Transcripts For CSPAN3 Mel Watt Testifies On Housing Finance Policy 20170531

System. Fannie mae and freddie mac have been in conservatorship for close to nine years. In september 2008, then treasury secretary hank paulson famously described the conservatorships as a timeout. Today, fannie and freddie along with fha continue to dominate the Mortgage Market. Approximately 70 of the mortgages are backed by the federal government. While fannie and freddie are currently earning profits, if the Housing Market experiences a downturn, taxpayers could again be on the hook for billions of dollars. The status quo is not a viable option. The Housing Finance system depends on two Government Sponsored Enterprises and perpetual conservatorship is not a sustainable solution. Taxpayers today bear too much risk and the government plays too big a role in the Mortgage Market. A number of groups have released proposals for reform in recent months. Including the mba, the icba, the milken institute, several coauthors writing jointly for the urban institute, and many others. The committee is considering all of these proposals, as well as other ideas, about what the future system should look like. In the meantime fhfa continues to serve as both conservator and regulator of the enterprises, and as regulator of the federal home loan banks. As conservator of the gses, fhfa is obligated to conserve and preserve the assets of fannie mae and freddie mac. Fhfa has taken a number in recent years. One significant undertaking is the creation of the common secure platform. The platform was originally intended to function like a market utility. Independent from the enterprises. That would be used to issue both agency securities, and private label securities. The platform has instead been developed specifically for securities issued by fannie mae and freddie mac. One important question as we embark on Housing Finance reform is whether we should utilize the csp or consider other alternatives such as expanding the ginnie mae platform. Another Important Development in Housing Finance is the increased transfer of credit risk from the enterprises to the private sector. I cone yourage fhfa and the enterprises to experiment with different forms of Risk Transfer including front end and back end structures. Transferring credit risk away from the government and into the private sector is central to protect taxpayers and to build a more robust and sustainable market. Increasing the amount of credit risk borne by the private sector will be a critical koepent of Housing Finance reform. Regardless of which Directions Committee ultimately decides to take. I encourage director watt to consider other policies and options to incentivize further private sector participation, and to help facilitate the transfer to a new system. Housing finance reform remains the most significant piece of Unfinished Business following the financial crisis. And it is important to build bipartisan support for a path forward. Three years ago seven republicans and six democrats on this committee voted in support of a comprehensive Housing Finance reform bill. A key priority this congress is to build on that bipartisan legacy and pass legislation that will create a sustainable Housing Finance system for future generations. I look forward to working with you, director watt, and your staff, at the fhfa throughout this process. Senator brown . Thank you, mr. Chairman. Director watt, welcome back. Nice to see you again. Thanks for your Public Service for so many years. I appreciate the chairmans calling this hearing and establishing a Bipartisan Committee process by which we can consider the conservatorship of the government backed mortgage companies. Since the beginning of the year there have been several articles claiming that Housing Finance reform is easy, some calling it an easy win for the Trump Administration. Has the chairman and any of us who were on the committee in 2013 and 2014 know, restructuring a fifth of the economy is far from easy. That doesnt mean we should avoid considering how the Housing Market could operate better and how we could prevent emergency government and emergency taxpayer intervention, and Financial Markets of the future. Currently an agreement between treasury and federal Housing Finance Agency Requires the Government Sponsored Enterprises to reduce their capital cushions each year until the reserves reach zero in january 2018. At that point gses will be prohibited from retaining any capital at the end of each following quarter, despite the fact that the Companies Back more than 5 trillion in the Mortgage Market. Director watt has been raising his concerns about dangers of the capital levels of the gses for some time. We should remember he was one of the first members of the house of representatives to warn about predatory lending prior to the housing pry sis. Unlike those warnings about predatory lending which the administration largely ignored at the time, im hopeful we can protect taxpayers from what is an avoidable situation created by an agreement entirely within the executive branch. Some argue any adjustment to retain capital levels is equivalent to the supporting of a return to the old structure of the gses. As arguments go, this is surely a straw man. Theres no reason we cant protect taxpayers and homeowners, protecting taxpayers in the nearterm should be a shared and a bipartisan goal. The committee should continue its work examining the gaps in the Housing Market, that the housing crisis exposed. The original to distribute model of certain lenders, Exotic Products that put even prime borrowers at risk, private labels of securities, private label securities that were not backed by gses, and lack standardized terms and responsibilities for trustees, and a near complete breakdown in Mortgage Servicing, and the ability of mortgage insurers to fulfill their commitments. Gses certainly made mistakes, too. Chasing the market to purchase pls, providing pricing discounts to lenders based on volume. Using price advantages to achieve shareholder gains rather than passing those benefits on to borrow rowers in or lenders that serve underserved communities. The mission is to provide a stable, liquid National Mortgage market including in rural underserved and low income communities something we should all want in any Housing Finance system. The Affordable Housing goals for sickle family in multifamily housing along with the duty to serve rule was finalized in december are key tools that continue prioritizing Affordable Access and prudent experimentation to safely reach underserved borrowers. All the changes Congress Makes will impact how expensive or affordable the 30 year fixed Rate Mortgage will be in the future, and who has access to it. Our decisions will impact how easily and quickly a growing family can sell their current home and buy a more expensive one. Our decisions will impact which lenders have access to the system, and whether a home buyer can get a mortgage from the Small Community lender in her town. These decisions are not just about bank Office Operations or far away capital markets, they will have a substantial impact on households across the country, whether renters or homeowners. Director watt, thanks for joining us, as the committee seek to understand the current status of the gses and how we move forward without harming homeowners and buyers or putting taxpayers at greater risk. Thank you very much, senator brown. And i do welcome you, director watt, we appreciate the service youve given. And are continuing to give as we move forward to deal with the Housing Finance policy of our nation. I want to remind all of the senators as we go into the question period to honor the five minutes rule with regard to the question periods so that senators who are in line can get their opportunities. Director watt, i would ask you to feel free to give your full statement, and so, would you please proceed at this time. Chairman crapo, Ranking Member brown and members of the committee, thank you for inviting me to testify. Your hearing topic confirms that you are well aware that the conservatorship of fannie mae and freddie mac have been unprecedented, especially considering that these Enterprises Support over 5 trillion in mortgages. Of additional importance is that taxpayer backing under the preferred stock Purchase Agreement is now limited to 118 billion for fannie mae and 141 billion for freddie mac and additional withdrawals will reduce these commitments further. Ill focus on three points in my Opening Statement. My first point is that fhfa has made numerous important reforms to the enterprises during conservatorship that are beneficial to the Housing Finance system and reduced risk to taxpayers. My written statement discusses a number of these reforms, and provides links to detailed reports about them. Despite these reforms, i regularly hear assertions that fannie mae and freddie mac are the same today as they were when they were placed into conservatorship. Assertions are simply false and to ensure that the reforms already made are not disregarded. Despite the reforms already made, fhfa is fully aware that Housing Finance reform will involve many crucial decisions that go far beyond these reforms. So the second point i want to make unequivocally is that it is the role of congress, not fhfa to make the decisions that chart the path out of conservatorship and to the future Housing Finance system. Among the important decisions for congress are the following. One, how many how much backing, if any, should the federal government provide and in what form . Two, what transition process should be followed to avoid disruption to the Housing Finance market and who should implement that process . Three, what roles, if any, should the Enterprises Play in the reformed Housing Finance system and what statutory changes will be required to ensure that they play those roles effectively . And four, what Regulatory Framework and authorities are needed in a reform system and who will have that responsibility . I reiterate that it is the role of congress to do Housing Finance reform and i encourage you to do so expeditiously. My final point is to identify and discuss the most significant challenge fhfa faces while Congress Moves ahead on reform. The challenge is that additional draws under the pspas would reduce the amount of taxpayer backing and the foreseeable risk that resulting uncertainty could adversely impact the Housing Finance market. Unfortunately, this challenge is significantly greater today than it has been, and it will continue to increase if not addressed. When i first discussed this in 2016, each enterprise had 1. 