HFSC Hearing with FHFA Director Watt
House Financial Services Commitee
“Sustainable Housing Finance:
An Update from the Director of the Federal Housing Finance Agency”
Tuesday, January 27, 2015
Key Topics & Takeaways
- Guarantee Fees: Watt stated that no decision has been made regarding whether or not to increase or decrease guarantee fees. He added that the results of a recent study will be made available either Q1 or Q2 this year.
- Capital Levels: Several committee members questioned Watt on the appropriateness of current capital levels for Fannie Mae and Freddie Mac.
- 3% Down Payment: Watt stated that lending is about accessing the ability of people to pay and a lower down payment will not necessarily led to increased foreclosures.
- Federal Home Loan Banks: FHFA is currently reviewing the 1,300 comment letters it received in response to a recent FHLB rule proposal.
- Two Housing GSEs vs. One: Watt noted the value in competition and in the alignment of their operations but said there are some things the GSEs should not compete on, such as lending standards
Witness
- Melvin L. Watt, Director, Federal Housing Finance Agency
Opening Statements
In his opening statement Chairman Jeb Hensarling (R-Texas) expressed concern that recent Federal Housing Finance Agency (FHFA) housing policy is moving in the direction of looser standards and higher risks. Hensarling stated that Washington “appears to be rolling the dice yet again” and described three FHFA policies announced in the past year that are harmful to the transition to a sustainable housing finance system: 1) the suspension of a scheduled increase in guarantee fees (g-fees) for Fannie Mae and Freddie Mac, locking in a “near government monopoly; 2) a “race to the bottom with the Federal Housing Administration (FHA) to become the nation’s largest subprime lender; and 3) the decision to put taxpayer funds into “government housing slush funds” while the GSEs remain “ridiculously leveraged.”
In her brief opening statement Ranking Member Maxine Waters (D-Calif.) offered a contrarian view to that of Hensarling by commending Watt on the decision to offer lower down payment loans.
Witness Testimony
In histestimony, FHFA Director Melvin L. Watt provided an overview of FHFA’s statutory responsibilities and an update on the Enterprises’ financial condition, FHFA’s activities as regulator and conservator of the Enterprises, the Federal Home Loan Banks’ (FHLB) financial condition, and FHFA’s regulatory activities as regulator of the FHLBs.
Watt discussed the main objectives of the 2015 Scorecard for Fannie Mae, Freddie Mac and Common Securitization Solutions. As stated by Watt, the first goal is to maintain credit availability and foreclosure prevention activities and to do so in a safe and sound way. He noted that during 2014 FHFA made progress with the Enterprises to clarify warranty frameworks. The second goal is to reduce taxpayer risk and increase the role of private capital in the mortgage market, Watt said, and FHFA will explore other ways of transferring risk and reducing risk to taxpayers. He said the third goal is to build infrastructure related to the common securitization platform.
Watt stated that FHFA is focused on regulating the federal home loan banks. Watt ended by stating that FHFA is actively considering input on g-fees and the single security.
Question and Answer
Watt received several questions regarding whether or not loans with a 3% down payment will be susceptible to delinquency. Hensarling stated that there is a correlation between lower down payments and higher defaults, and asked Watt if the 3% down payments loans are risky. Rep. Emanuel Cleaver (D-Mo.) referenced VA loans which are 0% down and have lower foreclosure rates than some loans with higher down payments. Cleaver asked if there is any evidence that the lower down payment loans will cause more foreclosures.
Watt stated that several factors can be used to understand if a borrower will be able to stay current on a loan. Watt acknowledged that when the down payment is lower the loan could be riskier but when paired with other factors the additional risk can be offset. Watt said lending is about accessing the ability of people to pay.
Rep. Sean P. Duffy (R-Wis.) stated that Fannie Mae has admitted that the 3% program will result in loans with a higher risk and asked if Watt agreed. Watt agreed that the possibility of increased risk exists but that FHFA is being careful and is doing things to offset and mitigate any increased risk.
