMR calculations. The FY2021 FMRs will be
calculated using 2018 ACS tabulations; however, because all of
the local survey observations were obtained after the mid-point
of 2018, HUD considers the local survey to be more current than
the ACS and continues to use the local survey as the basis for
the FY2021 FMRs as well. In FY2022, the FMRs will be based on
2019 ACS data, all of which was collected after the 2018 local
surveys. Additionally, the results may be used for up to 5 FMR
years when the survey is conducted in smaller nonmetropolitan
counties where statistically significant 1-year ACS data for
the FMR area is not available.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MARK A.
CALABRIA, Ph.D.
Affordability
Q.1. Director Calabria, you stated that you would continue to
direct the GSEs to send annual contributions to the Housing
Trust Fund and Capital Magnet Fund as ``long as the conditions
in the statute are met for funding it.'' Please describe what
conditions in the statute must be met, and please provide your
interpretation, as FHFA Director, of what may cause such
conditions not to be met.
A.1. By statute, the FHFA Director must temporarily suspend
Enterprise allocations to the Housing Trust Fund and the
Capital Magnet Fund upon a finding that the allocations (1) are
contributing or would contribute to the financial instability
of the Enterprise, (2) are causing or would cause the
Enterprise to be classified as undercapitalized; or (3) are
preventing or would prevent the Enterprise from successfully
completing a capital restoration plan. Because FHFA suspended
Enterprise capital requirements when the Enterprises were
placed in conservatorships, the latter two conditions have not
been applicable. To assess financial stability, FHFA considers
Enterprise earnings and income, among other performance
measures.
Q.2. Director Calabria, the Treasury Department's Housing
Finance Reform plan expresses support for affordable housing.
How would you define affordable housing as you seek to
implement the Treasury Department's recommendations? Please
address affordability in the context of home ownership, rental
housing, and explicit subsidies.
A.2. FHFA defines affordable housing using generally recognized
definitions, primarily by comparing the cost of housing to the
income of the resident, and by comparing the income of the
resident to the area median income (AMI). Generally speaking,
housing is affordable if it consumes less than thirty percent
of household income. Explicit subsidies can help make housing
affordable, but most people with incomes low enough to qualify
for help do not actually live in subsidized housing or receive
housing assistance. It should be kept in mind that demand-side
subsidies, such as interest rate reductions, may have little or
even negative effects on affordability in the presence of tight
supply constraints.
In a homeownership context, affordability usually focuses
on the monthly payment of principal, interest, taxes, and
insurance. Efficient delivery of mortgage capital helps to keep
the cost of borrowing down and makes housing more affordable.
FHFA oversees efforts by the Enterprises and the FHLBanks to
support mortgage financing for low-income households earning 80
percent of AMI or less, very low-income households earning 50
percent of AMI or less, and households in low-income areas.
In a rental context, affordability compares monthly rent
(and related housing costs such as utilities) to monthly
income. The affordable housing need is greatest at the lowest
income levels, especially households earning 30 percent of AMI
or less. Extremely low-income renters generally cannot afford
housing without rental subsidy. Affordability challenges for
renters occur at higher income levels, too. In some extremely
high-cost markets, even renters at 120 percent of AMI struggle
with housing costs.
I should note that FHFA is currently reviewing Treasury's
reform plan and there is yet no decision on which
recommendations will be implemented or how. As FHFA is an
independent regulator, Treasury's recommendations will be given
appropriate consideration, but will be treated as
recommendations.
Underwriting Improvements
Q.3. Director Calabria, during your oral testimony you could
not name any actions that had been taken in the prior 11 years
to address misaligned incentives and poor underwriting during
the financial crisis.
In the years following the crisis, Congress passed the
Dodd-Frank Wall Street Reform and Consumer Protection Act,
which created risk retention requirements and an ability to
repay standard, among other changes. The GSEs have also reduced
their retained portfolios as required under the terms of the
senior preferred stock purchase agreements and continually
updated their automated underwriting systems and seller/
servicer guides.
Do you believe that any of these changes have helped to
address the pre-crisis underwriting problems and incentives for
GSE-guaranteed loans, for mortgages held on a lender's balance
sheet, and for loans sold into private-label securities? If
not, why not?
A.3. While I do not recall using the word ``any,'' as I have
documented elsewhere (https://www.cato.org/publications/
working-paper/mortgage-reform-under-dodd-frank-act) the post-
crisis Dodd-Frank mortgage reform efforts have had at best
limited and very modest impacts on loan performance. This is
due to the fact that such reforms have ignored the largest
drivers of default, borrower credit history and loan-to-value.
Some evidence of this is displayed by the fact that GSE loan
performance today, in terms of delinquencies, is very similar
to that witnessed before the crisis. I would also point you to
a recent FHFA working paper for further evidence on trends in
credit risk: https://www.fhfa.gov/PolicyPrograms
Research/Research/Pages/wp1902.aspx. I remain deeply troubled
by the overall compliancy regarding credit risk in today's
mortgage market. It bears too strikingly a similarity to that I
regularly witnessed before the crisis.
Q.4.a. Director Calabria, in response to a question about why a
lender would make a loan without verifying a borrower's income,
you agreed that the lender would make such a loan because they
could sell it to the GSEs.
Are the GSEs currently guaranteeing loans with no
documentation of income?
A.4.a. I do not believe I stated or implied during the oral
testimony that the GSEs were buying no documentation loans. My
recollection was that the question was a hypothetical. To the
best of my knowledge, the Enterprises are not acquiring or
guaranteeing loans that do not have documentation of income,
nor is FHFA aware of any terms of business with specific
lenders that allow for them to deliver loans to the Enterprises
without any documentation of income. The Enterprises have
automated the collection, verification, and assessment of a
borrower's income and assets in their respective automated
underwriting systems, which increases efficiency and reduces
fraud in loan origination. Fannie Mae's data validation service
in Desktop Underwriter, commonly referred to as Day 1
Certainty, enables lenders to electronically obtain employment,
income, and asset documentation directly from the source rather
than relying on collecting the documents from the borrower.
Freddie Mac has a similar service in Loan Product Advisor
called Asset and Income Modeler, which automates the manual
process of assessing income and assets, particularly for self-
employed borrowers. All that said, as is reflected in the logic
behind ``risk retention,'' if an originator can pass along the
risk of a mortgage, said originator is likely to make riskier
mortgages.
Q.4.b. In the years leading up to the financial crisis, what
percentage of subprime and Alt-A, low- or no-documentation
loans were securitized into private-label securities, and what
percentage of such loans were securitized and guaranteed by the
GSEs?
A.4.b. There is no single, universally accepted definition for
what might be called a subprime or Alt-A loan.
For example, ``subprime'' may be defined in terms of
borrower characteristics such as credit scores, in terms of
loan characteristics such as interest rates, or even in terms
of whether the lender originating the loan is considered a
``subprime lender.'' ``Alt-A'' traditionally referred to
alternative documentation but not necessarily higher credit
risks, while in the years leading up to the crisis the
proliferation of low- and no-documentation loans was often
associated with higher credit risk borrowers and loans.
Another challenge in measuring ``subprime'' and ``Alt-A''
is that data from before and during the financial crisis is
sometimes missing or incomplete. Given these data challenges,
FHFA can only provide estimates comparing the prevalence of
some types of loans in private label securities and Enterprise
portfolios.
For purposes of this response, FHFA categorized loans with
Vantage Scores at or below 660 as ``Low Score Loans.'' Such
loans could be seen as one proxy for ``subprime'' because they
generally reflect borrowers who had weakened credit histories
that included payment delinquencies and possibly more severe
problems such as charge-offs, judgments, and bankruptcies. The
share of ``Low Score Loans'' increased significantly for PLS in
the years leading up to the crisis. For example, in 2001,
approximately 39 percent of all ``Low Score Loans'' originated
were for Enterprise portfolios, with 11 percent in PLS and 50
percent in ``Other.'' In 2006, the Enterprise share of all
``Low Score Loans'' remained at 40 percent while the PLS share
had increased to 37 percent, with 23 percent in ``Other.''
A similar pattern existed for ``Alt-A.'' For purposes of
this response, FHFA categorized loans with combined loan-to-
value ratios of 97 percent and without full income
documentation or not owner-occupied as ``Other Risky Loans.''
In 2001, approximately 33 percent of all ``Other Risky Loans''
originated were for Enterprise portfolios, with 12 percent in
PLS and 55 percent in ``Other.'' In 2006, the Enterprise share
of all ``Other Risky Loans'' fell to 22 percent while the PLS
share had increased to 44 percent, with 34 percent in
``Other.''
