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HFSC FHFA Hearing

House Financial Services Committee

Housing in America: Oversight of the Federal Housing Finance Agency

Wednesday, July 20, 2022

Topline

  • Republicans focused on financial stability, GSE conservatorship, capital requirements, and the secondary housing market.
  • Democrats focused on affordable housing and access to homeownership.
  • Thompson said she would reexamine the role of the Federal Home Loan Banks but did not provide much insight on whether she believed the GSE should exit conservatorship.

Witnesses

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters praised Thompson for her work at FHFA and highlighted the contrast between her and her predecessors.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said inflation and market instability are making it hard for Americans to achieve the American dream. He also said FHFA weakened the housing system by reducing taxpayer protection, failing to complete work on its 2020 proposed rule regarding prior approval of GSE approved products and pilots, and compelling government sponsored enterprises (GSE) to issue controversial equitable finance plans violating that 2020 proposed rule.

Subcommittee on Housing, Community Development and Insurance Chair Emmanuel Cleaver (D-Mo.)

In his opening statement, Cleaver touted Thompson’s leadership at FHFA.

Subcommittee on Housing, Community Development and Insurance Ranking Member French Hill (R-Ark.)

In his opening statement, Hill said the GSEs and conservators have a huge impact on the American economy, especially in a time of soaring mortgage rates and housing prices.

Testimony

Sandra L. Thompson, Acting Director, Federal Housing Financing Agency (FHFA)

In her testimony, Thompson said there is uncertainty about the long-term effects of the pandemic on housing finance markets but that the GSEs continue to manage their portfolio risks, exceeding FHFA guidance and expectations for liquidity by maintaining a large volume of high-quality liquid assets while FHFA continues to take steps to strengthen their capital positions. She highlighted FHFA’s finalization of important enhancements to the Enterprise Regulatory Capital Framework in February 2022 and finalization of additional capital planning and disclosure requirements. She then discussed FHFA’s efforts to strengthen fair lending, including the Memorandum of Understanding between FHFA and the Department of Housing and Urban Development (HUD). Thompson also explained FHFA’s work to ensure regulated entities identify and manage emerging climate-related risks, and natural disasters in particular.

Question & Answer

Third Party Service Providers

Rep. Bill Foster (D-Ill.) asked about FHFA’s current authority over third party providers to the GSEs and federal home loan banks. Thompson said FHFA has been asking for years for oversight authority over third party service providers and wants authority over third party service providers comparable to other agencies in order to ensure the safety and soundness of its regulated agencies.

Financial Stability

Foster asked if home price appreciation could create real estate bubbles in certain areas. Thompson said the GSEs do not directly impact the housing supply but that FHFA will work with stakeholders to see how it can address the issue. Reps. Ann Wagner (R-Miss.) and Anthony Gonzales (R-Ohio) asked Thompson what steps the agency is taking to ensure that in the event of a market downturn, taxpayers will not be required to bail out the GSEs. Thompson replied that the GSEs are building capital and engaging in the credit risk transfer program. She said the agency’s work with GSEs incorporates safety and soundness to ensure borrowers have loans that they understand and can afford and that she was concerned about some market volatility.

Conservatorship

Reps. Sean Casten (D-Ill.), Bill Posey (R-Fla.), Roger Williams (R-Texas), John Rose (R-Tenn.), Wagner, and McHenry asked about conservatorship, and Sherman commented that the GSEs should not be allowed to exit conservatorship. Thompson said Congress will have to make that decision, but the FHFA is taking steps to prepare them for a potential exit by building capital, transferring credit risk, and requiring capital disclosures. Rep. Blaine Luetkemeyer (R-Miss.) asked Thompson if $300 billion in capital is sufficient for the conservatorship to end. Thompson said that is only one component and that other factors need to be considered.

Rose asked Thompson if she believes the conservatorship of home loan banks is unsustainable and must be terminated. Thompson said nobody expected conservatorships to last 14 years, and that the agency will do what they can once Congress makes a decision about the secondary market. She explained that conservatorship allows enterprises to build capital, preventing the government from absorbing any losses, and facilitate the credit risk transfer program, pushing the private sector to absorb unexpected losses.

Capital Requirements

Wagner asked Thompson if FHFA calculated the impact of changing the capital rule. Thompson said the agency considered the capital requirements and changed the rule to facilitate credit risk transfer to private investors. Wagner also asked Thompson if it made sense to strengthen the capital reserve requirement for Fannie Mae and Freddie Mac, to which Thompson replied yes. Hill asked why the capital ratio was cut from 4 percent to 3 percent. Thompson said the ratio was cut to make the leverage ratio buffer a dynamic buffer instead of a static buffer and that there were concerns about the leverage ratio becoming a binding constraint. According to Thompson, the agency wants to ensure the leverage ratio serves as a credible backstop for the risk-based capital.

Private Sector Risk and the Secondary Market

Posey asked how FHFA has improved the safety of loans securitized by GSEs. Thompson said the agency looks at the enterprises’ portfolios and that because of low interest rates, a lot of risk was removed through refinancing to reduce mortgage payments. She said the loan value to housing price ratio has decreased on their portfolios, so homeowners’ equities have increased due to rising housing prices. Thompson also said FHFA monitors loan characteristics that enterprises purchase and ensures they are operating in a sound and safe manner.

Rep. Andy Barr (R-Ky.) asked what FHFA is doing to ensure GSEs spread risk to private markets to help limit taxpayer risk. Thompson said the credit risk transfer program is important from a safety and soundness perspective because such enterprises are the largest holders of credit risk. She added that there are several ways to transfer credit risk into the private sector to offset some losses.

Hill asked about the Administration’s vision for increasing the role of the private sector in the secondary mortgage market. Thompson said the GSEs play a countercyclical role in the mortgage market, as evidenced by the great recession and pandemic; when sources of liquidity are not available to borrowers, enterprises step in.

Luetkemeyer asked about the adequate or target amount of risk transfer. Thompson said the target for enterprises to transfer risk is 90 percent of risky loans with a loan to value ratio of 60 percent or higher. Thompson stressed that enterprises conduct such transfers through either the capital market structure or reissuance structure so that enterprises and taxpayers are not the only ones susceptible to risk.

Davidson asked how FHFA will adapt to the fact that the Fed is no longer soaking up $40 billion of demand for mortgage-backed securities every month. Thompson stated that the Fed will let some mortgage-backed securities run off and that their actions have not had any impact yet

Reps. Barry Loudermilk (R-Ga.) and Hill asked about the status on finalizing prior approval of enterprise products as the law requires. Thompson said the rule will be finalized as written by law in the near term, and the pilot transparency framework will not replace the rule.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.