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 FinanceAgency 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 NationalHousing 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 re