The PLS share of ``Low Score Loans'' and ``Other Risky
Loans'' reached their largest percentages as house prices were
peaking in 2005 and 2006. In later years, the PLS share quickly
dropped to zero as private label securities stopped being
issued almost entirely. It is critical to note, however, that
during the largest growth period in PLS, Fannie Mae and Freddie
Mac were the largest single purchasers of those securities,
adding considerable investor demand to the PLS market. It is
extremely unlikely that the subprime PLS market would have
reached such levels if Fannie Mae and Freddie Mac had not been
such larger investors in that market.
Q.5. Director Calabria, during your oral testimony you stated
that underwriting at the GSEs has ``gotten worse, not better.''
Please describe all underwriting changes that have been
made at the GSEs since 2008. Please indicate which of these
changes you believe have made underwriting worse.
A.5. During the financial crisis, the Enterprises tightened
their eligibility and underwriting standards, and their overall
risk appetite, as did many other mortgage market participants.
Some of these changes included:
LEliminating mortgage products that featured
negative amortization
LRequiring borrowers to be qualified at the fully
indexed interest rate (QM driven)
LNot permitting less-than-full documentation of the
borrower's income or other risky lender variances
LAdding and raising the minimum credit score
required
LAligning their manual underwriting policies with
their automated underwriting systems
LChanging debt-to-income (DTI) requirements
LCollecting data and building systems to verify/
validate the property appraisal
LLowering the maximum loan to value (LTV) and
combined loan to value (CLTV) ratios permitted
LAdjusting pricing, adding an adverse market charge,
and establishing risk-based pricing in the form of
delivery fees or loan level pricing adjustments
In recent years, the Enterprises have also relaxed some of
those standards, for example by re-establishing maximum LTV
ratios above 95 percent for certain mortgage products and by
recently relaxing DTI requirements, both of which are
problematic and have been a source of increased risk for both
Enterprises.
The evolving debt-to-income standards are a good example.
In July 2017, Fannie Mae removed compensating factors from its
automated underwriting system, Desktop Underwriter (DU), that
were required for loans to exceed 45 percent DTI up to 50
percent. With this change, all loans became eligible for a
maximum DTI up to 50 percent as part of the comprehensive risk
assessment performed by DU. Within months, Fannie Mae saw a
significant increase in loans with ratios exceeding 45 percent
DTI that also exhibited other high risk factors that included
very high LTV ratios and low credit scores. This practice is
commonly referred to as risk layering and loans with multiple
layers of risk tend to default at a higher rate. Freddie Mac
also experienced a similar increase in loans with risk layering
because it acquires loans that are assessed by DU. In March
2018 and again in December 2018, Fannie Mae made some
adjustments to DU's risk assessment to limit risk layering.
However, those changes have not had the desired effect and
Fannie Mae plans to make additional changes later this year.
Another critical factor is the large increase in high LTV
loans. In 2008, less than 4 percent of Fannie's acquisitions
had LTV's in excess of 95 percent, in 2018, almost 8 percent
had LTV's in excess of 95 percent. Such low levels of borrower
equity leave borrowers exposed to a possible downturn in home
prices.
De-risking the GSEs
Q.6.a. Director Calabria, in your oral testimony you stated you
will be ``de-risking'' the GSEs and that the GSEs ``cannot make
loans that are almost guaranteed to go bad.''
Are there loans that the GSEs are guaranteeing today that
you believe are almost guaranteed to go bad? If so, please
describe the characteristics of those loans, the volume of
those loans, and their current default rates.
A.6.a. During the financial crisis loans with multiple risk
factors, often called risk-layering, defaulted at much higher
rates than loans without multiple risk factors. For example,
loans with loan-to-value ratios greater than 90 percent and
credit scores less than 620 defaulted at rates more than double
the average default rate for all loans with loan-to-value
ratios greater than 90 percent.
Since the beginning of 2017, the Enterprises have been
acquiring an increasing share of loans with multiple risk
factors. This happens when a mortgage has more than one of
higher risk factors such as:
LBorrower's debt-to-income ratio greater than 43
percent,
Linvestor loan,
Lsecond or vacation home,
Lborrower with a credit score of less than 680,
Lcash out refinance, and/or
Lloan-to-value ratio greater than 80 percent.
Since the beginning of 2017, the Enterprises have acquired 1.76
million loans with more than one of the mentioned risk factors.
As of June 30, 2019, 0.28 percent of those loans were seriously
delinquent (three or more payments past due).
Q.6.b. What other products or activities would you alter or end
to ``de-risk'' the GSEs? Please provide a list of activities
and the changes you believe would be appropriate.
A.6.b. FHFA is currently reviewing the Enterprises' products
and activities with the goal to lower the risk profile of the
Enterprises, including a review of Enterprise pilot programs,
the risks within their book of business, and their risk
management practices. We expect the review of the Enterprises
products and activities to continue through the next year.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM MARK A.
CALABRIA, Ph.D.
Q.1. The final rule published this past August on the
implementation of the Credit Score Competition Act, which would
allow for the use of alternative credit-scoring models by the
GSEs, will increase home ownership and put more Americans on a
path to success.
I am glad to see FHFA's work to implement this and,
importantly, to reflect the intent of Congress in fostering
competition.
Do you view the use of alternative credit scoring as
integral to increasing access to home ownership? As I
understand the final rule, it may take the industry anywhere
from 18 to 24 months to fully adopt a new credit score model.
Will you commit to fully seeing this through until the new
models have become fully adopted?
A.1. I am fully committed to seeing through the completion of
this process. FHFA is committed to the validation and approval
process laid out in law and in FHFA's final credit score
regulation, and we believe the Enterprises will be able to
validate and approve a new credit score model using this
process. We want to ensure we allow the industry the
appropriate amount of time to prepare for any change to the
Enterprises credit score requirements. Based on analysis and
industry outreach, we do not believe that updating the credit
score model will have a significant impact on access to credit;
however, there is opportunity to increase access to credit
through the Enterprises no-score automated underwriting
systems. The nonscore AUS allows potential borrower who lack
traditional credit to be evaluated through automation,
eliminating the need for a manual underwrite.
Q.2. Given tools like Credit Score Competition, FHFA benefits
from access to more technologically advanced modeling tools and
resources. It is a well-known fact, however, that FHA is still
largely a paper-based operation. Congress provided $20 million
in IT funding to better assist FHA in getting to an advanced IT
infrastructure.
In HUD's reform plan, the Administration proposes re-
chartering FHA as an autonomous Government corporation within
HUD and to pursue inter-agency agreements. How would FHA's
potential role as an autonomous agency allow it to better
utilize modeling resources and tools, like those at FHFA and
the credit-scoring program, to increase access to home
ownership? And better adapt to technological changes in the
marketplace?
A.2. We cannot comment on the potential for FHA to utilize
modeling resources and tools, since that is outside our
authority. However, we do believe it is important that the two
agencies coordinate with respect to credit scores, to alleviate
any bifurcation in the industry. This has been explicit
feedback we have received from the industry and we believe
there is a benefit to having FHA and the Enterprises aligned on
their credit score requirements.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM MARK A.
CALABRIA, Ph.D.
Our housing finance system faces a number of profound
challenges. In most parts of the country, prices for starter
homes are skyrocketing as much as 10 percent per year.\1\
Millions of Americans are cost burdened, paying more than 30
percent of their income on rent, mortgages or other housing
costs. Perhaps most perniciously, the legacy of decades of
racist Federal housing policy is still too apparent today. The
average Black family has about \1/10\th the wealth of the
average white family,\2\ and while the Black families made some
gains in the healthy housing markets of the 1990s and early
2000s, that progress was wiped out in the subprime crisis.
Today, the homeownership gap between Black and white families
is as large as it was when housing discrimination was legal.\3\
---------------------------------------------------------------------------
\1\ Marketwatch ``One big reason it's so hard for first-time buyers
to find the right starter home.'' Jacob Passy, March 21, 2018, https://
www.marketwatch.com/story/another-hurdle-for-first-time-home-buyers-
there-are-barely-any-starter-homes-for-sale-2018-03-21.
\2\ Brookings, ``A conversation about the racial wealth gap--and
how to address it,'' Michaela Broyles, June 18, 2019, https://
www.brookings.edu/blog/brookings-now/2019/06/18/a-conversation-about-
the-racial-wealth-gap-and-how-to-address-it/.
\3\ Census Bureau, ``Quarterly Residential Vacancies and
Homeownership, Second Quarter 2019,'' July 25, 2019, https://
www.census.gov/housing/hvs/files/currenthvspress.pdf; National Bureaus
of Economic Research Working Paper Series, ``Race and Home Ownership,
1900 to 1990,'' William J. Collins and Robert Margo, August 1999,
https://www.nber.org/papers/w7277.pdf.
