Senate Banking hearing on The Federal Housing Finance Agency
Key Topics & Takeaways
- Guarantee Fees: Watt said the FHFA is reviewing the proposal to raise g-fees and expects the agency to provide further clarity in the first quarter of 2015.
- GSE Reform: At Sen. Crapo’s request, Watt confirmed that the FHFA’s role as conservator of the GSEs is to be the “bridge-builder” to a new housing finance system that would be designed by Congress, and denied that his agency’s action should suggest a long-term return to the old, failed system. He declined to offer his own position of legislative proposals.
- GSE Down Payment Requirements: Watt said more details will be released in December around a plan for the GSEs to accept loans with 3% down payments.
- Mortgage Principal Reduction: Sen. Warren pushed Watt on mortgage principal reduction, and Watt insisted that it has not been taken off the table but must be done in a responsible manner.
- Common Securitization Platform: The Common Securitization Platform under development is intended to be adaptable for use in a future housing finance system, not a proprietary product for the GSEs, Watt said.
- TBA Market and Single Security: Watt said the FHFA is working with SIFMA to create a single security, calling it the most important player in this area and saying that operating without its consultation would be “irresponsible.”
Witness
- Melvin Watt, Director, Federal Housing Finance Agency
Opening Statements
In his opening statement, Chairman Tim Johnson (D-S.D.) said this would likely be his last hearing regarding the government-sponsored enterprises (GSEs), but urged his colleagues to continue their hard work to move past the housing crisis. He noted that the Committee has spent “countless hours wrestling with possible solutions and pitfalls” and stated that “some options are practical while others are too ideological.”
Johnson pointed out that Fannie Mae and Freddie Mac remain in conservatorship, and said the Federal Housing Finance Agency’s (FHFA) dual role of both regulating and running the businesses of the largest entities in the mortgage market is not sustainable.
The credit box “remains extremely narrow,” Johnson said, and it “locks our many potential borrowers with good credit.” He stressed the need to “find a way to bring the pendulum back to rational underwriting,” but said “unfortunately, the tight credit conditions will remain a challenge while the future structure of the mortgage market is uncertain.”
Johnson credited the FHFA under Director Melvin Watt for taking steps to stabilize the GSEs and the housing market. He specifically mentioned efforts toward a common securitization platform, a single security to increase liquidity, and developing stronger counterparty oversight, but again noted that “there is only so much that be accomplished while the enterprises are in limbo.”
In his opening statement, Ranking Member Mike Crapo (R-Idaho) said Watt’s primary role is that of conservator of the GSEs and regulator of the Federal Home Loan Bank (FHLB) system – two separate and distinct tasks that are incredibly complex and important. He said he wished the hearing was about Watt’s implementation of the phase-in of the next housing finance system, but despite Sens. Johnson and Crapo’s legislation on housing finance being passed on a bipartisan basis out of the committee, he doubted that it would be completed in this Congress, making Watt’s job even more important.
Crapo noted that Watt has announced many FHFA actions, such as changes in the strategic plans of the GSEs that remove language about reducing their prominence in the market and shifting the focus of the common securitization platform to focus solely on Fannie and Freddie. He expressed concerns with each of the actions individually, but that collectively they appear to “feed the notion that the old, failed status quo is slowly starting to take hold again.”
Crapo stressed that the consensus of the Committee’s deliberations was that the status quo failed and must not be returned to, and the path forward should be based on sustainable home ownership facilitated by a strongly-capitalized private sector. Crapo stressed that the conservator’s role is to build a “solid bridge from where we are now to wherever Congress decides.”
Witness Testimony
In his testimony, FHFA Director Melvin Watt stressed that his agency’s mandate requires that it ensure the safety and soundness of the FHLBs and the GSEs, to ensure that they provide liquidity in the national housing finance market, and that the FHFA works to balance these obligations across all its activities.
Watt then spoke of the FHFA’s strategic plan for the conservatorships, released in May, which has three goals: 1) maintain credit availability and foreclosure prevention activities in a safe and sound way; 2) reduce taxpayer risk by increasing the role of private capital in the mortgage market; and 3) build a new securitization structure for use by the GSEs and adaptable for use by the future mortgage market. He said each goal is fully aligned with his agency’s statutory mandates.
Next, Watt highlighted the FHFA’s focus on regulating the FHLBs and efforts, including a proposed rule to clarify their membership requirements. He said the rule was proposed because the FHFA has a responsibility to ensure banks fulfill their statutory mission to support housing finance in a safe and sound manner.