2 billion under the pspas as a buffer to shield against having to make additional draws of taxpayer support in the event of an operating loss in any quarter. On january 1, 2017, the pspa buffer reduced to 600 million and on january 1, 2018, it will reduce to zero. At that point, neither enterprise will be able to weather any quarterly loss without drawing further taxpayer support. Gap accounting for any number of noncredit related factors in the ordinary course of business regularly results in large fluctuations in enterprise gains or losses. We also know that lower Corporate Tax rates under the under tax reform would reduce the value of the enterprises deferred tax assets and result in shortterm losses. Like any business, the Enterprises Need some buffer to shield against shortterm operating losses. In fact, it is especially irresponsible for the enterprises not to have a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce treasurys fixed dollar commitments under the pspas. As conservator, we reasonably foresee that this could erode Investor Confidence and stiefl liquid ditty in ways that could increase the cost of mortgage credit to borrowers. As conservator, fhfa cannot risk these consequences and meet our statutory obligation to ensure that each enterprise fosters, quote, liquid efficient, competitive, and Resilient National Housing Finance markets, closed quote. Consequently in our conservatorship role, fhfa will take actions as necessary to prevent additional draws of taxpayer support. Neither this committee nor anyone else should view such actions either as interference with the prerogatives of congress, as efforts to influence the outcome of Housing Finance reform, or as any step to recap and release. We will take only such actions as necessary to avoid normal operating losses that would trigger a draw during conservatorship. Thank you again for the opportunity to testify and, as always, we stand ready to assist the committee in any ways we are requested to do so. Thank you very much, director watt. I appreciate that commitment. My first question id like to focus on private capital. Among the reforms that you listed in your written testimony more fully, you discuss some of the efforts that the agency has undertaken to increase the participation of private capital in the markets. Since fha first started publishing its scorecard in 2012, an important component of the scorecard has been reducing taxpayer risk by attracting private capital and shrinking the footprint of the enterprises. Under your leadership, fhfa has overseen a significant increase in the amount of credit Risk Transfer to the private sector which i apply and encourage you to work to continue to increase. In addition to the existing Risk Transfer deals that youve already engaged, what can fhfa and the tax enterprise do to reduce taxpayer risk and to attract more private capital to the Mortgage Markets . Well, the first thing we do regularly is to not take loans that people cannot afford to pay. We have a defined credit box and we try to encourage lenders to use that credit box. But we will not take a loan outside that credit box. The second thing we have aggressively done is had the Enterprises Innovate in the Risk Transfer space, moving first to kind of secondloss positions or intermediary positions but then moving to firstloss position when it is financially feasible to do so. So i think the objective here is to make the whole system as responsible and not obviously move back to the kinds of practices that were taking place prior to the crisis. All right. Thank you very much in that. And, as you know, achieving this objective will be one of the important things that we seek to do here as we work on legislation to resolve Housing Finance policy. Id like to go as my final question to you in this round, to capital at the enterprises, you your final topic that you discussed with us. On january 1, 2018, the Capital Buffers at the enterprises will draw down is zero, requiring fannie mae and freddie mac to draw on their lines of credit with the treasury in the event of a quarterly loss. This confirms to me why this is unsustainable. No capital, taxpayers on the hook for losses, and the government effectively taking all the risk. While i understand that you have concerns with the gscs operating with Capital Buffers and want to work to address this issue. Adding a small capital buffer does not change the need for a longterm solution to our Housing Finance reform. Unfortunately, suspending Dividend Payments will lead some to incorrectly believe that reform is not urgent and that maintaining the status quo is sustainable. Id encourage you to work with this committee so that that does not occur. Could you please respond to that . First of all, let me just say i absolutely agree with you, were going to try to avoid a draw at all costs, because we think there are risks associated with it. And as conservator, our position is a little bit different than everybody else. I kind of liken it to the situation i faced several weeks ago when i went home and had a letter in my mailbox that said my car was subject to recall because of the air bag. Well, there were a number of people who were saying the risk of you driving that car is is minimal. And i absolutely agreed with them. But i was the responsible party and my family was going to have to ride in that car. And so in this situation, the cars that you all have given us are fannie mae and freddie mac, its our responsibility to keep them safe and sound, to make them efficient while they are in conservatorship, and its your responsibility to change cars if you want to after that or whatever you decide to do. Well, let me ask the question this way. Do you believe that the fhfa has the authority to withhold Dividend Payments . I do, yes. Without the consent of treasury and i do, yes. Yes. But i also want to assure that you my first option, obviously, would be to work with the secretary of treasury. These are contractual agreements, theyre not legislative agreements. The pspa is a contractual agreement between us and the secretary of treasury. So modest changes to the pspa would be the first and most prudent way to address this issue. Understood. But if that fails, the responsibility for that risk falls back on me as the conservator of these enterprises and we cannot afford to run that risk. Well, thank you. My time has expired and so i would just like to ask if you and your staff could provide us with your legal analysis as to why you believe that you have the Authority Without getting agreement from the secretary of treasury and dealing with the third amendment. Be happy do that, sir. Thank you very much. Senator brown. Thank you, mr. Chairman and director watt, again, thank you. Your testimony you talked about the potential and who knows what impending concerns you have about tax reform and shortterm losses. Let me start with that. The president s proposed tax reform plan that would cut the Corporate Tax rate from 35 to 15, if the finance committee and others would come to that, we dont know yet obviously. Moodys estimates that would cost fannie 15. 6 billion and freddie 5. 7 billion. Since the stock Purchase Agreement between treasury and fhfa limits, the gses retained capital this year, as you spoke about, and prohibits retained capital next year. Talk to us about the impact that that would have on the gses and their financial ability, especially what it would do to impact access in mortgages in the broader Housing Market. So you spoke about sort of generally. If you would dig down a little deeper on tax reform and where that goes. So, one of the things we obviously are monitoring on a regular basis are these discussions about tax reform, because they would have, if they are adopted and depending on what is adopted would have different impacts. They could range in our analysis from a low of like 5 billion up to 25, 26 billion. And, obviously, the extent of those tax reforms will have and thats a shortterm impact. This is not a commentary on the value of the reduction in the Corporate Tax rate. Were talking about the shortterm impact of that Corporate Tax rate cut on deferred tax assets which then has a shortterm impact on on the enterprises losses. So one of the things we are regularly doing is talking to to treasury and monitoring what is happening in that tax cut space. Because if we wait until that happens, it may be too late. Or, its possible that they could phase in the tax cuts over a period of time, or its possible that something could be written in to protect enterprises in conservatorship. So all of those are possibilities, but they are possibilities at this point and we have to be realistic about them and evaluate them so we are constantly making that kind of evaluation. The other regular kind of fluctuations that lead to quarterly losses is just gap accounting principles, how you account for hedging against risk. And those are things that have nothing to do with whether youve extended good or bad credit. Theyre noncredit related factors, but they bounce the enterprises losses around regularly. So going to zero in a buffer could, in any quarter, put us into a situation where we could end up having to make a draw. Thank you. Let me switch to a sort of an ohiospecific question, but one that could have impact moving forward in other places. In ohio, investors in the gse bulk sales use land contracts, as you know, known as contract for deed to generate income off these properties. These contracts offer none of the protections of a mortgage because obviously theyre not a mortgage. They often leave borrowers with properties that are unhabitable, thats happened in cincinnati, its happened in cleveland. You have the authority to be able to do something and my question is pretty simple. You prohibit bidders on npl sales and prohibit it on any single rental family deals Going Forward. We will certainly look that mr. Ranking member brown. We have changed the requirements a couple of times, but we never changed them retroactively. We always change them perspectively because people who have brought these nonperforming loans have bought them on a set of fixed assumptions that and criteria and requirements that weve imposed on them. So it would have to be on a goforward basis that we would di it, but we are looking at that issue right now. Thank you. Thank you. Senator corker. Thank you. Mr. Watt, thanks for being here today. Congressman . What do we call you now . Mel. Mel. Thats what i thought but i didnt want to do so in front of other people today. Thanks for coming and thanks for the job you do. I know weve had some conversations recently, but i just want to reiterate. Its your belief as weve had in multiple conversations that the future of Housing Finance reform is totally congresss job do and youre relying upon us to make that happen and i think you know theres some theres sort of a lefty think tank and a righty think tank and some in the middle folks that appear to be coming together around some conclusions. And its my sense that the chairman and Ranking Member wish to take that up in the near future and from your perspective thats our job to do and thats how we determine the future of these entities. I absolutely agree and i hope you heard me loud and clear, unequivocally, as that role of congress. Now, we have made some reforms to the enterprises, and i dont want those disregarded because theyre important reforms that we have made during the conservatorship process. And ive outlined a number of them in my longer form testimony. I didnt have a chance do it in the short period i have in giving an Opening Statement. But they are outlined specifically in my longer form written testimony with links to the details about them. So thats, in a sense, you could think of that as gse reform and think of what the committees responsibility and congresss responsibility is