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Any proposal for housing finance reform must confront these
problems. After all, as the U.S. Department of Treasury Housing
Reform Plan (``Treasury Report'') points out, ``[e]ach GSE's is
unique in that its congressional charter endows the GSE with a
public mission.'' These public missions make it clear that the
GSEs exist to ``promote access to mortgage credit throughout
the Nation (including central cities, rural areas, and
underserved areas)'' and to perform ``activities relating to
mortgages on housing for low- and moderate-income families
involving a reasonable economic return that may be less than
the return earned on other activities.''\4\
---------------------------------------------------------------------------
\4\ U.S. Department of the Treasury, ``U.S. Department of the
Treasury Housing Reform Plan,'' September 2019, file:///C:/Users/
js42247/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/
LTYNPN67/Treasury-Housing-Finance-Reform-Plan.pdf.
---------------------------------------------------------------------------
I have carefully reviewed the Treasury Report and the
Department of Housing and Urban Development's Housing Finance
Reform Plan (``HUD Report''). Both appear to eliminate many of
the mechanisms in the current system that support sustainable
home ownership among low- and moderate-income and middle-income
borrowers, especially in communities of color. The following
questions seek more information about the analysis that
Treasury, HUD and the Federal Housing Finance Agency (FHFA)
undertook to determine the effects of their various proposals
on housing prices, access to home ownership for first-time home
buyers, and the racial homeownership gap.
Q.1. The Treasury Report recommends that ``Congress should
restrict the permissible activities of guarantors to the
business of securitizing Government-guaranteed MBS,'' including
``cash-out refinancings, investor loans, vacation home loans,
higher principal balance loans [in high-cost areas], or other
subsets of GSE-acquired mortgage loans,'' and in the absence
legislation ``FHFA should assess whether each of the current
products, services, and other
single-family activities of each GSE is consistent with its
statutory mission.''
Q.1.a. Do you agree with this recommendation?
A.1.a. Yes. As Congress thinks through housing finance reform,
it will be critically important to define the role of Fannie
Mae and Freddie Mac, including permissible activities. In the
meantime, our mission will remain unchanged and focus on
ensuring that the housing Government-sponsored enterprises
operate in a safe and sound manner so that they serve as a
reliable source of liquidity and funding for housing finance
and community investment. I believe it is appropriate and
necessary for all financial regulators to regularly insure that
the activities of regulated entities are consistent with their
charters.
Q.1.b. Did FHFA analyze the effects of limiting the activities
of the guarantors on home prices, especially in high-cost
areas? If so, please provide the analysis.
A.1.b. FHFA to date has not done an impact analysis on
recommendations made by the Treasury. I do, however, largely
concur with the analysis and argument you advance in Chapter 6
of The Two-Income Trap. As you so accurately describe there,
``as housing prices leveled off, more families would be able to
afford a home . . . ''.
Q.1.c. Did FHFA analyze the effects limiting the activities of
the guarantors on access to home ownership for low-, moderate-,
and middle-income borrowers and first-time home buyers,
especially in high-cost areas? If so, please provide the
analysis.
A.1.c. FHFA to date has not done an impact analysis on
recommendations made by the Treasury. Again, I largely agree
with your assessment contained in Chapter 6 of The Two-Income
Trap, which very clearly describes how demand-side housing
subsidies can actually make housing less affordable. As you
also note in Chapter 6, between 1980, which largely predates
the growth of the GSEs, and the publication of The Two-Income
Trap in 2003, the increase in home ownership was modest, at
best.
Q.1.d. Did FHFA analyze the effects of these changes on access
to sustainable home ownership in communities of color? If so,
please provide the analysis.
A.1.d. FHFA to date has not done an impact analysis on
recommendations made by the Treasury. However, FHFA conducts
fair lending analysis of any proposed policy change to identify
and assess potential impacts to protected classes, including
communities of color. Again, I largely concur with the
arguments you advance in Chapter 6 of the Two-Income Trap. As
you so eloquently put it, ``credit was not supposed to be an
end in itself.'' Unfortunately, the area of GSE dominance has
seen almost no long-term increase in sustainable homeownership
rates in communities of color.
Q.2. The Treasury Report recommends that ``[p]ending
legislation, FHFA should consider more efficient mechanisms for
the GSEs to achieve the statutory affordable housing'' than the
affordable housing goals.
Q.2.a. Do you agree with this recommendation? Will FHFA
implement it?
Q.2.b. Please describe the ``more efficient mechanisms'' that
the FHFA is considering.
Q.2.c. Did FHFA analyze the effects of getting rid of the
affordable housing goals on home prices? If so, please provide
the analysis.
Q.2.d. Did FHFA analyze the effects of getting rid of the
affordable housing goals on access to home ownership for low-,
moderate-, and middle-income borrowers and first-time home
buyers? If so, please provide the analysis.
Q.2.e. Did FHFA analyze the effects of getting rid of the
affordable housing goals on access to sustainable home
ownership in communities of color? If so, please provide the
analysis.
A.2.a.-e. Treasury included a number of administrative actions
related to FHFA matters. As the current Enterprise Housing
Goals Regulation runs through 2020, we expect to engage with
the Treasury Department on the specifics of its recommendation
as we formulate our 2021-2023 goals regulation next year. FHFA
conducts fair lending analysis of any proposed policy change to
identify and assess potential impacts to protected classes,
including communities of color.
Q.3. The Treasury report recommends that ``FHFA and HUD should
develop and implement a specific understanding as to the
appropriate roles and overlap between the GSEs and FHA, for
example, with respect to the GSEs' acquisitions of high LTV and
high DTI loans and FHA's underwriting of cash-out,
conventional-to-FHA, and other refinancing loans and loans to
repeat FHA borrowers.''
Q.3.a. Do you agree with this recommendation? Will FHFA
implement it?
A.3.a. It is appropriate to further greater coordination
between FHFA and HUD, ensuring efforts are complementary, in
support of a well-functioning housing finance system.
Q.3.b. Did FHFA analyze the effects of limiting the footprint
of the GSEs and FHA on home prices? If so, please provide the
analysis.
A.3.b. To date, FHFA has not done an impact analysis on
recommendations made by the Treasury.
Q.3.c. Did FHFA analyze the effects of limiting the footprint
of the GSEs and FHA on access to home ownership for low-,
moderate- and middle-income borrowers and first-time home
buyers? If so, please provide the analysis.
A.3.c. To date, FHFA has not done an impact analysis on
recommendations made by the Treasury.
Q.3.d. Did FHFA analyze the effects of limiting the footprint
of the GSEs and FHA on access to sustainable home ownership in
communities of color? If so, please provide the analysis.
A.3.d. To date, FHFA has not done an impact analysis on
recommendations made by the Treasury. However, FHFA conducts
fair lending analysis of any proposed policy change to identify
and assess potential impacts to protected classes, including
communities of color.
Q.4. The Treasury Report recommends that ``FHFA's eventual
regulatory capital requirements should require that each
guarantor, or each GSE pending legislation, be appropriately
capitalized by maintaining capital sufficient to remain viable
as a going concern after a severe economic downturn and also to
ensure that shareholders and unsecured creditors, rather than
taxpayers, bear losses.'' It later recommends, ``would be . . .
to more fully align the GSEs' credit risk capital charges with
those of other fully private regulated financial institutions
for holding similar assets.''
Q.4.a. Do you agree with this recommendation? Will FHFA
implement it?
A.4.a. I believe that the Enterprises are woefully
undercapitalized and it is a priority of mine to correct that.
FHFA proposed an Enterprise capital rule in 2018 and received
extensive comments in 2019. Because those comments were
provided under a different set of assumptions about the future
of the Enterprises, I determined that FHFA would repropose the
capital rule in 2020, The rule will be re-proposed and
finalized within a timeline fully consistent with ending the
conservatorships. Requiring the Enterprises to build capital
that can properly support their risk ensures that taxpayers
will never be on the hook again during an economic downturn.
Q.4.b. Did FHFA analyze the effects of bank-like capital
requirements on home prices? If so, please provide the
analysis.
A.4.b. No. FHFA has not analyzed the effects of bank-like
capital requirements on home prices.
Q.4.c. Did FHFA analyze the effects of bank-like capital
requirements on access to home ownership for low-, moderate-,
and middle-income borrowers and first-time home buyers? If so,
please provide the analysis.
A.4.c. No. FHFA did not analyze the effects of bank-like
capital requirements on access to home ownership for low-,
moderate-, and middle-income borrowers and first-time home
buyers.
Q.4.d. Did FHFA analyze the effects of bank-like capital
requirements on access to sustainable home ownership in
communities of color? If so, please provide the analysis.
A.4.d. FHFA conducts fair lending analysis of any proposed
rulemaking to identify and assess potential impacts to
protected classes, including communities of color. I believe
having stronger capital levels would improve the ability of the
GSEs to provide access during all phases of the business/
housing cycle.