In closing, Watt emphasized that getting feedback from stakeholders is a crucial part of the agency’s policymaking process. He stressed that the FHFA would strongly consider comments made by members of the Committee and the public on all proposals.
Question and Answer.
Johnson asked about the interaction and impact of the proposed guarantee fee (g-fee) framework and the draft mortgage insurance eligibility requirements. Watt said both are being evaluated, and that one of the reasons that the comment periods were coordinated is because of the strong relationship between the two frameworks. He stressed that neither measure is intended to adversely affect the availability of credit, but rather seek to ensure that mortgage insurers have enough capital to perform their designated roles within the system. He warned that if counterparties cannot play their role, then the system falls back on the GSEs, and then to taxpayers.
Sen. Robert Menendez (D-N.J.) commended Watt for reconsidering the g-fee surcharge proposal of his predecessor, which he said would have penalized borrowers and increased costs for new borrowers in states already suffering from foreclosure backlogs. He asked for an update on the review. Watt said the comment periods for both g-fees and mortgage insurance have expired and the FHFA is in the process of evaluating both. He said he would expect the FHFA to bring further clarity on the matter in the first quarter of 2015.
Sen. Patrick Toomey (R-Pa.) pointed out that a report by the Financial Stability Oversight Council (FSOC) said higher g-fees are expected to help facilitate higher participation by the private sector in mortgage markets, and the FSOC recommended that FHFA raise g-fees. He asked if Watt disagreed with the FSOC opinion. Watt said he does not believe higher g-fees alone would bring back private capital, saying that risk transfers and providing greater certainty would also have a role in the process. He explained that all options are being considered in a responsible, deliberate way, but that saying higher g-fees along would bring private capital “flocking back” seems to be a “gross exaggeration.”
Toomey followed up by saying the FSOC seems to believe that as long as government guarantees are significantly underpriced, then no matter what the FHFA does, private capital will not return. Watt agreed that g-fees are “one factor,” but that raising them without evaluation would be inconsistent with his agency’s responsibilities.
Sen. Mark Warner (D-Va.) noted that many mortgage insurers were unable to perform their role in the last crisis. He asked whether insurance premiums should be considered in crafting capital standards. Watt called this a difficult issue because income, such as insurance premiums, is not generally considered capital.
Crapo reiterated his concern that the FHFA’s actions are a long-term return to the failed status quo. He admitted this may not be Watt’s intent, but added that there are some who would like to see a permanent conservatorship with taxpayers on the hook. Crapo stressed that Congress will create the next housing finance system, and asked if Watt would confirm that his ultimate role as conservator is to be the bridge-builder to the system that Congress creates. Watt answered that he “can certainly confirm that, and not only did I say it in my nomination hearings – I’ve said in consistently since then.” He confirmed that it is Congress’ role to determine the future state of the housing finance system, and denied any ambiguity about his own actions to this end.
Sen. Dean Heller (R-Nev.) said many members of the Committee are passionate about housing finance reform and that most have recognized that the current GSE model cannot remain. He noted that Housing and Urban Development Secretary Julian Castro has spoken on the need for reform, but that Watt has not commented on legislation. Heller asked if Watt would continue this “hands-off approach” or engage Congress. Watt said the FHFA’s role “is in the here and now,” and countered that it is Congress’ role to determine what the future should be and that the FHFA under him has cooperated fully as a resource to the Committee. However, he said that if the Committee is expecting him to have a specific position on what the future should be, “they will be sorely disappointed.” He insisted that if he gets embroiled in the debate, it “will make it more difficult to do the job of the present,” and said he would not give his independent opinion because people might then take it as the FHFA’s official position.
Menendez spoke about mortgage principal reductions for distressed and underwater homeowners and noted that despite “clear economic benefits,” former FHFA Acting Director Ed DeMarco refused to allow the reductions. Menendez said it is hard to understand DeMarco’s opposition and asked if Watt intends to revisit the policy. Watt said principal reduction has not been taken off the table, and that the FHFA is looking at whether there are ways to implement this policy responsibly. He called this “perhaps the most difficult issue I have faced.”