Housing Finance reform. I dont want to get into semantics here, but i just want to we dont have any issues with the steps youve been taking and we appreciate you informing us of those. The issue we obviously had a recent conversation at the end of last quarter regarding the building up of capital within the entities, and the reason we did that was that was a pretty big change from where weve been. The two entities have 258 billion worth of capital available to them, so theres i mean this whole notion of them running out of resources is its just a baseless issue. And i dont know why that even at this time is being discussed because what it does, mel, is it changes the dynamic of whats been happening. It makes it appear as if theres a different approach thats being taken by the administration. The administration is working with us, were working with others to move ahead and reform, but all of a sudden a unilateral step by you when theyve got 258 billion in capital available, you know, i ran a pretty Large Company that i started and, you know, our money went into overnight repos and we kept no cash, none. Each day when we needed it, we drew it out and in essence you have exactly that same type of thing available to fannie and freddie, 258 billion worth right now. And so to act as if drawing on this madeavailable credit when the u. S. Taxpayers already are 100 the backing of these entities, it just creates a different direction which sends a signal to the world that Something Different is occurring when its not. So i hope weve established today that youve got 258 billion available if you draw upon it, thats what its for, by the way. It in no way affects the credit or anybodys perception of the securities that are being put out. Senator, i hope you i tried to address that as forthrightly as i could in my Opening Statement. Ive addressed it repeatedly. But i hope you heard the analogy i used. You all gave me these cars to drive for five years, you said keep them safe and sound, you said make them efficient. If theres a risk that that a draw or a reduction in the commitment that backs these enterprises would interrupt the market, it is small, i acknowledge that, im not im not trying to overstate it. Yeah. But, it if it happens, and what i and what we say is reasonably foreseeable could happen, it wont be you that they come to and talk to about it, it will be the conservator because we are the responsible parties for this during conservatorship. Youre the responsible parties for it Going Forward. Yeah. Why dont you go ahead and draw 10 billion on it right now and see. Im telling you its going to have no effect. Well, i dont need to draw 10 billion on it. Do it anyway. Do it anyway. I just i would not do that and run that risk because that would expose me to the same risk that that im trying to avoid. I just dont understand why why well, i dont weve had this conversation before, but believe me, i cant afford to take that risk anymore than i could afford to drive a car that has a recall on it with an air bag with my family in it. And ive tried to make that analogy for you, thats my responsibility, and i have to live up to that responsibility as conservator. Thats what you all thats why you all approved me in this committee to do this job. And thats why the Senate Confirmed me to do this job. So i dont know what else i can say about that. I cant afford to assume that risk, you can afford to say its theoretical, i cant afford to say that i will assume it. Well, its one of the most baseless arguments ive ever heard. Any company in america that had access to a 258 billion line of credit from the u. S. Government, backed by the u. S. Government, i dont think would be concerned about market fluctuations. But somethings happened recently, i dont know what it is, but it could get into a discussion about whether thats adequate or not adequate, i dont know, for a 5 trillion portfolio. You know, you dont know what you know, and im not saying this is a large risk, im just saying i cant afford to take it as conservator because i have responsibility for it. Thats the point i keep trying to make to you. Thank you. Senator tester. Thank you, mr. Chairman. A number of things you talked about in your opening comments that youve been moving towards sharing with the private sector and you have. Do you have a figure that would be appropriate as to how much how much of the portfolio should be put into private versus versus taxpayers . We have a goal of risk sharing on at least 90 of the singlefamily new loans that fit our criteria. And thats a substantial part of our portfolio. The goal, obviously, would be to transfer as much of it as you can. You think 90 s attainable. In normal times, actually we have exceeded that goal since we set that goal, but the problem is, if you if you require it and theres a downturn and investors walk away, then you are youve made us have to adjust the price down so we are subsidizing the transfer and we dont want to do that. Thats why i say we always do it based on rational economic decisions. So i dont have any problem with a goal. The problem we have is when you write that and say you must do it, it really it really is an imposition into the market that is nearly justified, nor is it in our opinion reasonable to do that. Okay. So i think i dont want to speak for everybody, i think a fair number of folks on here want to see private capital go in to take the risk off the taxpayers. And we do, too. Yes. So the question is, we want to make sure that you or whoevers in your position is as active as possible to get private equity into the into the into the entities. The question is, how should it be written so as not to tie your hands but yet make sure that you maintain aggressiveness. I think it would be appropriate to set a goal and and to give us flexibility based on the criteria that weve talked about. So i mean, we we share the goal. Yeah. Of doing that. But you could easily get into a situation where you are requiring us to make noneconomic decisions if if you say you must do it regardless of the economic circumstances. Okay. Do you think its possible to have the thirdyear note without an explicit government guarantee . Senator, i think thats probably more into the Housing Finance reform area than it is for me to say because i could just give you my personal opinion. I want to hear it. Which is not worth much. Its worth a lot. I really try to keep before doing personal opinions. I think its as opposed to expressing an opinion of our agency. And we have not developed an opinion on that. Okay. Well, i mean, i think your opinion does mean a lot, quite frankly, because youre in the business a lot more than we are. Were depending on you in that regard. Let me put it like this. I have read a number of experts in this area who do not believe it would be possible to do. Okay. And i presume theyre credible arguments on the opposite side, but i dont know. I want to talk about the buffer a little bit, the buffer i believe is an agreement through treasury . It is, yes. Okay. You said it will be down to zero by 2018, which is coming right up. And by your Opening Statement you indicated that you think you need to have a buffer . Yes, sir. How much . Well, it could vary because the objective is not to make a draw. Okay. So we want to cover first normal fluctuations in operations. We want to monitor whats happening on tax reform because that could have a major impact. Okay. Shortterm on our loss situation. So give me a ballpark figure on how much. Its its just hard for me to do that, senator, because so let me ask you this. Has secretary mnuchin or anybody from the Trump Administration have you approached them or have they approached you about a buffer amount . We have had discussion with the secretary of treasury. You have them before you next week, and i think it would be more appropriate for him to talk about. Did he give you a number . Did he give not a specific number, no. Was he opposed to a buffer at all . Were they going to stay at the zero or did they talk about it at all . Okay. My five minutes is up. Thank you, mr. Chairman. Senator scott . Thank you, mr. Chairman thank you for holding this very important meeting. Director watt, thanks for coming out this morning and sharing your thoughts and your views at the agency. Good to see you again. You too, sir. Not on an airplane, so this is good. Director watt, you may know that South Carolina is a state where about 1. 4 Million People live in distressed communities, which is one of the reasons why ive spent a lot of time on what i call my opportunity agenda, looking for ways to help folks leave those distressed communities and really experience their economic potential. And much of climbing the economic ladder in this country, most of us actually would even suggest that living the American Dream means owning your own home. And i think the reality of it is getting there is critically important to not think theres ways for to us help folks get there and do it in a way thats logical and responsible. I know that theres been a lot of conversation around the fact that today we are seeing the lowest firsttime home buyers since the 1970s. Multiple years in a row we saw a decline in firsttime homeowners and we know that those folks living in distressed communities are the folks who are disproportionately representing those folks who are not able to climb out and experience Home Ownership for the first time. We also know that the difference between the net worth of americans can often times be seen in the equity in that home. A renters net worth is somewhere around under 10,000, according to Consumer Finance report, and for those who own their home, its nearly 200,000. So at least 20 times more. And so the question is, how do we help those folks who are paying their rent on time, paying their utilities on time, use that data and evaluating their desire to own a home . So according to the statistics there are about 26 Million People who are credit invisible because the models that some use have not been updated to the latest model. I know that you have, i understand, been considering updating the credit scoring model the gses accept. Can you tell me how much progress youve made in that direction and what your thoughts are on going from what is for the most part an antiquated system that leaves so many millions of americans without the credit worthiness to start the process of buying a home and what you think about heading towards that newer model sooner than later . Senator, we have set as an objective to try to get through this process by the end of this year. Good. But i also tell you that we thought it was going to be a lot simpler than it has turned out to be. And the primary reason for that is any time you Start Talking about changing the credit scoring models, you set off a whole sequence of events that are very costly for people to change. And changing back and forth between competing models is very difficult for the industry to do. So and so weve spent a lot of time trying to figure out how what impact there would be to going to a new model. We know that new models will take into account different considerations. The enterprises themselves and theyre automated underwriting systems are trying to take some of those factors into account