Q.5. The Treasury report recommends that ``[f]ollowing any
change to the CFPB's ability-to-repay rule, FHFA should revisit
the determination as to which single-family mortgage loans
should be eligible for acquisition by the GSEs (with
appropriate amendments to the PSPAs) or, following legislation,
should be eligible to secure Government-guaranteed MBS.''
Q.5.a. Do you agree with this recommendation? Will FHFA
implement it?
A.5.a. Yes. As conservator and regulator, FHFA must assess any
rule changes that may impact the Enterprises. Following updates
to the ability to repay rule, both FHFA and each of the
Enterprises will assess the impact of the new rule on the
Enterprises' businesses and the Agency will determine whether
any additional changes to eligibility requirements are
necessary.
Q.5.b. Did Treasury analyze the effects of further limiting the
footprint of the GSEs on home prices? If so, please provide the
analysis.
A.5.b. N/A
Q.5.c. Did Treasury analyze the effects of further limiting the
footprint on access to home ownership for low-, moderate-, and
middle-income borrowers and first-time home buyers? If so,
please provide the analysis.
A.5.c. N/A
Q.5.d. Did Treasury analyze the effects of further limiting the
footprint of the GSEs on access to sustainable home ownership
in communities of color? If so, please provide the analysis.
A.5.d. FHFA is unaware of Treasury analysis regarding the
effect of acquisition eligibility of loans on access to
sustainable home ownership.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM MARK A.
CALABRIA, Ph.D.
Q.1. Is FHFA aware of increased GSE multifamily volumes in the
Class A high-end market rate space?
A.1. FHFA monitors the Enterprises' multifamily activities
through monthly volume reporting and outreach to multifamily
market participants, and requires the Enterprises to report
their business under Conservatorship Scorecard cap and in the
targeted affordable categories. In addition, FHFA meets with
multifamily market participants, including Fannie Mae and
Freddie Mac, on a quarterly basis to discuss market conditions
and the Enterprises' multifamily business activities to ensure
that we have a strong handle on what is happening in the
market.
Q.2. Do you believe it is appropriate for the GSEs to crowd out
private capital in these markets?
A.2. No, it is not appropriate for the GSEs to crowd out
private capital. FHFA sets the multifamily volume caps
utilizing market forecasts, expertise from industry
participants, and other market information in order to prevent
the Enterprises from crowding out private capital. FHFA also
closely monitors the Enterprises' business activities in the
multifamily market through monthly reporting and quarterly
meetings with other multifamily market participants to identify
potential areas of concern.
Q.3. Is the Agency considering how it can refocus the GSEs on
their mission and supporting the supply of affordable housing,
rather than Class A apartments?
A.3. Examples of Class A high-end projects where the GSEs
narrowly outbid the private market (there are many more, this
is just a small sample):
LA 146-unit luxury apartment complex in Florida that
was constructed in 2017. 1-bedroom units rent for
$2,430/month while local area ``A'' quality 1 bedroom
apartments average $1,800 and ``B'' quality 1-bedroom
apartments average $1,500 or lower. In 2018, the
property owner was seeking a $26 million 7-year
mortgage. A private market participant quoted the
mortgage at T + 150 bps, but Fannie Mae reportedly won
with a quote of T + 106 bps--[equates to less than 50
bps spread].
LA 280-unit apartment community in Florida that was
constructed in 2018. The average asking rent per unit
for the property is $1,520 per month while local area
class A rents average $1,300. In 2019, the property
owner was seeking a $44.5 million loan. A private
market participant bid aggressively, but Fannie Mae
reportedly offered a lower spread and was chosen by the
borrower.
LA 252-unit multifamily project in an affluent area
of Pennsylvania. The multifamily recently stabilized
and the sponsor is renewing tenants at proforma rents.
In 2019, the property owner requested financing for
$59MM, 10-year fixed. A private market participant was
quoting the mortgage at T + 215 bps for full proceeds,
but Freddie Mac reportedly won with a quote of T + 176
bps--[39 bps less].
LA newly constructed, 135-unit Class A multifamily
property located in Minnesota. The sponsor was seeking
a $30MM, 10-year fixed-rate loan to pay off its
existing construction loan and return a portion of its
equity in 2019. A private market participant was
quoting the mortgage at T + 190 bps for $27.5MM (68
percent LTV), but Fannie Mae reportedly won with a
quote of T + 165 bps for more proceeds at $30.25MM (75
percent LTV)--[25 bps less with $2.75MM more proceeds].
FHFA recognizes that the private sector plays a key role in the
multifamily market and should not be crowded out of the market.
On September 13, 2019, FHFA announced the multifamily volume
caps for the fourth quarter of 2019 through the fourth quarter
of 2020 and a revised cap structure that it is intended to
ensure that the Enterprises do not grow their share of the
market to the detriment of private investors, while still
ensuring that they maintain a presence and a strong focus on
affordable housing and traditionally underserved markets. To
accomplish this, FHFA directed that at least 37.5 percent of
the Enterprises' multifamily business be mission-driven,
affordable housing. Traditionally, one-third of Enterprise
business, outside of Green loans, has fallen into the mission-
driven space. This new minimum of 37.5 percent responsibly
assures that the Enterprises' multifamily businesses have a
strong and growing commitment to affordable housing finance.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR TILLIS FROM MARK A.
CALABRIA, Ph.D.
Q.1. Given your previous commitment to transparency and risk-
based pricing, can you assure me that the release of any new
capital standards will abide by the Administrative Procedures
Act (APA)?
A.1. Yes, absolutely. FHFA intends to fully comply with the
Administrative Procedures Act in finalizing a capital rule for
the Enterprises.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM MARK A.
CALABRIA, Ph.D.
Q.1. The Treasury report detailed recommendations to support a
level playing field for new participants in the housing finance
system. These regulatory requirements touch on items like
capital relief, data standardization, and third-party credit
risk transfers; however the report does not address the
technological infrastructure that the enterprises have built up
over the past decade while in conservatorship. Post
conservatorship, how do we limit the competitive advantage
Fannie & Freddie would have over new competitors due to the
technological infrastructure they have accrued over the past
decade on the taxpayers' dime?
A.1. Related to the technology infrastructure for the
securitization of single family loans, the Enterprises have
established a joint venture (Common Securitization Solutions,
LLC), which owns and operates a new common securitization
platform (CSP). The CSP is used to perform key activities
related to security issuance, bond administration, disclosures
and tax reporting. The CSP was developed so that it would be
adaptable for use by additional market participants, in part by
leveraging industry-standard interfaces, industry software and
industry data standards, wherever possible. In addition,
earlier this year, the Enterprises, leveraging the CSP,
implemented the new Uniform Mortgage-Backed Security (UMBS),
creating a new common security, with common security
characteristics and disclosure requirements. FHFA believes that
the development and implementation of the CSP and UMBS will not
only lead to a more efficient, resilient, and liquid secondary
mortgage market, but also they will support a more level
playing field for new participants in the housing finance
system, by providing the potential for third parties to
participate in using them.
Q.2. The Treasury report details the harmonization of
regulatory requirements applicable to the GSEs, including the
standardization of data practices that the GSEs use and those
of the greater housing finance system. Do you see increased
transparency and the sharing of GSE data and other information
with industry--which has given the enterprises an almost
unassailable competitive advantage--as a precondition for
release from conservatorship?
A.2. FHFA supports improvements in Enterprise data quality and
standardization of information submission requirements from
market participants. At the same time, greater transparency by
the Enterprises is merited. For example, as part of risk-
sharing transfers, the Enterprises have increased the amount of
public data
regarding their loans and their characteristics. These have
enhanced investor and public understanding of the loan
composition of Enterprise underwriting. Continued expansion of
data production will be part of FHFA attention going forward.
Q.3. In the report from the U.S. Department of the Treasury,
recommendation #6 is that ``pending legislation, each GSE
should be recapitalized so that private capital takes the
first-loss position on the GSE's exposure to risk and loss.''
To best protect taxpayers from mortgage-related credit risk, do
you agree that the entities taking the first-loss risk should
be dedicated to the housing finance system, highly regulated,
and available during all market cycles?
A.3. To best protect taxpayers from mortgage related credit
risk, entities taking credit risk should have capital
requirements that are sufficient for the risks. I believe that
an appropriate amount of capital commensurate with the
Enterprises' risk as well as with a strong and effective
regulator will best protect the taxpayers from future losses.
Q.4. I appreciate that the report recognized the impact to
housing affordability that local jurisdictions are causing
through myriad barriers such regulations, land use and rent
control. What impact can the GSEs, through direction from FHFA,
have on breaking down these barriers or incenting localities to
modify their rent control initiatives?
