And freddie mac is in the conservatorship of veneers september 2008 and paulson describe the conservatorship as a timeout. Today fannie and freddie continued to dominate the market approximately 70 percent of the mortgages are back for the federal government while fannie and freddie with the Housing Market experiences a downturn the status quo is not a viable option. The Housing Finance system with two Government Enterprises in conservatorship as not a sustainable solution. Taxpayers today have to much risk with to a bigger role in the Mortgage Market. Those that have released proposals including the i see the day in several coauthors and many others. About what the future system should look like. In the meantime continuing to serve as a conspirator in regulator and as the Federal Home Loan Bank fhfa has undertaken a number of initiatives including those that began prior to the directors 10 year. One significant undertaking is the securitization platform that was originally intended to work independent from the enterprises to issue both agencies security is in private label securities. Instead it has been developed specifically for securities issued by fannie mae and freddie mac. One important question is whether we should utilize to consider other alternatives such as expanding the ginnie mae platform. Also the increased risk to the private sector. They will continue to experiment with different forms including frontend and back and. Transferring credit risk away from the government is essential to protect taxpayers with a more robust and sustainable market that credit risk is a critical rest of Housing Finance reform. Regardless of which direction they ultimately decide to take. I encourage director watt to consider other policies for to help facilitate a transfer to a new system. Housing finance reform is the most significant piece of Unfinished Business and it is important to build bipartisan support for a path forward. Three years ago seven republicans and six democrats voted in support of a comprehensive Housing Finance reform bill. Hickey priority is to build on that legacy and pass legislation to create a sustainable sustainable system for future generations and afford to working with hugh director watt with your staff at fhfa the process. Welcome back director watt 84 Public Service for so many years i appreciate the chairman to call this hearing to establish a process to consider the conservatorship claiming Housing Finance reform is easy or easy when for the trump demonstration restructuring that the economy. The federal Housing FinanceAgency Requires the sponsored enterprises to reduce their capital cushion each year until the reserve reaches zero in january 2018. Then gses will be prohibited from retaining any capital at the end of each following quarter to despite the fact that the Companies Back 5 trillion in the Mortgage Market. Director watt has been raising his concerns for some time. We should remember he was one of the first members of the house of representatives to warn about predatory lending prior to the housing crisis. Unlike those warnings which the administration largely ignored at the time, i am hopeful we can protect taxpayers from what is an avoidable situation created by an agreement entirely within the executive branch. Some argue any adjustment to the retained levels is equivalent of supporting a return to the old structure to the gses. As arguments go, this is surely a strawman. There is no reason we cant protect taxpayers and homeowners. Protecting taxpayers should be a shared and bipartisan goal. The committee should continue its work examining the gaps in the Housing Market that were exposed. Exotic products that put prime borrowers at risk, private label securities that were not backed by gses and a near complete breakdown in Mortgage Servicing and the ability of insurers to fulfill their commitments. Gse certainly made mistakes too, chasing the market to purchase pls, providing pricing discounts to lenders based on volume, using price advantages to achieve shareholder gains rather than passing those benefits on to borrowers in or lenders that serve underserved communities. The mission is to provide a stable, liquid, National Mortgage market including world, under served communities. Thats something we should all want in any Housing Finance system. The goals for singlefamily and multi Family Housing along with the duty to serve rule that was finalized in december are key tools that pretend continue prioritizing to safely reach underserved borrowers. All the changes they make will impact how expensive or affordable the 30 year fixed rate will be in the future and who has access to it. Our decisions will impact how easily and quickly a growing family could sell the current home and buy a more expensive one. It will impact who has access to the system and whether a homebuyer can get a mortgage from the Small Community lender in her town. These decisions are not just about back offices or faraway markets. They will have impact on households across the country whether renters or homeowners. Thank you for joining us as the Committee Seeks to understand the current status and how we move forward without harming homeowners and buyers or putting taxpayers at greater risk. Thank you very much. I welcome you director watt. We appreciate the service you have given