because unlike what most people assume, the enterprises dont always rely on credit scorers to make these decisions, they they are factors in making these decisions but they have independent evaluation to automated underwriting systems that can make these judgments. So weve been aggressively asking them to do the innovation thats necessary, but not be irresponsible because part of the reason that people a lot of people are having this problem is that their credit was so damaged by bad loans that they got involved in before that they couldnt they just havent been able to dig out. So its a multifaceted problem. Chairman has just helped me realize that even on the Banking Committee five minutes is still five minutes. Im going try to stretch that a little bit here. Ill say two things. Number one, the fact of the matter is, if youre paying your rent on time, your utilities on time, your cable on time, cell phone on time, that is necessary information for making a credit decision. The primary predominant way that someone buys a home is their credit score. About 76 of south carolinians can be scored. If we were go to the new model we would see another 16 of south carolinians being scored. Since the gses have such a wide footprint in the market space, if youre not using the most current model its very difficult for 16 , nearly 900,000 south carolinians, to be scored. Thank you. Thank you. Senator cortez masto. Thank you. Director watt, im going to talk to servicing standards to start. How are you . The new senator from nevada. Good morning. Great to have you here. So servicing standards. Fhfa has done quite a bit to improve the servicing standards but i remain concerned we havent yet gotten to the core of the problem driving servicer misconduct. In 2011 fhfa released a white paper looking to overhaul the way the gse pay servicers, but did not complete work in this space. The legal settlements and gse rules have raised servicing standards. They still stand to profit from default and foreclosure while services are costly. Servicers have an incentive to extract fees from both home owners and investors, and home owners are powerless to fire their servicer if they arent satisfied. Do you agree we still need to address the way servicers are paid so they dont profit more from foreclosures than from keeping families in their homes . And then let me follow up with a second, is fhfa going to do further work in this space, or is this up to congress if we are undertaking housing refinance reform . Answer to your first question is, yes, i agree that that something needs to be done in the space, its a serious concern. We cannot do it alone as the enterprises, because lenders have servicers and they are the bulk of the people who compensate services. So if we if we try do it alone, we just wouldnt be able to get there without their consultation. I dont know that legislative that theres a legislative solution to it, but we are working aggressively with the industry to try to to try to get through this problem. Servicing used to be just collecting mortgage payments. During the crisis, it became a much, much more difficult exercise and the compensation didnt necessarily follow the complexity of it. So the industrys got to catch up on that. Of course, now were moving back to a more normalized time where it might not be as work intensive as it as it was during the crisis. So all of those factors go into evaluating how much you are going to pay a servicer for servicing a loan. Thats the collection of the money which is easy if people pay it on time, its just an accounting thing. Right, i dont mean to cut off, but i get it because nevada was ground zero for the foreclosure crisis and servicers are more interested in the fees and costs that they could get from the foreclosure than they were actually making sure that the loan was performing. So i think we need to address that Compensation Structure for servicers. And im hoping youre committed to helping us do that. Certainly. If you can find the legislative solution, i would certainly certainly work aggressively with you to try to help because theres definitely movement needed in this area. Okay, great. Let me ask one other question, because i know my time is running out. Community banks, some of the upfront credit sharing deals in recent years have benefited large banks that use a vertical integration model. One concern that has been raised about this structure is that if it is scaled up too much, you may end up choking off small lender access to the Mortgage Market. In other words, small lenders cant compete because they dont have large scale operations or securitization affiliates. As congress contemplates the next phase for gse reform, do we need to be mindful that credit risk sharing deals particularly those involving upfront risk sharing dont box out small and Community Based lenders . We definitely need to be aware of that and we are aggressively working on making sure that that does not happen, because one of the things we tried to do during conservatorship is make sure large and small lenders are treated alike. Great. And that should also be true in the credit Risk Transfer space. Thank you. And thank you. I know my time is up but i will submit additional questions for your response as well. Thank you. Thank you. Senator cotton . Thank you, mr. Chairman. And director, welcome. Its good to see you on this side of the capitol. Thank you for your service and for being here this morning. You and i recently discussed the issue of Residential Property assessed Clean Energy Loans referred to as pace lanes since they get super lane status through local tax systems and how they effect the Housing Market. Arkansas doesnt yet have these residential pace loans but many other states do. These loans are unusual, not only because theyre liens because also because lenders are not following truth and lending act requirements. As a result, these loans are often high interest, up to 12 for 25 years. They include home liens that jump priority even though these loans come after the mortgage. They contain no federal disclosure or underwriting and weve seen several examples of severe consumer abuse. For example, im aware of a case of an 86yearold widow on Social Security dealing with severe dementia who was giving a pace loan for more than a 100,000 and she may now lose her home. To address this scandal, brad sherman and the house of representatives and i have introduced legislation that would clarify that the truth and lending act applies to pace loans. Id like to discuss with you fannie and freddies positions on these types of pace lanes. Do fannie and freddie repurchase mortgages with pace lanes attached. We have a policy against doing that, the problem is these liens are put on after our loans are already made and they jump ahead of fannie and freddies lien position which has been our primary concern. And also they show up in the tax office not in the Land Registry office, so even after theyre put on after we have made bought the loans that were superior to them they jump ahead then we dont get notice of that so that we can adjust for it. So theyre multiple problems. Your bill would, i believe, address or start to address some of those problems but our primary concern is that something that benefits a larger wider group of people, not a single homeowner. And and this runs counter to that that theory because it treats them as as a superior tax lien which we have already taken into account any time you make a loan, but then you come back and you might put a 25, 30,000 renovation for efficiency. It may be worth that, it may not be worth that. But we dont have any control over that and it is really really created a serious problem for the Mortgage Finance industry and so we prohibit it, but there are limitations to even how we can find out about them. Thank you very much for that, director watt. So my legislation and representative shermans legislation would address the consumerfacing problems that you have often times vulnerable consumers being exploited by predatory lenders, by applying the truth and lending act. But what i hear you saying is even if that act passed, you would still have the separate issues because, one, its a super lane that takes over your First Priority mortgage. Two, its retro active after those mortgages and three it even occurs often times in a separate record system, the tax system versus the Land Registry system. Even if we addressed the consumer abuse, you would still have the problem of your financing system, which could create broader problems of liquidity in the Mortgage Market, is that right . Youre absolutely right. Ill give you another little piece of information. Theres no rational reason, if you think about it, why a superior tax lien would be having an Interest Rate of 10 , 11 , 12 when a lien subordinate to it is going at 4 or 5 . Thats the market rate. So theres preferences here that are really its just not not something thats working in the marketplace. Thank you very much for protecting the taxpayers from what really is a scandalous program, director watt. Were trying to protect consumers but there are real problems that the pace loan system creates for taxpayers as well. I hope you preserve that system. Ive talked to your counterparts about this program, see what we can do to rein in these abuses. I thank you for your time. Thank you, senator cotton. Senator menendez . Director watt, welcome. Your service is exemplary. As the ranking democrat of the housing subcommittee, i wanted to take this first opportunity the full committees has had on the question of Housing Finance systems to lay out a few principles that i think are important. One is to have a system that ensures broad affordability and access, including for those homeowners in high costs states like new jersey. Strong Mortgage Servicing standards that were to keep borrows in their homes and foreclosure prevention options that provide homeowners with sustainable modifications. Of course, the protection of taxpayer dollars, equitable access for lenders of all sizes so we dont overly concentrate the market in the larger institutions, and clear observations to show low and moderate income borrows and support the preservation of Affordable Housing. I want to look forward towards those goals with those who have similar views. My home state of new jersey continues to struggle with underwater foreclosures and from 2007 to 2016, 85,000 new jersey residents lost their homes to foreclosures. 3. 