A.4. One driver in the rising cost of housing throughout the
United States is a lack of housing supply caused by regulatory
barriers, inclusionary zoning and growth management controls,
rent controls, and a variety of other State and local
regulations. FHFA continuously monitors State and local
regulations and their effects on the Enterprises' multifamily
loan purchases.
FHFA has worked directly with State and local authorities
to ameliorate the impact of unnecessary, antiquated or counter-
productive rules that adversely affect the availability of
housing including affordable housing. Rules that impose fees
that actually are taxes, rules that delay foreclosures and the
restoration of housing to the market, rules that prevent in
someinstances Enterprises from maintaining properties and in
other instances mandate overly prescriptive local rules for
such maintenance all evidence adverse pressures on affordable
housing supply. In the coming months, FHFA plans to explore
State and local laws, identify roles the Enterprises can play
in addressing these regulatory barriers, and look into
approaches to encourage responsible changes to these laws or
ordinances while assuring safe conditions remain for
properties.
Q.5. The report mentions the deleterious effect that rent
control policies can have on housing affordability--why not be
more explicit about what FHFA should do about underwriting
loans eligible for the GSEs to purchase from jurisdictions that
have enacted rent-control laws and regulations?
A.5. FHFA continuously monitors State and local regulations and
their effects on the Enterprises' multifamily loan purchases.
In the coming months, FHFA plans to explore State and local
laws, and identify roles the Enterprises can play in addressing
these regulatory barriers.
Q.6. The report identifies that housing affordability is a
major concern but then calls for contracting the GSEs'
multifamily footprints and reducing liquidity in the market.
What measures does FHFA propose to create more supply of
multifamily assets to put downward pressure on rents?
A.6. On September 13, 2019, FHFA announced a revised cap
structure on the multifamily businesses of the Enterprises. The
revised structure caps new multifamily loan purchases at $100
billion for each Enterprise, a combined total of $200 billion
in support to the multifamily market, for the five-quarter
period Q4 2019-Q4 2020. The new caps apply to all multifamily
business--no exclusions. This new cap regime will ensure the
Enterprises do not crowd out private market participants.
However, to ensure a strong focus on affordable housing and
traditionally underserved markets, FHFA directs that at least
37.5 percent of the Enterprises' multifamily business be
mission-driven, affordable housing. This new minimum of 37.5
percent responsibly assures that the Enterprises' multifamily
businesses have a strong and growing commitment to affordable
housing finance. FHFA's priority is to ensure the provision of
liquidity where needed, without crowding out private capital.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
MARK A. CALABRIA, Ph.D.
Q.1. Congress required Fannie Mae and Freddie Mac have a duty-
to-serve rural communities and manufactured home buyers and
preserve affordable housing. Is it your understanding that the
FHFA must implement those requirements until Congress rescinds
them?
A.1. As I have consistently said, including at my confirmation
hearing before this Committee, I fully intend to carry out the
law as enacted. This includes the Duty-to-Serve provisions of
HERA. During my tenure at FHFA, I intend to hold the
Enterprises accountable for meeting their statutory
responsibilities to serve the rural, manufactured housing, and
affordable housing preservation markets.
Q.2. FHFA has the responsibility to monitor the housing finance
market for discrimination, inequities and risks. Has the
elimination of some loan quality criteria from small banks and
credit unions reported through the Home Mortgage Disclosure Act
banks and credit unions hindered your ability to monitor for
discrimination in lending?
A.2. The recent changes to the Home Mortgage Disclosure Act
reporting requirements have not hindered our ability to monitor
for discrimination in lending. FHFA uses loan-level acquisition
data provided by the Enterprises for fair lending monitoring.
This data provides a robust, complete, and accurate view of
Enterprise activities.
Q.3. In your confirmation hearing, you said that you would
recruit and expand career staff hires with a background in
financial regulation. Please list the hires made since your
confirmation and note their background.
A.3. Over the last 5 months, FHFA hired 12 career staff
employees with financial regulation experience. These hires
include five examiners, three economists, two financial
analysis/research specialists, and two attorneys. I also
approved 19 new positions for the fiscal year in financial
regulation functional areas.
Q.4.a. In your confirmation hearing, you said that you would
expand the research and economics function at the FHFA.
Who have you hired to lead the research department?
A.4.a. We have not hired anyone to lead the research
department. I am using my recently appointed Senior Advisor for
Economics to evaluate the Agency's research functions and make
a recommendation on if/how it should be organized into a single
department.
Q.4.b. Who have you hired to work there?
A.4.b. Although we have not established a single Agency-wide
research function, we have filled five positions in economic
and research analysis functions since my arrival. In addition,
I approved six economic and research positions for FY2020.
Q.4.c. Have you created an economics and statistics function
with a direct report to the Director? If so, please explain its
function. If not, what is your timeframe to do this?
A.4.c. Yes, I appointed a Senior Advisor for Economics on May
20, 2019. This employee is responsible for formulation,
establishment, and promulgation of economic practices and
policies for the Agency.
Q.4.d. In what forums has FHFA staff presented research?
A.4.d. Speaking engagements have included academic conferences,
university seminars, think tank forums, and special topic
research symposiums. Below is a list of organizational names
for which FHFA's research has been presented during the past 5
years.
2019-11 Association for Public Policy Analysis and
Management
2019-10 American Enterprise Institute
2019-07 Office of Financial Research
2019-07 Federal Reserve Board
2019-06 North American Econometric Society
2019-06 American Real Estate and Urban Economics
2019-04 American Real Estate Society
2019-04 Federal Reserve Bank of Cleveland
2019-03 Federal Deposit Insurance Corporation
2019-03 U.S. Department of Housing and Urban Development
2019-01 American Economic Association
2018-12 Housing Statistics Users Group
2018-11 National Association of Regional Science Council
2018-11 National Association of Realtors
2018-10 National Community Stabilization Trust
2018-10 Fannie Mae, Appraisal Institute, University of
Connecticut
2018-09 Workshop on Improving the American Community Survey
for The National Academies of Science Engineering and Medicine
2018-09 Federal Reserve Bank of Richmond
2018-06 Federal Reserve Board, Consumer Financial
Protection Bureau Research, Federal Reserve Bank of
Philadelphia
2018-05 Consumer Financial Protection Bureau Research
Conference
2018-05 Housing Statistics User Group
2018-04 American Real Estate Society
2018-04 Florida State University, University of Florida,
University of Central Florida
2018-01 CoreLogic Federal Symposium
2017-11 Federal Reserve Bank of Philadelphia
2017-11 National Association of Realtors
2017-11 Urban Economics Association
2017-10 Federal Deposit Insurance Corporation Consumer
Research Symposium
2017-09 University of South Alabama
2017-06 Freddie Mac
2017-06 American Real Estate and Urban Economics
2017-05 Housing Statistics Users Group
2017-04 Urban Institute, Lincoln Institute of Land Policy
2017-04 Homer Hoyt Group
2017-04 American Real Estate Society
2017-02 National Association of Realtors
2017-02 CoreLogic Federal Symposium
2017-01 American Economic Association
2016-10 Florida Atlantic University, Florida International
University
2016-10 University of Michigan Conference on Big Data in
Finance
2016-09 Association of Public Data Users Annual Conference
2016-09 Regulatory Data Workshop
2016-08 American Enterprise Institute
2016-07 Society for Economic Measurement Conference
2016-06 George Washington University
2016-05 American Real Estate and Urban Economics
2016-05 Experian Vision Conference
2016-04 American Real Estate Society
2016-04 Freddie Mac
2016-03 U.S. Department of Housing and Urban Development
2016-02 Americans for Financial Reform
2016-01 Federal Deposit Insurance Corporation
2015-09 CoreLogic Property Data Roundtable
2015-09 University of Wisconsin Real Estate and Economic
Outlook Conference
2015-09 Association of Public Data Users Annual Conference
2015-05 American Real Estate and Urban Economics
2015-04 American Real Estate Society
Besides presenting work at forums, FHFA researchers also
received their first patent for the invention, ``Data Analytics
Database and Platform System and Method (U.S. Patent No.
10,282,781),'' issued by the U.S. Patent and Trademark Office
(USPTO) in May 2019.
Q.4.e. Were there research forums where FHFA staff were invited
to participate but they did not attend, if so, why did they not
attend?
A.4.e. While there are occasional schedule constraints, funding
is prioritized to allow FHFA researchers to attend most
domestic forums, conferences, or seminars when invited. FHFA's
staff participation in international events is less frequent,
although invitations have been extended from a variety of
entities (e.g., Bank of England, ESCP Europe Business School).
Q.5.a. In your confirmation hearing, you promised to expand the
borrower education and financial literacy activities under
FHFA.
How have you done that?