and continued to give as we deal with the Housing Finance policy. I want to remind the senators to honor the five minute rule so senators in line can get their opportunities. Director watt i ask you to give your full statement. Would you please proceed at this time. Chairman, Ranking Members and members of the committee, thank you for inviting me to testify. The hearing topic confirms you are well aware that the conservato conservatorship of freddie mae and freddie. Have been unprecedented considering these Enterprises Support over 5 trillion in mortgages. Of additional importance is taxpayer backing under the preferred stock Purchase Agreement is limited to 118 billion for fannie mae and 141 billion for freddie. Additional draws will reduce these further. I will focus on three points in my Opening Statement. My first point is f hfa has made numerous reforms to the enterprises during conservatorship which are beneficial to the Housing Finance system and reduce risk. My written statement discusses these reforms and provides links to detailed reports. Despite the reforms i regularly hear that fannie mae and freddi freddie. Are the same today as they were when they were placed into conservatorship. Its important that these assertions are recognized as false and to recognize the reforms already made are not disregarded. Despite reforms already made f hfa is fully aware that housing reform will involve crucial decisions that go far beyond these reforms. The second point i want to make unequivocally is that it is the role of congress, not f hfa to make the decision that chart the path out of conservatorship and to the future Housing Finance system. Among the important decisions for congress are the following. 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 role if any should the enterprise play in the reform Housing Finance system, and what statutory changes will be required to ensure they play those roles effectively . For what Regulatory Framework are needed in a reform system and who will have that responsibility . I reiterate, it is the role of congress to do housing reform and i encourage you to do so expeditiously. My final point is to identify and discuss the most significant challenge f hfa faces as Congress Moves ahead on reform. The challenges that a additional draws would reduce the taxpayer backing and the foreseeable risk that uncertainty could adversely impact 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 one point to billion dollars 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 emma the psp a buffer reduce the 600 million and on january 1, 2018 it will reduce to zero. And neither point neither enterprise will enter a quarterly loss without drying further taxpayer support. Gap accounting for any number of noncredit factors in the ordinary course of business, regularly result in large fluctuations in enterprise gains or losses. We also know lower Corporate Tax rates under tax reform would reduce the value of the enterprise tax asset and resorresult in shortterm losses. The Enterprises Need some buffer to shield against shortterm operating losses. In fact, it is especially irresponsible for the enterprise not to have a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce treasuries fixed our commitment. As conservator, we reasonably foresee this could erode Investor Confidence and stifle liquidity in ways that could increase the cost of mortgage credit to borrowers. As conservator we cannot risk these consequences and meet our statutory obligation to ensure that each enterprise fosters liquid, efficient, competitive and Resilient NationalHousing Finance market. Consequently, in our conservatorship role, f hfa take action as necessary to prevent additional draws of taxpayer support. Neither this committee nor anyone else should view such action as interference with the prerogatives of congress, as efforts to influence the outcome of Housing Finance reform or as any step toward recap and release. We will take only such actions as necessary to avoid normal operating losses that would trigger a draw during conservatorship. Thank you again for the opportunity to testify, and as always, we stand ready to assist the committee in any way requested to do so. Thank you very much director watt. I appreciate that commitment. My first question, i would like to focus on credit capital. Among the reforms listed, you discussed some of the efforts that the agency has undertaken to increase the participation of private capital in the market. Since fha first started publishing a scorecard in 2012, an important component has been reducing taxpayer risk by a attracting investment in reducing the footprint. You have seen a significant increase in the Risk Transferred to the private sector which i applaud and i encourage you to continue to work to increase. In addition to the Risk Transfer deals, what can f hfa and the enterprises do to attract more private capital to the market. The first thing we would 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 the credit box, but we will not take alone outside that credit box. The second thing we have aggressively done is have the Enterprises Innovate in the Risk Transfer space, moving first to second loss positions or intermediary positions and moving to first loss position when it is financially feasible to do so. I think the