2 million homes around the country still have underwater mortgages, including more than 9 in new jersey. In 2014, fhfa announced that it freddie mac and later fannie mae would sell off delinquent loans in bulk to reduce risk to taxpayers and help families stay in their homes. The enterprises have sold off more than 11,000 loans in new jersey and they are recent plans to do more. So i was extremely pleased in march to see the new Jersey Community capital win the bid on Community Impact pool of 158 loans in new jersey and new york area. In my mind its clear that communityoriented organizations, like new Jersey Community capital with vested interest in the neighborhood, improvements can achieve outcomes that mutually benefit borrowers, distress communities and the enterprises themselves. What i want to know from you is what fhfa and the enterprises can do to provide greater access to loan sales for Community Oriented institutions, like new Jersey Community capital, or better positioned to help borrowers stay in their homes. And i understand that fannie maes prohibited from entering into direct sales of assets but it could offer pools for nonprofit bidders, for example. Given the proven track record like an entity of new Jersey Community capital, so id like to hear what you think can be done better and id like to encourage fhfa to push fannie mae to pursue loan sales exclusively for nonprofits. This is an area weve done a lot of work in and to be clear, one purpose was to get risk off the enterprises books but a more important purpose was to get these loans into the hands of people who had more ability than we had, fannie and freddie had, because of our statutory limitations to do the kind of Innovative Community preservation and stabilization work. So weve always had as an objective trying to get these loans to people who are responsible, which is why weve gone back and changed the criteria for bidders to write in certain requirements that they have to comply with whether they are Community Based or whether theyre big purchases. So what we did is weve reduced substantially the size of the pools because the biggest impediment to nonprofits is just that nonprofits generally are nonprofits. They dont have money. And so you need you need money to buy these nonperforming loans off of our books. We are statutorily obligated not to give them away. We cant do that, so reducing the thats not what im arguing for. I understand. Reducing the size of the loan pool was very critical. In fact, i think eight or nine of the Community Loan pools have been won by the organization in your state. So and ill tell you what else weve done. Weve met with local governments who were writing to us or state governments who were writing to us saying you should quit selling these loans to big wall street firms and our response to them is, okay, if you would buy them, you have a vested interest in community stabilization, youre closer to the community. We can identify the loans in your state and you could you could help the nonprofits or you as an entity as a state or local government could could get into the space and were close to to dealing with with the state of new york because the bulk of these loans really are in florida, new jersey, new york you know, five states are where the bulk of them are. So were trying to be as aggressive and innovative as we can be because we share the objective of getting them and having these decisions about stabilizing communities made as close to the neighborhoods as the decisions can be made. Well look forward to working with you and suggesting some other ideas to achieve that. Its also not only about community stabilization, in many cases its also about the reality of communities of color being able to have a place to continue to call home. Thank you, mr. Chairman. Thank you. Were going to work through the roll call which just begins. Senator crapo will return shortly. Senator tillis . Thank you, senator brown. Mel, its good to see you. You wouldnt remember this or necessarily know it, but the first congressman i ever met was you in 2004 when i was a cornelius commissioner and you were very gracious and attentive in our discussions we had in your office. I remember that well and i appreciate your indulgence there and now. Im still one of your constituents. I know you are. Born in steel creek. And mel, can you i think that you were right in the position that you took that its weve weve got to come up with the solution, but i have to believe that the work that youve done, you mentioned in response to one question that youve implemented enterprise reforms that that the best way for us to get to a bipartisan something that ultimately comes out of congress is to be very much instructed by the views of the white house and the views of your organization in terms of boundaries or priorities. Do you agree with that and what would you envision is a good first step so that weve seen proposals over the past couple of years, they havent moved forward, but to kind of get a universe of what the good ideas are and maybe some things that wouldnt be based on your own on the ground experience, could you talk about that a little bit . Senator, ive gotten a lot of criticism because i took fhfa out of the Housing Finance discussion because it seemed to me that our role was to manage the enterprises and conservatorship and what i affectionately called the here and the now. So weve never developed an Agency Position on these things, but i agree with you if somebody asked us to do that, we have a lot of experience, its just not in our statutory mandate and and i havent wanted to, you know people get critical when i get out there and start advocating for for certain principals in Housing Finance because i havent been asked to do that and its not part of my statutory mandate. I admire the fact that youre staying within the lanes. Its not necessarily always the case in every agency, so i appreciate that, but in this case you have expertise that i think would be very helpful and rather than drilling down on the details, two minutes and 30 seconds left if you all ask me to do it, i would try to do be more aggressive in that space. Yes. I think it would be helpful particularly when you have discussions about where do we go forward with gse reform. The instate of fannie or a freddie or some newly combined institutions, those sorts of things i think would be very, very helpful to get your insights in the role that you played over the past few years and were going to need that help. I do have one question that really just relates to the delay, the recent delay in pushing back the i think its the underlying css system under csp, but its being pushed back to 2019. There are some who have expressed concern that there may not be a commitment to moving forward with that, but i think that even in your written testimony you said when, you didnt say if, so its your intention, its just a matter of your working through technical difficulties . Absolutely. This is a major, major undertaking to build that platform, and weve learned a lot and weve tried to stay on a schedule but nobody should read that were not committed to the csp. With the delay do you feel like the push back to 2019 is an achievable . I mean, how would you rate the soundness of that implementation . Because as you know the industry, a lot of other stakeholders have to invest a lot of time in it and planning and trying to get some idea whether or not that needs to be relooked or if thats a relatively sound date moving forward for planning purposes. I think it is sound and i think we actually built a little little leeway into the timeline because we didnt want to go back and reextend again, so we built in some time. We just we just added actually six more months. To end of 18, 19 . Right. Right. So i think well be ready, and its critically important and its absolutely necessary to get to a single security, which will save the taxpayers a lot of money. Will help support the tba market and increase liquidity in the market so theres no question about that. Were absolutely committed to it. Well, thank you and with the chair and the Ranking Member be discussing how we can actually engage you to get you to a point where were fully harvesting your knowledge and expertise and opinions on how we move forward, because its going to be critically important if were going to get a bipartisan solution that actually fulfills what i think is our obligation to move forward with reform. Thank you. Thank you. Thank you, senator tillis. Senator donnelly . Thank you, mr. Chairman. And i want to say to my dear friend congressman watt and director watt how pleased we are to have you here and what a fine job that youve done in this position. Were grateful for your service to our country. Thank you. First i think i want to ask you is on the quarterly dividends to treasury, and i know youre going to start putting in a buffer in, as well, that you had talked about earlier. Do you expect that flow will be positive for the foreseeable future as you look at the markets . I expect it to, yes, but, you know, theres some factors that i outlined in my Opening Statement that could adversely impact that and especially when its done on a quarterly basis, those fluctuations can be exaggerated. One of the areas for my state that is important is manufactured housing and ive encouraged your agency to finish the duty to serve rule for many years, because i think it will increase affordable Home Ownership, particularly in rural areas. The pilot Channel Program for manufactured housing is a good start, but i encourage you to expand those efforts and im encouraged that the duty to serve is making progress. How do you see that rule impacting manufactured housing particularly with chattel . I think having a duty to serve rule and approaching it in the way we are approaching is the responsible way to do it, to do piloting in this area, because an area that fannie and freddie have not been involved in, certainly not in the last eight, ten years during conservatorship. And so theres its a specialized market and we have to we have to get involved in it in a responsible way and i believe that if we do that the standards for the industry will actually be raised and so were just pushing the the two enterprises to look at ways to do this responsibly. Dont just wade in there as some people wanted us to do and try to do the same thing in the chattel space that we do in the fixed housing space. Right . Umhum. Because theyre different challenges and different obstacles, and theyre different risk associated with it, and we have to be we have to responsibly assess those risks and be able to meet them and price them appropriately. When you look at affordable Home Ownership, which i know has always been one of your cornerstones, various legislative proposals weve heard have been offered that would change the gses from the current status. One of my fears is that if the wrong changes are made it could endanger the American Dream for middle class families who could be priced out of a mortgage loan. Do you share concerns around the 30year fixed Rate Mortgage that those changes could make that more difficult or could lead to higher Interest Rates and make it harder to borrow . I think 30year fixed Rate Mortgage has become a standard for american homeowners, and its important to retain that. How it gets retained or what is necessary to retain it, i think is a subject that this committee and congress will have to address, but i do think that it is an expectation that American People have because it is always been there. Umhum. What are the changes to the Current System that worry you the most in terms of maintaining accessibility and affordability that youve heard . Well, i think most a lot of the plans that i have seen have some elements of trying to protect affordability and i do believe that that is important to do and i think the American People believe that it is important to do. So how that gets done and how it gets structured in a in Housing Finance reform, i think is more in in the