A.5.a. At the direction of FHFA the Enterprises are working to
enhance their homeownership education and financial education
curriculum. In September, Fannie Mae previewed many changes,
including waiving the $75 fee for Fannie Mae's online education
platform Framework and expanding their homeownership education
requirement to apply to all first-time time home buyers with
greater than 95 percent loan-to-value ratios. Freddie Mac, by
end of 2019, will introduce enhancements their homeownership
education and financial literacy curriculum provided through
their online education platform Credit Smart. Additionally,
it's important to mention our efforts with the Mortgage
Translations clearinghouse. The Mortgage Translations
clearinghouse houses a collection of translated documents and
tools to assist lenders, servicers, housing counselors, and
other parties involved in the mortgage process to help mortgage
borrowers who have limited English proficiency (LEP). Created
by FHFA, Fannie Mae, and Freddie Mac in collaboration with
industry, consumer, and Government partners, the Mortgage
Translations clearinghouse contains resources such as
translated documents, borrower education materials, a
standardized glossary of mortgage terms, and more. Today, the
Mortgage Translations clearinghouse has English and Spanish
content; we are working toward having content in the five most
common non-English languages spoken by LEP households in the
United States which include Spanish, Chinese, Vietnamese,
Korean, and Tagalog.
Q.5.b. Some argue that your decision to eliminate language
related to housing counseling and language preference from the
Uniform Residential Loan Applications undermines borrower
education and fair treatment. How does eliminating housing
counseling and language preference from the URLA affect
borrowers, especially those concerned that borrowers might
marketed a loan in one language but sign documents in English
that they cannot understand?
A.5.b. Including housing counseling and language preference on
the URLA does not have a key impact on the experience of
borrowers who need to sign documents in English they may not
understand. This is because only the English version of the
redesigned URLA is a legally executable document. FHFA
recognizes that some industry participants see benefits in
asking questions about language preference. The Enterprises
will develop and make available a new Voluntary Consumer
Information Form to capture the language preference and housing
counseling questions and thus support industry participants
that choose to collect this information.
As part of the 2019 Conservatorship Scorecard, the
Enterprises are tasked with addressing the needs of limited
English proficiency (LEP) borrowers, and ensure understanding
of their documentation, through the development of a Mortgage
Translations clearinghouse, a website geared toward industry
and other market participants who serve LEP borrowers. The
clearinghouse is a repository of key mortgage documents and
educational materials, including, the URLA translated into the
top five languages spoken in the U.S. according to the U.S.
Census Bureau. To date, the URLA and other loan documents have
been translated into Spanish. Chinese translations are set to
launch on the website in October 2019, with Vietnamese, Korean
and Tagalog to follow. FHFA and the Enterprises intend to add
glossaries of key mortgage terms in these languages as well.
Q.6. In your confirmation hearing, you promised to strengthen
the core human resources function at FHFA. Please explain how
FHFA has reached out to historically underrepresented
communities for your open positions.
A.6. FHFA maintains a recruiting presence at a number of career
fairs that represent historically underrepresented communities.
Since August 2018, we have attended or are scheduled to attend
eight career fairs that target underrepresented communities to
include veterans, Blacks, Hispanics, and candidates with
disabilities. We also announce all our entry-level positions
via Handshake. Handshake allows us to simultaneously post our
vacancy announcements to hundreds of schools' career websites.
These schools include a large number of Historically Black
Colleges and Universities and Hispanic Association of Colleges
and Universities.
Q.7. In your confirmation hearing, you promised to be a vocal
spokesperson for ``an affordable and vibrant national housing
market.'' Please provide a list of your speeches, articles,
etc., where you spoke about expanding the affordable housing
market.
A.7. I have made an effort as FHFA Director to reach out to
stakeholders of all kinds, listen to different perspectives,
and advocate for a strong national housing market that has more
affordable housing. For example:
LMeetings with Stakeholders: As of November 25,
2019, I had met with 57 stakeholder, advocacy, and
industry groups to
discuss and solicit ideas for addressing the Nation's
affordable housing shortage.
LVisits to Affordable Housing Developments: On
September 19 and 20, I visited and toured two
affordable housing developments in Newport, KY, and
Indianapolis, IN, which were financed in part by the
Federal Home Loan Banks of Cincinnati and Indianapolis,
respectively. The Northern Kentucky Scholar House is
made up of 48 temporary rental units for low- and very
low-income single parents who are enrolled in post-
secondary education, and provides child care for their
children and other services aimed at achieving self-
sufficiency. Illinois Street Senior is made up of 63
housing units that are reserved for low-income
residents 55 years and older.
LPublic remarks, interviews, and articles: I've
given numerous speeches, remarks and interviews and
published an op-ed calling for action to resolve the
Nation's housing affordability crisis in a number of
public venues, including:
LInterview with Jennifer Schonberger, Fox
Business--May 10, 2019 [Video and Written Summary,
https://video.foxbusi-
ness.com/v/6035185923001#sp=show-clips]
LMortgage Bankers Association National Secondary
Market Conference & Expo 2019--May 20, 2019 [Remarks as
Prepared for Delivery, https://www.fhfa.gov/Media/
Public
Affairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-
Director-of-FHFA-at-Mortgage-Bankers-Association-
National-Secondary-Market-Conference-Expo-2019.aspx]
LHUD and NAHB's Innovative Housing Showcase--June
3, 2019 [Remarks as Prepared for Delivery, https://www.
fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-
Dr-Mark-A-Calabria-Director-of-FHFA-at-Mortgage-
Bankers-Association-National-Secondary-Market-
Conference-Expo-2019.aspx]
LHousing Wire, Article by Kelsey Ramirez, ``Mark
Calabria: New Director Changes Course for FHFA''--
September 3, 2019 [https://www.housingwire.com/
articles/49939-mark-calabria-new-director-changes-
course-for-fhfa/]
LU.S. Senate Banking Committee Hearing, ``Housing
Finance Reform: Next Steps''--September 10, 2019
[Testimony as Prepared for Delivery, https://
www.fhfa.gov/Media/Public
Affairs/Pages/Statement-of-Mark-A-Calabria-Director-
FHFA-Before-the-US-Senate-Committee-on-Banking-Housing-
and-Urban-Affairs-09102019.aspx]
LNational Association of Federally Insured Credit
Unions congressional Caucus--September 11, 2019
LNational Multifamily Housing Council Fall
Meeting--September 13, 2019
LAmerican Credit Union Mortgage Association Fall
Conference--September 23, 2019
LThe Cincinnati Enquirer, Opinion Editorial, ``The
future of affordable housing depends on finance
reform''--September 30, 2019 [https://
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future-affordable-housing-depends-finance-reform/
2423345001/?utm_medium=email&utm_source=gov
delivery]
LU.S. House of Representatives Committee on
Financial Services Hearing, ``The Future of Affordable
Housing Depends on Mortgage Finance Reform''--October
22, 2019 [Testimony as Prepared for Delivery, https://
www.fhfa.gov/Media/Public
Affairs/Pages/Statement-of-Mark-A-Calabria-Director-
FHFA-Before-the-US-House-of-Reps-Comm-on-Financial-
Services-10222019.aspx]
LBoston Business Journal, ``Why Boston needs
housing finance reform''--October 24, 2019 [https://
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housing-finance-reform.html]
LMortgage Bankers Association 2019 Annual
Convention & Expo--October 28, 2019 [Remarks as
Prepared for Delivery, https://www.fhfa.gov/Media/
PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-
Calabria-at-MBA-2019-Annual-Convention-and-Expo.aspx]
LStructured Finance Association Residential
Mortgage Finance Symposium--November 4, 2019 [Remarks
as Prepared for Delivery, https://www.fhfa.gov/Media/
PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-
Calabria-at-SFA-Residential-Mortgage-Finance-
Symposium.aspx]
LIndianapolis Business Journal, ``Why Indianapolis
needs housing finance reform''--November 15, 2019
Q.8. What is the current delinquency rate of loans guaranteed
to Fannie Mae, Freddie Mac and the Federal Home Loan Banks
through their MPF/MPP programs? For Fannie and Freddie, please
break out the single-family from the multi-family portfolio.
How do these delinquency rates compare over the past 20 years?
A.8. As of September 30, 2019, Fannie Mae had a serious
delinquency rate of 0.68 percent for its single-family
portfolio and 0.06 percent for its multifamily portfolio.
Freddie Mac had a serious delinquency rate of 0.61 percent for
its single-family portfolio and 0.04 percent for its
multifamily portfolio. The MPF/MPP program only includes
single-family loans. As of September 30, 2019, the serious
delinquency rate was 0.34 percent for the MPF/MPP program.
The following data table shows the serious delinquency
rates for the last 15 years. It should be noted that the MFP/
MPP program largely shut down in the mid-2000s (when
acquisitions decreased from 603,000 in 2003 to 35,000 in 2007),
so the MFP/MPP program largely missed the low underwriting
standards that characterized loans leading up to the financial
crisis.
