Months. Including the iba, mill ken 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, f hrks a serve as regulator of the enterprises and as regulator of the federal home loan banks. As conservator of the gse easy, theyre obligated to preserve and conserve the as 70s franny and freddie mac. They have undertaken a number of initiatives in recent years including some that began prior to director watts tenure. The platform was originally intipped 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 fanny mae and fredty mack. One important question as we embark on this is whether we should utilize the csp or consider other alternatives such as extraneous and itting the jenny mae platform. Another Important DevelopmentHousing Finances is the increase transfer of credit risk from the enterprises to the private sector. I erne courage them to continue to experiment with different forms of Risk Transfer, including both front end and backend structures. Transferring credit risk away from the government and into the private sector is essential to protect taxpayers and to build a more robust and sustainable market. Increasing the amount of credit risk born by the private sector will abe critical comb ponment of housing reform. Regardless of which direction the committee ultimately decides to take. I encourage director watt to consider other policies and options to incentivize further private sector participation and to help facilitate the transfer to a new system. Housing finance reform remains the most significant piece of up finished business following the financial crisis and it is important to build bipartisan support for a path forward. Three years ago seven republicans and six democrats on this committee voted in support of a comprehensive Housing Finance reform bill. A key priority of this congress is to build on that bipartisan legacy and pass legislation that will create a sustainable Housing Finance system for future generations. I look order in to working with you, director watt, and your staff at the fhfa throughout this process. Senator brown. Thank you, mr. Chairman, director watt, well, you back. Nice to see you again. Thanks for your Public Service for so many years. I appreciate the chairmans calling this hearing and establish a Bipartisan Committee process by which we can consider the conservatorship of the governmentbacked mortgage companies. Since the beginning of the year there have been several articles claiming that Housing Finance reform is easy, some calling it an easy win for the Trump Administration. As the chairman and as any of us who were on the committee in 2013 and 2014 know, restructure a fifth of the economy is far from easy. That doesnt mean we should avoid considering how the Housing Market cooperate better and how we can prevent emergency government and emergency taxpayer intervention in Financial Markets in the future. Currently in agreement between treasury and federal Housing FinanceAgency Requires the governmentsponsored enterprises to reduce their capital cushions each year until the reserves meet zero in january, 2018. At that point gses will be prohibited from retaining any capital at the end of each following quarter, despite the fact that the Companies Back more than 5 trillion in the Mortgage Market. Director watt has been raising his concerns about dangers of the capital levels at the gses for some time. We should remember he was one of the first members of the house of representatives to warn about predatory lending prior to the housing crisis. Unlike those warnings about predatory lending which the administration largely ignored at the time, 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 the retained capital levels is equivalent to the supporting of of supporting a return to the old structure of the gses. As arguments go, this is surely a strawman. Theres no reason we cant protect taxpayers and homeowners. Protecting taxpayers in the near term should be a shared and a bipartisan goal. The committee should continue its work examining the gaps in the Housing Market that the housing crisis exposed. The original to distribute model of certain lenders, Exotic Products that put even prime borrowers at risk, private label securities that were not backed by gses, and lack standardized terms and responsibilities for trustees, and a near complete breakdown in Mortgage Servicing and the ability of monoline mortgage insurers to fulfill their commitments. Gse easys made mistakes too, chasing the market, providing pricing discounts to be lenders based on volume, using price advantages to achieve shareholder gains rather than passion those benefits on to borrowers in or lenders that served underserved communities. Gse mission is to provide a stable, liquid National Mortgage market, including in rural, underserved, and lowincome communities. Something we should all want in any Housing Finance system. The Affordable Housing goals for Single Family and multifamily housing along with the duty to serve rural that was finalized in december, are key tools to prioritizing Affordable Housing acts to safely reach underserved borrowers. Only the changes Congress Makes will impact how expensive or affordable the 30year fixed Rate Mortgage will be in the future and who has access to it. Our decisions will impact how easily and quickly a growing family could sell their current home and buy a more expensive one. Our decisions will impact which lenders have access to the system and whether a home buyer can get a mortgage from the Small Community lender in her town. These decisions are not just about backoffice operations or far away capital markets. They will have a substantial impact on households across the country, whether renters or homeowners. Thanks for joining us as the Committee Seeks to understand the current status of the gses and how we move forward without harming homeners or buyers and putting taxpayers at greater risk. Thank you very much, senator brown. I do welcome you director watt we appreciate the service you have given and are continue to give as we move forward to deal with the Housing Finance policy of our nation. I want to remind all the senators as we go into the question period to honor the fiveminute 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 conservatorships of fanny 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 10,818,000,000,000 for fanny mae, and 141 billion for freddie mac, and additional draws will reduce these commitments further. Our focus on three points in my Opening Statement. My first point is that fhfa has made numerous important reforms to the enter priepzs during conservatorship that are beneficial to the Housing Finance system and reduce risk to taxpayers. My written statement discusses a number of these reforms and provides links to detail reports about them. Despite these reforms, i regularly hear assertions that fanny mae and freddie mac are the same today as they were when they were placed into conservatorship. It is essential for this committee to be aware that these assertions are simply false and to ensure that the reforms already made are not disregarded. Despite the reforms already made, fhfa is fully aware that Housing Finance reform will involve many crucial decisions that go far beyond these reforms. So the second point i want to make unequivocally is that it is the role of congress, not fhfa to make the decisions that chart the path out of conservatorship and to the future Housing Finance system. Among the important decisions for congress are the following. One, how 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 NationalHousing Finance markets, kwoezclosed quote. Consequently in our conservatorship role, fhfa will take actions as necessary to prevent additional draws of taxpayer support. Neither this dmit committee nor anyone else should view such actions either as interference with the per rogtives of congress, as every forts 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 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 amtd 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 ufr already engaged, what can fhfa and the enter priermz dos 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 whens if is financially feasib feasib 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 bufrz that the irnt prizes will draw down is zero, requiring fanny 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 gsc easy operating with zero bufrz, 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 erne courage 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 washe t 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 fanny 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 tots pspa would be the first and most prudent way to address this issue. Understand. 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