Housing Finance reform space than it is in the in the conservatorship. I want to commend you for your leadership, for your steeringness into a very stable, solid position, that youve done a strong job in trying to follow the mandates that are there and youve taken a terrific leadership position and, again, i want to just say how grateful i am for your friendship as well. Thank you so much. Thank you, senator donnelly. And director, you may have seen everyone disappear here. Theres a vote going on. I was aware of that. So i do expect some senators to return, and while were waiting for some of them, ill take another turn at questions. I want to return to the issue that senator corker discussed with you. As i understand it, according to the preferred stock agreements, treasury has committed to buying senior preferred stock to ensure that freddie and fannie maintain a positive net worth and theres currently 258 billion under of treasury assistance under these agreements that can be accessed. Senator corker, i dont want to speak for him, but as i understand his point, hes saying that the markets know that this agreement is in place and that this option for the conservatorship is available if there is a problem as you have described potentially could come. I understand you to have concern about whether i guess what are your concerns about using that option to deal with a problem if there is an issue that arises . I think, senator mr. Chairman, when you say the markets know, i think if you ask most people out in the public, there is there is actually the opinion that theres an unlimited guarantee to to this space and thats not true. And if you continue to erode the amount of the backing, i think that becomes more apparent to to investors and it runs the risk that it could start to have an impact. And thats all i have said. Sure. And and so i think its important not to draw more because, if you draw more, it will reduce that that explicit dollar amount of backing. Its already out of whack its already out of whack because if you look at it freddie is substantially smaller than fannie, but freddie actually has more backing than fannie does. So let me ask you, in that context then, what is the solution . Is it to stop sweeping as much would you recommend the treasury agreement for the sweep be adjusted so the buffer could be created . What would you think would be the appropriate way to protect against this problem . I think there are there are several options that we can look at that are theyre not legislative options because the pspa is a contractual agreement and i think the appropriate conversations about those options really need to take place between us and the secretary of treasury. The problem is that if the Committee Sends to the secretary of treasury the message that this is a nono, to have those discussions or to try to resolve this in a coordinated way, then it leaves us it leaves it to to us to have to unilaterally deal with it, which is something that i would prefer not to do. Which gets back to the dividend question. Right. But there are ways to address this by minor adjustments to the pspa, and thats not a move toward recap and release. Its not an invasion of the prerogatives of this committee, its not an invasion into Housing Finance reform, but we have to have that leeway to do it and if if the two of us dont have it, its a bilateral agreement, if if if the two parties cant dance, then i have to i may have to dance by myself and thats thats not a pleasant position to be in, but and it may not be pretty, but but but i have the ultimate risk here is the point that i keep trying to make, which is why i made the analogy to the to the to the to my automobile and the and the collision bag. Right . I mean, you know, somebody has to assume that ultimate risk and right now, unless we can assume it together, it falls on me. When you say we, youre referring to you and treasury . Thats correct. So, first of all, let me say i appreciate what youve reiterated several times in this hearing and im going to restate it that any of the moves that you ultimately make whether it be agreements with treasury, whether it be a unilateral move which i do not believe you should make, that those are not moves toward recap and release. I think that this i made one important points today. That point is made and i appreciate it being made. All right. I also believe that this conversation is puts a highlighter or an exclamation point on the other point one of the other points you made is that we need to move expeditiously to resolve this issue here in congress with responsible housing reform. I think it really highlights that, that concern. That being said, i just want to delve a little deeper and clarify. Im hearing you say that you feel tell me if im understanding you wrongly, that you feel that a draw on or a an action under the current agreements to sell additional preferred stock to treasury to keep that buffer in place should we end up in a problem is a less preferable option or would be received less favorably in terms of its Market Impact than an adjustment to those agreements entered into mutually between you and the secretary of treasury, is that right . I guess my question is this. It seems to me that we have some preferred stock Purchase Agreements in place. If accessing those terms of those agreements is going to create market unease, would adjusting those agreements not also create market unease . Not to deal with a shortterm law situation. This is this is just about dealing with a shortterm possibility of a loss and and i dont think the market would react to that. I think you know, from everything ive heard, senator, this reducing buffer was designed to put pressure on congress to do Housing Finance reform. It was a three year, 3 billion down to, you know it just went down. But if it gets to zero, theres no buffer there. Theres no theres no operating reserve that we can rely on. We would have to make the draw. I understand that. And that would be, i think it could be, and i shouldnt say it would be, it could be unsettling to the market, and we cant as conservator afford to have that happen because then you start to adversely effect the pricing of mortgages. You run the risk of having liquidity issues in the market. I mean, you know i understand. Now it may be farfetched, it may be but and people can talk about it in theoretical terms. But but youre concerned about the impact. Right. Let me just say i tend to agree with senator corker and perhaps the conversations youve had with me and him today can help to allay that worry in the marketplace that your utilization of the terms of the existing agreements should not create any undue concern. That being said, i understand your point and i think it just highlights that both you and the secretary of treasury need to work at this and we in Congress Need to work on getting a permanent solution in place. You do need to understand, mr. Chairman, though, that a term of the existing agreement gives us the authority to either declare or not declare a dividend and so thats not what im lobbying to do. I think a better solution to this would be a joint solution. I agree with that. Thats what i was getting to in my earlier questions. Thank you for that. Senator heitkamp. Im going to go back to the 30year fixed Rate Mortgage. Dont sigh so heavily. I think i just want yes or no questions, mel. Do you believe that a federal backstop is necessary to ensure a 30year fixed Rate Mortgage . Im sighing because our agency has not developed a position on that and so any opinion i could give would be my personal opinion and i have since i took this position just assiduously stuck to the notion that i should not be expressing my personal opinions as opposed to agency opinions. I will tell you one of the greatest challenges we have in my state is housing, whether its rural housing, whether its its Affordable Housing across the board. Ive done economic roundtables, Economic Development roundtables, number one, housing. Access to housing, Affordable Housing. We cant have Rural Development without housing. We cant have Economic Development without housing. We need a workforce and that workforce to come to north dakota needs to make sure that they can afford their house and afford a place to live and live in good neighborhoods. I understand the sigh and i probably know what it means, but the next question is in the absence of a federal backstop what options would the middle class family have for getting access to a home loan . Again, i think this committee would have to define those options, and i want to go back and reemphasize my position again. My responsibility as conservator is to manage in the state that we have now and thats what i try to stick stick to my knitting as they say. I think when you get into defining what will be necessary in the future, thats Housing Finance reform. And i think its the congresss responsibility to do that. So i just i dont mean to sound like im trying to avoid the questions that youre asking, i just i dont want to be criticized. And once i left congress, i didnt think it was my prerogative anymore to express personal opinions about how legislative things needed needed to be done, and especially as long as i am the director of an agency, which is not developed an Agency Position on it. When will you develop an Agency Position on this . Well, we wouldnt unless you all ask us to do consider this a request. If you ask us to do it because its not in our statutory mandate now to do future stakes. So maybe we can get to this in a different way and i would ask you whether your agency has conducted any analysis of what complete privatization would mean for access to mortgage credit and corresponding impact on middle class families. I dont think our agency has conducted formal research on that. We are aware of literature and we, obviously, have people in our agency who probably have great expertise and could develop such a position. I think thats the point. The point is your agency does have great expertise. No one in government knows whats happening in the Mortgage Market, knows whats happening in Affordable Housing, and i include hud in this, knows what you know. You see it every day. You have the metrics. We need advice. We need information. And were going to have a choice here. Were going to have a choice on whether were going to take that allimportant provision of the American Dream, which is Home Ownership, and make it completely inaccessible for middle class families. And that is a Major Initiative for us and its a major concern. And so, at some point here, we do need to have some analysis using the data you have on what works and what wouldnt work. We can listen to the mortgage bankers. We can listen to the Lending Community who express great concern about complete privatization. I think we had a proposal here starting off Corker Warner then became crapo johnson. But i think weve got weve got to have your advice and so you cant play coy on this and i know were not being coy. Im not saying that as a pejorative. Im just saying youve got to engage and give us advice and data thats going to help us make decisions. We regularly give technical advice. Any proposal that comes out, we will say, look, if you do this it will have this impact. So