Data source: Fannie Mae and Freddie Mac 10K SEC filings, and
FHFA. Seriously delinquent is defined as the percentage of
loans that are 90 days or more delinquent as of the date
indicated, consistent with public disclosures in the SEC
filings and credit supplements.
Q.9. In your confirmation hearing, you said ``my first actions
would be to conduct a series of stress-tests on the regulated
entities.'' Have you undertaken such an analysis? What have you
found?
A.9. In August 2019, FHFA published the results of the annual
Dodd-Frank Act Stress Tests (DFAST). The 2019 DFAST includes a
Severely Adverse scenario, which assumes a severe global
recession accompanied by stressed commercial real estate and
corporate debt markets.
The scenario is not a forecast, but instead is a
hypothetical future economic environment designed to assess the
strength of the Enterprises and other financial institutions
and their resilience to unfavorable market conditions. The
planning horizon for the implementation of the 2019 DFAST is
over a nine-quarter period from December 31, 2018 through March
31, 2021.
In the 2019 DFAST Severely Adverse scenario, U.S. real GDP
declines by about 8 percent from its pre-recession peak. The
rate of unemployment increases from 3.8 percent at the
beginning of the planning horizon to a peak of 10.0 percent in
the third quarter of 2020. The annualized consumer price
inflation rate falls to about 1.25 percent in the first quarter
of 2019 and then rises to approximately 2 percent by the second
half of 2020.
Both Enterprises simulated their portfolios under the
Severely Adverse scenario using their internal models. Fannie
Mae estimated a comprehensive loss of $9.5 billion and Freddie
Mac estimated a comprehensive loss of $8.4 billion under the
assumption that they would not need to establish a valuation
adjustment for deferred tax assets. Fannie Mae estimated a
comprehensive loss of $26.1 billion and Freddie Mac estimated a
comprehensive loss of $17.2 billion under the assumption that
they would need to establish a valuation adjustment for
deferred tax assets.
Q.10. Will you change policies to allow Fannie Mae and Freddie
Mac to resume providing financing to investors to purchase
homes in bulk through the REO program or something similar?
A.10. No, FHFA has no plan to allow the Enterprises to resume
investor financing for bulk sales of REO. In 2012, FHFA worked
with Fannie Mae on a bulk sale of REO properties that were
largely tenant occupied. The REO properties were both large in
number and heavily concentrated in certain geographies (CA, AZ,
NV, IL and FL). To incentivize investment, the transaction
included a financing tool to encourage large institutional
buyers capable of providing property and asset management to
undertake the scattered site single family homes. The
transaction structure was also specifically designed to
incentivize qualified bidders to partner with regional and
local property management companies to stabilize and improve
market conditions. In contrast to the REO portfolio
characteristics at the time (large size, strong geographic
concentration), today's portfolios are much smaller and more
disperse. These changes to the REO portfolio make the future
bulk sales uneconomical for the Enterprises and taxpayers. The
Enterprises continue to provide targeted financing in certain
challenged markets for their REO properties to support owner-
occupant purchases.
Q.11. Do you seek any changes to the number of staff focused on
affordable housing at the Enterprises; do you believe today's
number of staff focused on affordable housing is too low, too
high or just about right? Do you seek any changes in the areas
of focus?
A.11. FHFA does not establish the Enterprises' staffing levels
focused on affordable housing; that is the responsibility of
Enterprises' Boards of Directors and management. FHFA has not
requested that the Enterprises make any changes to these
staffing levels or in the areas of focus.
Q.12. Nationwide, nearly 20 million families live in
manufactured homes; about 7 percent of the housing stock. The
quality of the homes is good, but, at times, the financing can
be predatory. Just recently, Fannie Mae and Freddie Mac were
assigned a duty-to-serve manufactured homeowners. They are in
the early stages of meeting the financing needs of
manufacturedhomeowners. In Nevada, Fannie Mae estimates it owns
approximately 3,500 loans with a little under 1,000 purchased
last year.
What changes would you make to the GSEs' requirements to
serve people who buy manufactured homes either with mortgages
or with chattel loans?
A.12. Manufactured housing is an important segment of the
Nation's housing stock and a historically underserved market.
Additionally, we agree with you that newer manufactured housing
is usually high quality and is an important part of the
affordable housing supply solution. We find the existing legal
authority sufficient to serve this market.
Manufactured housing is part of the Enterprises' specific
Duty to Serve under the Housing and Economic Recovery Act of
2008. The law does not permit FHFA to set requirements for the
Enterprises; rather, the Enterprises set their own targets and
FHFA's responsibility is to annually evaluate how well the
Enterprises do at enhancing how they serve the Duty-to-Serve
markets.
As you note, both Enterprises are in the early stages of
meeting the financing needs of manufactured homeowners. In
2018, Fannie Mae increased its purchase of loans on
manufactured housing titled as real estate by 26 percent year-
over-year, while Freddie Mac increased its purchase of loans
titled as real estate by 8.6 percent over the previous 3 year
average.
Q.13.a. Fannie Mae and Freddie Mac finance manufactured housing
communities. In Nevada, in 2018, they purchased 62 loans of
manufactured housing investors.
What changes will you implement to ensure that those loans
facilitate community ownership for owners who provide robust
tenant protections?
A.13.a. FHFA's Duty-to-Serve program includes a specific
Regulatory Activity which is a part of both companies' current
Duty-to-Serve Plans to incentivize community owners to adopt
certain minimum tenant protections for residents of
manufactured housing communities who lease the land under their
unit. FHFA believes that allowing the Enterprises to continue
to work through the private market to encourage leases that
treat tenants fairly is the best approach.
Q.13.b. Are there things Fannie and Freddie can do to ensure
that the manufactured home communities they finance do not have
abusive practices such as high lot rents and fines, unfair
evictions, limitations on tenant associations, etc.?
A.13.b. The Enterprises require that MHC borrowers follow all
applicable State and local laws regarding tenant protections;
however, these laws can vary from State-to-State. FHFA is aware
of the business practice of some MHC owners who raise pad rents
or unexpectedly cancel leases where the land has appreciated in
value. In order to encourage MHCs to adopt pad lease
protections for tenants, or enhance existing pad lease
protections, the Duty-to-Serve program offers credit for MHCs
with tenant pad lease protections. In 2019, Fannie Mae began
offering pricing reductions to MHC owners that provide tenant
pad lease protections in their pad leases. Without the pricing
reduction facilitated by the Conservatorship Scorecard, MHC
owners may not be able to access the necessary capital to
maintain the communities and provide the tenant protections
encouraged by the Duty-to-Serve program.
Our current Duty-to-Serve Program also addresses some of
these practices, including some eviction practices. There are
limits to how much Enterprise financing can do to curb abusive
landlord practices. Since landlord/tenant practices are a
matter of State law, the most direct way to address potential
abuses is through action by a State and local governments.
Q.14. Do you support the Federal Home Loan Banks affordable
housing goals as recently proposed? If not, what changes would
you make? How will the goals help bridge the ever-widening
homeownership gap between whites and Latinos and African
Americans? What do you think would increase homeownership rates
for Latinos and African Americans?
A.14. FHFA published in the Federal Register a notice of
proposed rulemaking to amend the existing FHLBank housing goals
regulation on November 2, 2018. The 90-day comment period ended
January 31, 2019. It would not be appropriate for me to comment
on a rulemaking in progress, other than to say that we are hard
at work developing a final rule to amend the FHLBank housing
goals to make them both meaningful in terms of mission impact
and achievable for the FHLBanks, consistent with safety and
soundness. Housing goals for the FHLBanks fulfill a statutory
requirement, but as they affect less than 1 percent of the
mortgage market, they are only one tool among many to address
homeownership gaps.
The gap in homeownership rates between white borrowers and
Latino or African American borrowers is of concern, as is the
devastating loss of wealth in those communities as a result of
the housing crash and Great Recession. FHFA's focus on
addressing the homeownership gap is to emphasize safe and sound
lending that encourages sustainable home ownership that can be
a path to long-term wealth building. Unless the secondary
market is safe and sound, we risk leading minority borrowers
into another last-in, first-out repeat of the Great Recession.
Two recently updated tools that FHFA uses to help ensure
that the mortgage market serves all potential homeowners well
are 1) the recent credit score rule to allow validation and
approval of third-party credit score models that the
Enterprises can use to more accurately measure risk; and 2) the
mortgage translations clearinghouse (https://www.fhfa.gov/
MortgageTranslations).
Q.15. In your confirmation hearing, you said that you would
consider ``increased data collection and evaluation'' of
Federal Home Loan Banks economic development mission
activities. Have you been able to undertake such an analysis?
If so, what have you found? If not, what is your timeframe for
ensuring that the FHLBanks provide small business, small
agricultural and community development investments in rural,
urban and low-income communities?