Robert Pittenger (R-N.C.) asked what will be done to offset the risk of the 3% down mortgages. Watt stated that a number of things can be done and listed homeownership counseling, private mortgage insurance, and higher FICO scorecards as a few possible examples.
Rep. Scott Garrett (R-N.J.) expressed concern with the current construct of the g-fee. Garrett asked why good borrowers with high down payments and high credit scores have to pay same g-fees as people with low down payments and low credit scores.
Watt responded by saying Garrett’s question shows the complexity of the issue. Watt said an increase in g-fees was suspended until pending further evaluation. He told Garret that FHFA might take into account some of the things he mentioned but that doing that without a thorough evaluation is foolish.
Rep. Randy Neugebauer (R-Texas) asked why another g-fee study was being conducted when one was already conducted under the previous acting director Edward DeMarco. Watt stated that information from the prior study will be taken into consideration for the new study.
Duffy pressed Watt on the intended goal of the g-fee. He asked if the g-fee is meant to make money, lose money or perfectly price the risk, and asked why borrowers with better credit scores and better risk profiles pay the same as borrowers with lower credit scores and lower down payments. Watt stated that he will be better able to articulate the purpose of the g-fee once the study is done.
Rep. John C. Carney, Jr. (D-Del.) asked Watt what the appetite is for private capital to enter the housing space and what the premium might be for the first lost position. Watt did not give a number regarding the premium but did say there is an appetite for private capital in the market.
Pittenger expressed the view that policy makers should continue to increase g-fees to promote the growth of private capital in the market. He asked how private capital will be attracted without increasing g-fees. Watt stated that it is encouraging to look at different risk sharing models rather than just the ones already proven successful.
Rep. Blaine Luetkemeyer (R-Mo.) asked why lending standards are being loosened when the FHFA has stated the importance of the private sector entering back into the market. Watt stated FHFA’s goal is to maintain and have a liquid housing market until GSE reform is done.
Rep. Joyce Beatty (D- Ohio) pressed Watt on the proposed changes regarding FHLB membership. Watt stated that FHFA is still working through the 1,300 comments received regarding the proposed rule. He explained that preliminary analysis shows that only 50-100 of the total FHLB membership would be adversely impacted by the rule, and that member beneficiaries of the system should have to meet the criteria set by Congress.
Rep. Stephen Lynch (D-Mass.) stated that there is a need for more affordable homes. Lynch said that people have resigned themselves to being renters and not buyers and asked Watt how those people will be helped. Watt stated that on the ownership side, FHFA wants to make mortgages more available to those who can afford them. He added that there is a need for more multifamily availability on the lower end instead of just the high end.
Rep. Al Green (D-Texas) referenced the GSE FICO standard and asked if there is a possibility to have a more inclusive credit scoring model. Watt stated that there are alternative credit scoring models that are out there now and FHFA must figure out how to incorporate them in a sustainable way, if at all. Watt also stated that FICO updated its credit score model.
Rep. Edward R. Royce (R-Calif.) asked how the GSEs can be so leveraged and not be seen as undercapitalized and financially unstable. Watt stated that FHFA put in place prudential stops in case circumstances go back in the other direction, and that a draw on treasury would stop funding of housing trust fund.
Rep. Bruce Poliquin (R-Maine) asked if Watt agreed that Fannie Mae and Freddie Mac should have the same capital requirements of nongovernment financial institutions. Watt said that it is not his job to speak on what the appropriate capital level is for the GSEs and that Congress can address capital levels with GSE reform.
Rep. Mick Mulvaney (R-S.C.) expressed the view that the housing trust fund should not be funded since, in his view, Fannie Mae and Freddie Mac are undercapitalized. Watt stated that if Congress does not want to fund the housing trust fund, then it has the power not to.
French Hill (R-Ark.) asked Watt if the Treasury Department should be consulting before sweeping money into the trust fund. Watt answered that there is nothing in the preferred stock purchase agreement that says Treasury should be consulted.
Rep. Denny Heck (D-Wash.) asked Watt if there was any public benefit for the GSEs to be two separate entities instead of one. Watt replied that there is value in competition but that they should not be competing on things like lending standards.