i just asked you, if we completely privatize, whats the impact . Well, if thats a proposal thats out there it is out there. Well, its out there im not sure its out there on this side of the capitol. It may be on the other side of the capitol. Im over my time, mr. Watt. Im sure well have more conversations about this in the future. Thank you and senator shots, i apologize. I should have i skipped over you. I apologize to you for that. You got here earlier some of the other senators so its your turn now. Thank you, mr. Chairman. Director watt, i want to talk to you about the role of fannie and freddie and financing multifamily housing and for providing Affordable Housing. Multifamily housing is often overlooked when we talk about Housing Finance reform. Im aware that fhfa has been making an effort over the past few years to realign fannie and freddies activities with their core Mission Helping Rural Communities this includes their work on financing multifamily housing. Have you seen progress in motivating gses to finance more affordable multifamily housing for lowincome families . Yes. When we cap the amount that they could do in the in the upper end and said you cant do any more because then you would be taking business away from the private sector, they turned substantial amount of attention to the affordable space. And so, yes, we have seen substantial progress in that area and i think you will continue to see progress. Im glad you focused on this because a lot of the questions sometimes assume that our that our responsibility is fhfa and fannie and freddies responsibility is only in Home Ownership. It is actually in access to Affordable Housing, and were supposed to be agnostic really about whether its Home Ownership or rental. Obviously because most people think the American Dream involves Home Ownership, theres more emphasis on that, but were playing an active role in the affordable rental space and the private sector is playing a very active role in the in the other part of the rental space. We control the amount that fannie and freddie play in that space. So theres a lot of talk on this committee and elsewhere when we talk about Housing Finance reform about the macro aspects of this, and i want to drill down on what we can do to build more multifamily units, apartment buildings, rentals, whatever it may be because it strikes me that that heidi and i have the same problem and yet our states are so different and i see Chris Van Hollen from maryland nodding, as well. This is a problem in every state rural and urban and in every part of every state. And so my question is, is there more that you can do administratively to push in this direction . And my other question is, is there any statutory impediment that we might be able to work on as we do reform . I dont think we have statutory impediments in this area. The one thing we have done to to get more aggressive in this space especially in Rural Communities is is the duty to serve rule, which obligates the enterprises to take aggressive steps to serve underserved areas and a lot of the problems in this space, in underserved rural areas because fannie and freddie have not been backing manufactured housing. They dont do chattel lending, so the duty to serve rule is forcing them to look at in a responsible way how you might how they might be able to do more with manufactured housing, which is, i mean, you know, it is a major part of the Housing Stock in in especially in rural areas. So if we dont if we dont do something in that space, then were missing an opportunity to support housing for people in rural areas. So thats we finally got the, you know, the legislation was out there since 2008. A run was made at putting a rule out there in 2010 and then it was then it was put on the back burner. We finally have finalized the duty to serve rule and the first plans proposed plans for the gses have come forward in the last two weeks, in fact. Thank you. Thank you. Senator van hollen. Thank you, mr. Chairman. Director watt, its great to see you. Good to see you. Thank you for your service in the congress and your good stewardship at fhfa. And i want to thank you for exercising good and prudent judgment on behalf of the mission that youve been entrusted with. We all know that families across the country are absolutely devastated by the financial meltdown. 5 million americans lost their homes and the recoveries been uneven. If you look at my state of maryland, if you look at Baltimore City, Prince Georges County and some of the rural areas, theyre still not fully back on their feet. Theyre facing challenges of access to credit, foreclosure mitigation, neighborhood blight. Can you talk a little bit about the tools you have at your disposal to address these issues and if you could also take a moment to discuss the progress we may be making with the Neighborhood Stabilization initiative in Baltimore City . Well, we started Neighborhood Stabilization with detroit, chicago and one other and then we expanded it substantially in and one of the places we expanded it to was baltimore because and we just went down the list of the most vulnerable neighborhoods. We didnt do this, you know, just off the top of our head. It was done very scientifically. So i think what that does is, it gives fannie and freddie more latitude in how they dispose of properties in vulnerable neighborhoods. It gives them the opportunity to work with nonprofits who are in the community and in some cases where its going to cost them more to go through a foreclosure process than the propertys worth, it gives them even the opportunity to contribute housing. It has to be a financial decision, obviously. Umhum. So i think were making progress in all of the cities that we and they are primarily cities because they were high concentration areas that got hit very, very hard in the in the crisis. Yeah. Thank you. I look forward to working with you and your team on that especially in maryland. A question about the National Housing trust, because one of the things the state of maryland and some of our counties have used very effectively is the idea of Housing Trusts and of course to be effective Housing Trusts really requires source of dedicated revenue, so that they can make decisions with their Development Partners and allow these projects to be capitalized in a timely manner. Last year, we saw i believe the first installment of funds from the National Housing trust fund dollars. Can you talk about the importance of that fund and give us a sense of how you think its going to be capitalized Going Forward . Well, its on the statutes now and it was suspended administratively, and i took a lot of heat for reinstating it, but it was a statutory mandate, and i didnt see a reason not to follow the statute as i told this committee when i appeared before them in my confirmation process. And since that has occurred in 2016, 382 billion million, im sorry, million dollars. Not billion. Has been contributed to the trust fund in 2016 and 455 million has been contributed in based on 2016 earnings because its always a year behind. So we dont have any control at fhfa about what happens with the funds after they go over there. They go part to hud and part to treasury. So we dont have any control over the disposition that has been made of those funds, but we did have the authority to make the decision to fund to to reverse the decision that had been made not to fund the Housing Trust fund. And we made it, and i think it hopefully is served the useful purpose. I want to thank you for making that decision. As you pointed out that was consistent with the statute. I appreciate your moving forward and i just want you to know that maryland is using its allocation of those funds effectively. So thank you. Appreciate it. Thank you, mr. Chairman. Thank you. Senator warren. Thank you, mr. Chairman. Good to see you again, director watt. Im glad this committee is tackling finance housing reform again. Ill push the same point ive pushed since i joined the congress in 2013. We need to end the government conservatorship of fannie mae and freddie mac. And we need to do so in a way that protects taxpayers established and explicit government guarantee and gives more Affordable Housing options. On that question of access, director watt, as you know the cfbps define certain loans as qualified mortgages or qm and offer lenders legal immunity for loans that meet the qm standards. But cfpb also grants qm status for any mortgage thats eligible for purchase by fannie mae or freddie mac which means that the und und underwrithing criteria at fannie and freddie helped define the scope of the qm rule and accordingly have a huge impact on the kinds of families that can get access to mortgage credit. Despite all this, fannie and freddies underwriting algorithms and criteria are kept secret. So can you explain why it is reasonable to keep this information hidden given its importance, both to the economy and to appropriate oversight of the Mortgage Market . I dont know that i can explain that to you, senator, but i can i can have our agency explain it to you as we understand it. But im not sure that i have focused on that as an issue. Well, let me suggest it this way then. I think it is an issue and instead of explaining it to me, what id really like to do is get a commitment as soon as we can that we would make this information public. Well, i wouldnt make that commitment without knowing why its not public. Im glad to pursue that. That would be part of what we would be handling. I want to be clear. As long as these entities are in conservatorship and as long as their standards are setting the boundaries of our consumer federal protection issues, i think its important that they be public. We cant exercise oversight without that. So let me ask another question. And that is about principal reduction. In the 2008 bank bailout, congress required fhfa to adopt a plan and im going to read here that seeks to maximize assistance for homeowners and minimize foreclosures. And congress specifically requires fhfa to consider principal reduction to achieve those goals. That was in 2008. And for years, fhfa did nothing and people kept losing their homes. And when you were nominated to run the agency in 2013, you said you would tackle principal reduction. I asked you about it repeatedly but for two years after you were sworn in you didnt move an inch on this. Finally, in april of 2016, you announced a Principal Reduction Program thats eight years and literally millions of foreclosures later. Even then, you used Eligibility Criteria that were so demanding that by your own calculations only 33,000 borrowers in the entire nation would qualify for principal reduction. And worse, you didnt actually require services to reduce the loan principal for those 33,000 eligible borrowers. You only required them to quote, solicit borrowers eligible for principal modification no later than october 15th of 2016. All right. Were now nearly seven months past that october deadline. Ive looked at fhfas quarterly foreclosure reports. I cant find any information about how this program is working. So i just want to know, how many of those 33,000 eligible borrowers as of today have actually gotten a principal reduction . I cant give you the exact number but