A.15. FHFA is currently very focused on working with the
FHLBanks to implement the recent amendments to the Affordable
Housing Program. We do continue to monitor community
development activities and you will be able to read more about
that when we release our Annual Report on the Low Income
Housing and Community Development Activities of the FHLBanks
later this month.
The FHLBanks' support community development activities
through their Community Investment Program (CIP) and their
Community Investment Cash Advance Program (CICA). In 2018, CIP
generally funded housing projects while CICA generally funded
economic development projects. CIP advance commitments for
economic development projects increased from $96.9 million in
2017 to $105.1 million. But economic development projects
continue to constitute a minority of total CIP projects. In
2018, 74 of 483 CIP projects funded with advances were economic
development projects.
Total CICA advance commitments were approximately $3.1
billion in 2018, a decrease from about $3.8 billion in 2017.
CICA grants in 2018 increased by about $2.1 million from 2017,
and CICA advance commitments for mixed-use projects decreased
to approximately $4.6 million in 2018 from about $21.1 million
in 2017.
Q.16. What are you doing to ensure that the Federal Home Loan
Banks meet their OMWI requirements regarding board leadership?
How are you ensuring that public interest board members have
deep affordable housing and community development experience?
A.16. Since 2016, FHFA staff have served as advisors to the
Federal Home Loan Bank's Diversity Task Force, comprised of
representatives from each of the 11 FHLBanks. One of the task
force's activities has been to develop best practices for
soliciting and nominating diverse candidates for both member
and independent board director positions.
On September 9 of this year, the FHLBanks disbanded the
task force and, in its stead, created a six-member Subcommittee
on Board Diversity comprised of FHLBank chairs and vice chairs.
To support the Subcommittee, another subcommittee comprised of
Bank presidents will serve as its staff. The president's
subcommittee has authority to appoint OMWI officers and other
FHLBank employees as needed. FHFA is supportive of this recent
reorganization as it places the responsibility for diversity
and inclusion on the collective leadership of the System.
At the September meeting, FHFA's Office of Minority and
Women Inclusion (OMWI) met with the FHLBank chairs and vice-
chairs to share expectations and recommendations for diversity
competencies applicable to both existing and incoming
directors. OMWI staff has also met with FHLBank leadership to
identify challenges and opportunities for the recruitment and
election of diverse board directors. This dialogue will
culminate in an FHFA Advisory Bulletin on Board Diversity,
which will provide guidance to the FHLBanks on diversity and
inclusion competencies, as well as clarification of legal
authorities for the recruitment and election of diverse
directors.
By statute, the board of each Federal Home Loan Bank must
include at least two ``public interest'' independent directors
having significant experience representing consumer or
community interests in one or more of four designated areas:
banking services, credit needs, housing, or financial consumer
protections. It is the province of each Bank's board of
directors to nominate candidates for its public interest
directorships, although FHFA reviews the qualifications of all
nominees to ensure that they meet statutory requirements. While
each public interest director must have experience in at least
one of the areas mentioned in the statute, there is no legal
requirement that any of a Bank's public interest directors have
experience in affordable housing in particular.
Nonetheless, experience representing consumers on
affordable housing matters falls within the ``housing'' area,
and many of the Banks have public interest directors with
significant experience in affordable housing, as well as in
community development. Other types of Bank directors--that is,
regular independent directors and member directors--also may
have significant experience in providing or promoting
affordable housing, even though they are not designated as
public interest directors. In addition, each Bank has an
Affordable Housing Advisory Council of between 7 and 15
members, all of whom must be drawn from community organizations
actively involved in providing and promoting low- and moderate-
income housing and community lending in the Bank's district.
The Advisory Council is required by statute to advise the board
of directors on how best the Bank can identify and meet the
affordable housing and community lending needs of persons in
its district.
Q.17. Has FHFA changed the criteria for the Home Possible and
the HomeReady programs to only serve people at the 80 percent
AMI threshold or below instead of the 100 percent threshold? If
so, what analysis was done to support that change? With the new
limit of 80 percent, how many households are excluded that used
to be eligible?
A.17. Yes, FHFA has permitted the Enterprises to change the
criteria for the HomeReady and Home Possible programs to better
serve households at or below 80 percent of AMI in order to
focus Enterprise attention and resources on low-income and very
low-income borrowers who are in need of down payment
assistance. FHFA's housing goals define low-income households
as households whose income is at 80 percent or below of AMI
while very low-income households have incomes at or below 50
percent of AMI. FHFA's analysis based on preliminary January
through March 2019 data, showed that approximately 38 percent
of Fannie Mae's HomeReady loans were to borrowers with
household income above the 80 percent AMI threshold and would
no longer be eligible for a HomeReady loan. These households
would need to seek alternative mortgage products. The decision
was communicated through Lender Letter 2019-06 (https://
www.fanniemae.com/content/announcement/ll1906.pdf), where
Fannie Mae noted that this change would go into effect at the
same time as changes to DU Eligibility that would find certain
loans with multiple-high risk factors to be ineligible. Freddie
Mac also aligned to these changes through changes to its Home
Possible product (announced through its Bulletin 2019-16,
https://guide.freddiemac.com/app/guide/content/a_id/1003267).
Both Enterprises recently made changes to the area median
income (AMI) requirements for their affordable lending programs
HomeReady and Home Possible to better target subsidy to low-
income borrowers (< or = to 80 percent AMI) and align with the
Enterprises' statutory housing goals. These changes set the
income requirements of both programs at 80 percent AMI and were
approved by FHFA. The Enterprises project that these changes
will reduce the volume of HomeReady and Home Possible
acquisitions. The
Enterprises also expect that the vast majority of the borrowers
who no longer meet the Home Possible and Home One income
requirements will still be eligible for Fannie Mae's Standard
97 percent LTV product, Freddie Mac's Home One, or the Federal
Housing Administration programs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM MARK A.
CALABRIA, Ph.D.
Q.1. What kind of gaps in affordability do you anticipate as
private sector funding of multifamily loans ramps up and
funding from Fannie Mae and Freddie Mac winds down? Was a gap
in funding during transition, and its effects on affordability,
considered in the FHFA's recent decision to revise Fannie Mae
and Freddie Mac's lending caps?
A.1. One of FHFA's top priorities is maintaining a strong
affordable housing market, without driving out private capital.
In 2015, FHFA developed Scorecard caps to ensure consistent
liquidity in the affordable housing market. The revised cap
paradigm, adopted in September 2019, seeks to improve on the
existing cap structure, by setting an overall cap of $100
billion for each Enterprises. The new cap also directs that at
least 37.5 percent of the Enterprises' business must be mission
driven and eliminates green loans as part of the Enterprises'
mission driven activities. FHFA believes these changes will
balance the need to eliminate loopholes that have crowded out
private capital in the multifamily market, while simultaneously
increasing affordable housing support over previous years'
production levels. I do not foresee any additional gaps in
affordability, beyond those already existing in the market,
developing from the recent change in the GSE multifamily caps.
Q.2. How do you know the private sector has the capacity to
fully serve the multifamily market? Do you believe this
capacity will remain sufficient during an economic downturn,
and if not, will FHFA allow Fannie Mae and Freddie Mac some
flexibility to compensate for a lack of private capital during
economic downturns?
A.2. FHFA is committed to fulfilling the Enterprises'
affordability mission and addressing the Nation's shortage of
rental housing. In recent years, however, the multifamily
market has grown considerably, and the Enterprises' share of
multifamily loan originations has expanded in a procyclical
manner. To address this issue, FHFA modified the multifamily
lending cap structureand eliminated green loans from the
mission driven category. These changes to the cap are intended
to limit the amount of multifamily debt that is purchased by
the Enterprises in an expanding economy and will allow the
Enterprises to participate more meaningfully when the economy
is in a downturn. FHFA is certainly open to revisiting the caps
in a time of market stress, if there is evidence of private
capital leaving the market.
Q.3. Our Nation faces a serious multifamily housing shortage.
According to the National Multifamily Housing Council, the U.S.
will need to build an average of 328,000 units per year by 2030
to meet growing demand. As private capital becomes a growing
source for multifamily assets, what measures will the FHFA and
Department of the Treasury take to ensure a greater supply of
affordable multifamily housing units?
A.3. FHFA announced on September 13, 2019, that to ensure a
strong focus on affordable housing and traditionally
underserved markets, FHFA directs that at least 37.5 percent of
the Enterprises' multifamily business be mission-driven,
affordable housing during from now until the end of 2020, when
the next year's scorecard will be published. This new minimum
of 37.5 percent responsibly assures that the Enterprises'
multifamily businesses have a strong and growing commitment to
affordable housing finance. FHFA continues to work in
collaboration with the Enterprises to identify potential
solutions to the growing affordability crisis.
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