For more information on this hearing, please click here.
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House Financial Services Commitee
“Sustainable Housing Finance:
An Update from the Director of the Federal Housing Finance Agency”
Tuesday, January 27, 2015
Key Topics & Takeaways
- Guarantee Fees: Watt stated that no decision has been made regarding whether or not to increase or decrease guarantee fees. He added that the results of a recent study will be made available either Q1 or Q2 this year.
- Capital Levels: Several committee members questioned Watt on the appropriateness of current capital levels for Fannie Mae and Freddie Mac.
- 3% Down Payment: Watt stated that lending is about accessing the ability of people to pay and a lower down payment will not necessarily led to increased foreclosures.
- Federal Home Loan Banks: FHFA is currently reviewing the 1,300 comment letters it received in response to a recent FHLB rule proposal.
- Two Housing GSEs vs. One: Watt noted the value in competition and in the alignment of their operations but said there are some things the GSEs should not compete on, such as lending standards
Witness
- Melvin L. Watt, Director, Federal Housing Finance Agency
Opening Statements
In his opening statement Chairman Jeb Hensarling (R-Texas) expressed concern that recent Federal Housing Finance Agency (FHFA) housing policy is moving in the direction of looser standards and higher risks. Hensarling stated that Washington “appears to be rolling the dice yet again” and described three FHFA policies announced in the past year that are harmful to the transition to a sustainable housing finance system: 1) the suspension of a scheduled increase in guarantee fees (g-fees) for Fannie Mae and Freddie Mac, locking in a “near government monopoly; 2) a “race to the bottom with the Federal Housing Administration (FHA) to become the nation’s largest subprime lender; and 3) the decision to put taxpayer funds into “government housing slush funds” while the GSEs remain “ridiculously leveraged.”
In her brief opening statement Ranking Member Maxine Waters (D-Calif.) offered a contrarian view to that of Hensarling by commending Watt on the decision to offer lower down payment loans.
Witness Testimony
In histestimony, FHFA Director Melvin L. Watt provided an overview of FHFA’s statutory responsibilities and an update on the Enterprises’ financial condition, FHFA’s activities as regulator and conservator of the Enterprises, the Federal Home Loan Banks’ (FHLB) financial condition, and FHFA’s regulatory activities as regulator of the FHLBs.
Watt discussed the main objectives of the 2015 Scorecard for Fannie Mae, Freddie Mac and Common Securitization Solutions. As stated by Watt, the first goal is to maintain credit availability and foreclosure prevention activities and to do so in a safe and sound way. He noted that during 2014 FHFA made progress with the Enterprises to clarify warranty frameworks. The second goal is to reduce taxpayer risk and increase the role of private capital in the mortgage market, Watt said, and FHFA will explore other ways of transferring risk and reducing risk to taxpayers. He said the third goal is to build infrastructure related to the common securitization platform.
Watt stated that FHFA is focused on regulating the federal home loan banks. Watt ended by stating that FHFA is actively considering input on g-fees and the single security.
Question and Answer
Watt received several questions regarding whether or not loans with a 3% down payment will be susceptible to delinquency. Hensarling stated that there is a correlation between lower down payments and higher defaults, and asked Watt if the 3% down payments loans are risky. Rep. Emanuel Cleaver (D-Mo.) referenced VA loans which are 0% down and have lower foreclosure rates than some loans with higher down payments. Cleaver asked if there is any evidence that the lower down payment loans will cause more foreclosures.
Watt stated that several factors can be used to understand if a borrower will be able to stay current on a loan. Watt acknowledged that when the down payment is lower the loan could be riskier but when paired with other factors the additional risk can be offset. Watt said lending is about accessing the ability of people to pay.
Rep. Sean P. Duffy (R-Wis.) stated that Fannie Mae has admitted that the 3% program will result in loans with a higher risk and asked if Watt agreed. Watt agreed that the possibility of increased risk exists but that FHFA is being careful and is doing things to offset and mitigate any increased risk.
Robert Pittenger (R-N.C.) asked what will be done to offset the risk of the 3% down mortgages. Watt stated that a number of things can be done and listed homeownership counseling, private mortgage insurance, and higher FICO scorecards as a few possible examples.