Sen. Elizabeth Warren (D-Mass.) said Congress explicitly included reduction of loan principal as an option for struggling homeowners and called it a win-win that helps families and the GSEs. She criticized Watt for saying “again and again” that the FHFA is looking into it and said that after nearly a year in office, he has not helped “a single family in this way.” She asked why it has not been a priority. Watt said it is an overstatement to say it is not a priority, and repeated that it is a difficult issue that must be resolved in a responsible way.
Warren pushed Watt further, saying that he has accomplished many other difficult, technical actions and asked him when he would finally have an answer on principal reduction. Watt replied that “it won’t be as long as it has been.”
Common Securitization Platform
Sen. Bob Corker (R-Tenn.) repeated Crapo’s concern that the common securitization platform under development may be designed “as part of some proprietary arrangement where only Fannie and Freddie” would benefit from it. He asked for assurances that the platform would be able to be used by any other enterprises that might enter the market. Watt assured Corker that scenario is “certainly” the FHFA’s intention. He further stated that designing a platform for the future system without knowing what the system will be is an “extremely risky and costly venture.” He explained that the agency’s feeling is that if the system is designed to work for the current system, it will also work in the future.
Corker asked again that Watt confirm that the common securitization platform will not be a proprietary product for the GSEs. “I can assure you of that,” Watt answered.
Corker brought up the To Be Announced (TBA) market, which he called a “very constructive step,” and asked if it is correct that the FHFA is working with SIFMA to create a single security that would work very well with the legislation that came out of the Committee. Watt answered that the FHFA is “absolutely working very closely with SIFMA. They are the most important player in the TBA market, and for us to try to do this without close consultation with them would be irresponsible.”
Crapo said the reduction in down payment requirements, from five percent to three percent for loans going through the GSEs, would result in higher risk for taxpayers and asked for clarity on accompanying new taxpayer protections. Watt said the details of the plan would come out in early December, adding that there would be “compensating factors,” such as mortgage insurance, to be taken into account. Watt said FHFA is not making credit available to borrowers that cannot be reasonably and accurately predicted to make payments.
Housing Trust Fund
Sen. Jack Reed (D-R.I.) pointed out that payments from the GSEs into the Housing Trust Fund have been suspended, and noted that he joined in a letter asking for payments to be restored. Reed asked for an update. Watt said the issue will be addressed directly before the end of the year, but that letters were also received from senators on the opposite side, illustrating that the FHFA is “walking the line” between safety and soundness and access to credit. He further explained that statutory provisions indicate when contributions can be suspended, and the agency is evaluating whether circumstances have changed to justify restarting the payments.
Menendez also supported the restoration of GSE contributions to the Housing Trust Fund and called it critical to GSE reform.
Credit Scores
Warner asked whether the FHFA has looked into use standards other than FICO credit scores. Watt said the agency is exploring this on an ongoing basis and considering whether the GSEs can evaluate credit worthiness through their own processes.
Sen. Jeff Merkley (D-Ore.) asked why the FHFA’s seller service guidelines still use FICO’s 2004 credit score model when newer models more effectively weigh borrowers’ debt obligations. Watt said the cost of changing to a new model is large and that complicated systems would have to be adjusted. He said the agency would try to get through an analysis of new FICO models and alternative scoring models to come up with a better system before adjusting operational practices.
FHLB
Johnson asked how many FHLB members would not meet ongoing mortgage participation requirements under the proposed membership rule. Watt replied that a preliminary review indicated that less than 100 members would not meet the requirements, out of a total membership of some 7,500 entities. He continued that this is a very small number given the total size of membership, but added that the agency is still taking comments on the proposed rule and will take any feedback into account to minimize adverse consequences
Access to Credit
Johnson noted that the credit box continues to narrow and asked what administrative steps the FHFA could take to improve access to credit. Watt emphasized that the FHFA’s actions are focused on normalizing the expectations of participants in the mortgage market by bringing certainty and clarity back. He explained that uncertainty causes lenders to increase the cost of credit. Included among these actions are efforts to ensure that relationships between the GSEs and FHLBs with small lenders are just as effective and efficient as with larger lenders.
Deficiency Judgments
Sen. Sherrod Brown (D-Ohio) asked about deficiency judgments and the use of debt collectors by the GSEs to pursue families that have lost their homes to foreclosure and how the FHFA ensures that this only happens to borrowers who can afford to repay their debt. Watt said this is the subject of a thorough review, and the agency is exploring whether the costs of this practice are greater than the revenues. He said there has been no conclusion yet.