objective is to make the whole system as responsible and not move back to the kind of practices that were taking place prior to the crisis. Thank you. Achieving this objective will be one of the important things we seek to do as we work on legislation to resolve Housing Finance policy. Has my final question in this round, id like to address capital at the enterprises. On january 1, 2018, the Capital Buffers at the enterprises will draw down to zero. That requires fannie mae and freddie. To draw on their lines of treasury if they have a loss. This appears to me why conservatorship is not feasible. The government is taking all the risk. While i understand you have concerns with the gse operating with zero Capital Buffers and want to work to address the issue, adding a small capital buffer does not change the need for a longterm solution to Housing Finance reform. Unfortunately, suspending dividends will lead some to believe reform is not urgent and maintaining the status quo is sustainable. I would encourage you to work with the committee so that does not occur. Could you please respond. First of all, let me say i agree with you, we will avoid a draw at all cost because we do believe there are risks associated with it. As conservator, our position is a little different than everyone else. I like and not to a situation when i went home and had a letter in my mailbox and it said my car was subject to recall because of the airbag. There were a number of people who said the risk of you driving the car is minimal. 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 cause that you have already given us a fannie mae and freddie. , its all responsibility to keep them safe and sound, to make them efficient while they are in conservatorship and its your responsibility to change cause if you want to after that or whatever you decide to do. Let me ask this question. You believe they have the authority to withhold dividend payments. I do. I also want to assure you that my first option would be to work with the secretary of treasury. These are contractual agreements. The not legislative agreements. Its a contractual agreement between us and the secretary of treasury. Modest changes to the psp i would be the first to most prudent way to address this issue, but if that fails, the responsibility falls back on me as the conservator of these enterprises and we cannot afford to run that risk. Thank you. My time has expired. I would like to ask if you and your staff can provide us with a legal analysis as to why you believe you have the Authority Without getting agreement from the secretary of treasury and dealing with the third amendment. Centered around. Thank you mr. Chairman and director watt, thank you again. You talked about potential impending concerns on tax reform and shortterm losses. The president s proposed tax reform plan that would cut the tax rate from 35 down to 15 of the finance committee and others would come to that, we dont know. Moodys estimates that would cost fannie 15. 6 billion and freddie 5. 6 billion. Since the stock Purchase Agreement and the limit of the retained capital and prohibits retained capital next year, talk to us about the impact it would have on the gse and their financial ability and what it would do to impact access to mortgages in the broader Housing Market. You spoke about the general, but if you would dig down deeper with tax reform and where that goes. We are monitoring these discussions about tax reform because they would have, if they are adopted, and depending on what is adopted, would have impacts. It could range in our analysis from a low of like 5 billion up to 25 or 26 billion, and obviously the extent of those tax reforms and thats a shortterm impact. This is not a commentary on the value of the reduction in the Corporate Tax rate. We are talking about the shortterm impact of that Corporate Tax rate cut on deferred tax assets which then has a shortterm impact on the enterprise losses. One of the things we are regularly doing is talking to treasury monitoring what is happening in that tax cut space. If we wait until that happens, it may be too late or its possible they could phasein the tax cuts or its possible something could be written in to protect the enterprises in conservatorship. All of those are possibilities , but 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, cap accounting principles and how you count hedging against risk. Those are things that have nothing to do with whether youve extended good or bad credit. They are noncredit related factors but they balance the enterprises and losses around regularly. Going to zero in a buffer could, in any quarter, put us in a situation where we could end up having to make a draw. Thank you. Lets switch to an ohio specific question, but one that could have impact moving forward in other places. In ohio, investors used land contracts, known as contract for deed to generate income. They offer none of the protections of a mortgage because theyre not a mortgage. They leave borrowers with properties that are uninhabitable. It happened in cincinnati and cleveland. You have the authority to be able to do something and my question is pretty simple. Do you prohibit bidders from using deed and on singlefamily rental deals Going Forward. We will certainly look at that. We have changed the requirements a couple time