i can tell you its a small number. The 33,000 is a small number and ive tried to explain why that is so. I get that the 33,000 is a small number. What portion of the 33,000 . Can you give me a ballpark . Ill provide it to you. I just dont have it at my fingertips. Do you have half . No. I dont think its half. Actually, i think a quarter . I think our projections indicated that it would be more in the range of 15 to 20 would be who would likely be able to do this. So after Congress Mandated a plan you didnt mandate that. Wait a minute. We did in 2008. Its written in the statute. It says maximize but theres also a statute that a counter veiling in the statute that says we cannot do certain things that are not economically feasible. So the analysis i did im sorry. Im sorry, director watt. To get to the 33,000, got to the people that we could do with justice to both statutes. For years, for years, people lost their homes because fhfa would not enforce the part of the bill that says give some relief to homeowners and study after study showed that it was economically feasible to do that and instead millions of people lost their homes. Senator, thats just not true, now. What we didnt do was principal reduction but there are millions and millions of people that we have provided relief for whose homes were in jeopardy. So to say that we havent done anything in that space just because we did a modest Principal Reduction Program is just not true. Well, but you didnt do the principal reduction. We did not do the principal reduction and i have explained that to you multiple times in this committee. Why . Actually its interesting. You did not start out explaining it. You started out saying you would do it. I asked you in this hearing room over and over, i asked you originally at your confirmation hearing and at followup oversight and you did not say, weve already done something else. You said you would do principal reduction. Senator, i do not believe, if you go back and look at the record either at my confirmation hearing or at any point in this hearing, in the hearing where we discussed this, that i made that commitment to you. I said i would look at it. I would do it in accordance with the statute and thats exactly what i have done. And now youre down to a few thousand people. After the crisis, the money just flew out the door for the banks. Billions and billions of dollars as fast as people could sign the checks, but money for people, many of whom had been ripped off by those same banks, it was just one message of delay and no and we have to balance this other thing out, hand wringing about moral hazard, excuses. Not to help i certainly hope youre not blaming me for that. You were in charge for at least i didnt create that situation. I tried to stop it when i was a member of the house by getting people to quit making loans to people who could not afford to repay them. I mean, i was the original author of the bill. So i dont know i agree that all of those things have taken place, but to make it sound like for some reason i am responsible for that, i think, is unfair and untrue and unjust. So let me say, mr. Watt and you will understand that i think of. Mr. Watt, the people who preceded you certainly share the blame. They did nothing. But when you came in, youve been driving this bus since 2013 and on principal reduction by your own numbers at best a few thousand people have gotten help. And i think that is shameful. We need to move on. Ive let this go on a bit so the two of you could get it out, but its its out. Now its senator reeds turn. Senator reed. Thank you, mr. Chairman. Director, in your testimony you state, and i quote, like any Business Enterprise needs some kind of buffer to shield against shortterm operating losses. In fact, it is especially irresponsible for the enterprises not to have such a limited buffer because a loss of any quarter would result in a additional growth of taxpayer support and reduce the fixed dollar commitment that the Treasury Department has made to support the enterprise. By additional draw of taxpayer support what i hear you say is you want to prevent taxpayer bailout, is that accurate . Theres that risk that that it could additional draws could be misinterpreted by and we have to guard against that risk, yes. So in effect, what you want to do is have a buffer in your organization so that you can respond to a changing conditions in the market thats correct. And not even changing conditions in the market. Because we we monitor closely changing conditions in the market. These are non credit related factors that are driving losses sometime that have nothing to do with whether were responsible or not. Theyre basically accounting the way you have to account for things and the timing of the accounting process. So, its really not even about losses. Its more about accounting things. Now, if tax reform were done, depending on the extent of the Corporate Tax reduction there would be a dramatic impact. Depending on i mean, on it and we can calculate that so that would be one of the factors that we would be monitoring regularly to see whats happening in that space. But this is this is a risk that i i dont want to make it sound like it is a likely thing to happen. Because i think that could be misinterpreted. But as conservator, we dont have the luxury of assuming that risk. And you werent here earlier when i used the example of when i got the notice that the airbag on my car needed to be replaced. And everybody was telling me, oh no, thats not a problem. Youre not going to have but i was the responsible party in my family and now i am the responsible party. I am driving these cars. Until Congress Changes the cars this im driving, i have to drive these cars and i have to make them safe and guard against those kind of even remote risk that we have. I thank you. There was a discussion, obviously, of the principal reduction. But there are a number of loans, im told 59,000 nonperforming loans, which fannie and freddie have sold to private sector and are subject to some type of either remediation or some efforts. Could you tell us what youve done to improve the borrower enabled outcomes . I know principle reduction is one but are there other things you have done . So i wish senator warren was still here to hear this. One of the one of the reasons we did nonperforming loan sales was that the private sector who buys these loans has substantially more flexibility than fannie and freddie have statutorily to do principal reduction. And its part of the waterfall in the nonperforming loan sales program. Theyre required to consider that as an option if it would improve the ability of borrowers to perform on their loans and get those loans reinstated at some reduced Interest Rate or longer term or reduced principal amount. All of those things are in the nonperforming loan requirements that we have adopted. We couldnt we couldnt do anymore than we did as fannie and freddie but we could transfer the loans to the private sector and they have substantially more flexibility and that was one of the basis on which we did that. So just a final point, drmr. Director. All of us get feedback from borrowers they havent been helped. Can you and i presume you have sort of some metrics about the different types of measures that have been taken and, again, as you described, a lot of it is within the purview of the banks or the holders of the notes because they have more flexibility but if you can give us a completer picture i think that would help us in terms of if its not principal reduction but the ultimate number i think is how many people are still in their homes and can stay in their homes even though that, you know, they have had difficulty. Thats the objective. Yes. We do keep metrics on all of those things because they are required to report, the buyers of the nonperforming loans are required to report to us on the outcomes because there are requirements they assume when they purchase the loans and the only way we can monitor compliance is to know what the actual performance is and their results are substantially better than the results that we would have gotten had we maintained those nonperforming loans on the books of fannie and freddie. I think that could be helpful. One other, if you if you have data that shows what happens when they foreclose and, you know, because if theres an incentive to foreclose because you can sell the exact same property at a much higher price i think we have removed that incentive but yes. We can provide that information. Thank you, director. Thank you very much. Thank you, mr. Chairman. Thank you, senator reed. Director watt, thats the end of the questions. You have been here essentially two hours and given us your time and responded openly and honestly to these questions. Did you want to say anything else, senator brown . Thank you, director. Before we wrap it up, let me just say to all senators, we will have seven days and as you know there would be additional questions in writing i ask you to respond to promptly, director watt. One of which is the question i asked about the legal jus if i case for believing you can unilaterally issue dividends. With that, again, i want to thank you. Were hof vily interested in and engaged in this issue and continue to work with you as we move forward to develop the best housing policy we can develop for this country. Thank you, director watt. This hearing is adjourned. Each night this week while congress is on break, were featuring American History tv in prime time. And tonight, its a look at ap lay khan history and culture, including a look at the 1870s moon shine wars. American history prime time begins at 8 00 p. M. Herein here on cspan3. It resulted in a naval victory for the u. S. Over japan, just six months after the attack on pearl harbor. And friday, American History tv will be live all day from the Macarthur Memorial Visitors Center in virginia for the 75th anniversary of the battle of midway. Featured speak you ares is author of the admirals. Eliot carlson. Anthony tully coauthor of shattered sword. And timothy orr, coauthor of never call me a hero. A pilot remembers the battle of midway. Watch the battle of midway 75th Anniversary Special live from the Macarthur Memorial Visitors Center in virginia friday beginning at 9 30 a. M. Eastern on cspan3. Sunday on q a theres a political structure crafted in the 1927 radio act, primary actor herbert hoover, secretary of commerce, and those rules, 90 years ago still govern the way actually allow resources to be used in our economy today. Clemson University Professor and former chief economist at the fcc thomas hazle the t talks about his book the political spectrum looking at the history and politics of American Communications policy. When we went to this political system for aloe kaiting spectrum rights in 1927, within a couple of years the regular lay to recalls at the commission are renewing licenses but very carefully noting that propaganda stations will not be allowed and, in fact, early on in 1929, in that period, you had left wing stations, if i could use that political term, owned by the wcfl in chicago, a labor union, and wevd, the socialists that bought a station near new york city, they wanted for political purposes, free speech, you might say, they