Rep. Scott Garrett (R-N.J.) expressed concern with the current construct of the g-fee. Garrett asked why good borrowers with high down payments and high credit scores have to pay same g-fees as people with low down payments and low credit scores.
Watt responded by saying Garrett’s question shows the complexity of the issue. Watt said an increase in g-fees was suspended until pending further evaluation. He told Garret that FHFA might take into account some of the things he mentioned but that doing that without a thorough evaluation is foolish.
Rep. Randy Neugebauer (R-Texas) asked why another g-fee study was being conducted when one was already conducted under the previous acting director Edward DeMarco. Watt stated that information from the prior study will be taken into consideration for the new study.
Duffy pressed Watt on the intended goal of the g-fee. He asked if the g-fee is meant to make money, lose money or perfectly price the risk, and asked why borrowers with better credit scores and better risk profiles pay the same as borrowers with lower credit scores and lower down payments. Watt stated that he will be better able to articulate the purpose of the g-fee once the study is done.
Rep. John C. Carney, Jr. (D-Del.) asked Watt what the appetite is for private capital to enter the housing space and what the premium might be for the first lost position. Watt did not give a number regarding the premium but did say there is an appetite for private capital in the market.
Pittenger expressed the view that policy makers should continue to increase g-fees to promote the growth of private capital in the market. He asked how private capital will be attracted without increasing g-fees. Watt stated that it is encouraging to look at different risk sharing models rather than just the ones already proven successful.
Rep. Blaine Luetkemeyer (R-Mo.) asked why lending standards are being loosened when the FHFA has stated the importance of the private sector entering back into the market. Watt stated FHFA’s goal is to maintain and have a liquid housing market until GSE reform is done.
Rep. Joyce Beatty (D- Ohio) pressed Watt on the proposed changes regarding FHLB membership. Watt stated that FHFA is still working through the 1,300 comments received regarding the proposed rule. He explained that preliminary analysis shows that only 50-100 of the total FHLB membership would be adversely impacted by the rule, and that member beneficiaries of the system should have to meet the criteria set by Congress.
Rep. Stephen Lynch (D-Mass.) stated that there is a need for more affordable homes. Lynch said that people have resigned themselves to being renters and not buyers and asked Watt how those people will be helped. Watt stated that on the ownership side, FHFA wants to make mortgages more available to those who can afford them. He added that there is a need for more multifamily availability on the lower end instead of just the high end.
Rep. Al Green (D-Texas) referenced the GSE FICO standard and asked if there is a possibility to have a more inclusive credit scoring model. Watt stated that there are alternative credit scoring models that are out there now and FHFA must figure out how to incorporate them in a sustainable way, if at all. Watt also stated that FICO updated its credit score model.
Rep. Edward R. Royce (R-Calif.) asked how the GSEs can be so leveraged and not be seen as undercapitalized and financially unstable. Watt stated that FHFA put in place prudential stops in case circumstances go back in the other direction, and that a draw on treasury would stop funding of housing trust fund.
Rep. Bruce Poliquin (R-Maine) asked if Watt agreed that Fannie Mae and Freddie Mac should have the same capital requirements of nongovernment financial institutions. Watt said that it is not his job to speak on what the appropriate capital level is for the GSEs and that Congress can address capital levels with GSE reform.
Rep. Mick Mulvaney (R-S.C.) expressed the view that the housing trust fund should not be funded since, in his view, Fannie Mae and Freddie Mac are undercapitalized. Watt stated that if Congress does not want to fund the housing trust fund, then it has the power not to.
French Hill (R-Ark.) asked Watt if the Treasury Department should be consulting before sweeping money into the trust fund. Watt answered that there is nothing in the preferred stock purchase agreement that says Treasury should be consulted.
Rep. Denny Heck (D-Wash.) asked Watt if there was any public benefit for the GSEs to be two separate entities instead of one. Watt replied that there is value in competition but that they should not be competing on things like lending standards.
For more information on this hearing, please click here.