Warren was also highly critical of the deficiency judgments, pointing out that in 2011 the GSEs pursued 35,000 borrowers with a collective unpaid balance of $2.1 billion, but was only able to recover $4.7 million before expenses. She said the practice is not benefiting Fannie and Freddie while hurting families, and needs to be “severely cut back.”
Putbacks
Brown asked about a round of changes to further restrict the FHFA’s ability to “putback” defaulted loans to lenders, questioning whether the agency still has tools to hold irresponsible lenders accountable. Watt said the FHFA has been very careful about retaining its authority, and assured that the agency will retain the ability to putback loans throughout the life of a loan.
For more information on this event, please click here.
Key Topics & Takeaways
- Guarantee Fees: Watt said the FHFA is reviewing the proposal to raise g-fees and expects the agency to provide further clarity in the first quarter of 2015.
- GSE Reform: At Sen. Crapo’s request, Watt confirmed that the FHFA’s role as conservator of the GSEs is to be the “bridge-builder” to a new housing finance system that would be designed by Congress, and denied that his agency’s action should suggest a long-term return to the old, failed system. He declined to offer his own position of legislative proposals.
- GSE Down Payment Requirements: Watt said more details will be released in December around a plan for the GSEs to accept loans with 3% down payments.
- Mortgage Principal Reduction: Sen. Warren pushed Watt on mortgage principal reduction, and Watt insisted that it has not been taken off the table but must be done in a responsible manner.
- Common Securitization Platform: The Common Securitization Platform under development is intended to be adaptable for use in a future housing finance system, not a proprietary product for the GSEs, Watt said.
- TBA Market and Single Security: Watt said the FHFA is working with SIFMA to create a single security, calling it the most important player in this area and saying that operating without its consultation would be “irresponsible.”
Witness
- Melvin Watt, Director, Federal Housing Finance Agency
Opening Statements
In his opening statement, Chairman Tim Johnson (D-S.D.) said this would likely be his last hearing regarding the government-sponsored enterprises (GSEs), but urged his colleagues to continue their hard work to move past the housing crisis. He noted that the Committee has spent “countless hours wrestling with possible solutions and pitfalls” and stated that “some options are practical while others are too ideological.”
Johnson pointed out that Fannie Mae and Freddie Mac remain in conservatorship, and said the Federal Housing Finance Agency’s (FHFA) dual role of both regulating and running the businesses of the largest entities in the mortgage market is not sustainable.
The credit box “remains extremely narrow,” Johnson said, and it “locks our many potential borrowers with good credit.” He stressed the need to “find a way to bring the pendulum back to rational underwriting,” but said “unfortunately, the tight credit conditions will remain a challenge while the future structure of the mortgage market is uncertain.”
Johnson credited the FHFA under Director Melvin Watt for taking steps to stabilize the GSEs and the housing market. He specifically mentioned efforts toward a common securitization platform, a single security to increase liquidity, and developing stronger counterparty oversight, but again noted that “there is only so much that be accomplished while the enterprises are in limbo.”
In his opening statement, Ranking Member Mike Crapo (R-Idaho) said Watt’s primary role is that of conservator of the GSEs and regulator of the Federal Home Loan Bank (FHLB) system – two separate and distinct tasks that are incredibly complex and important. He said he wished the hearing was about Watt’s implementation of the phase-in of the next housing finance system, but despite Sens. Johnson and Crapo’s legislation on housing finance being passed on a bipartisan basis out of the committee, he doubted that it would be completed in this Congress, making Watt’s job even more important.
Crapo noted that Watt has announced many FHFA actions, such as changes in the strategic plans of the GSEs that remove language about reducing their prominence in the market and shifting the focus of the common securitization platform to focus solely on Fannie and Freddie. He expressed concerns with each of the actions individually, but that collectively they appear to “feed the notion that the old, failed status quo is slowly starting to take hold again.”
Crapo stressed that the consensus of the Committee’s deliberations was that the status quo failed and must not be returned to, and the path forward should be based on sustainable home ownership facilitated by a strongly-capitalized private sector. Crapo stressed that the conservator’s role is to build a “solid bridge from where we are now to wherever Congress decides.”
Witness Testimony
In his testimony, FHFA Director Melvin Watt stressed that his agency’s mandate requires that it ensure the safety and soundness of the FHLBs and the GSEs, to ensure that they provide liquidity in the national housing finance market, and that the FHFA works to balance these obligations across all its activities.
Watt then spoke of the FHFA’s strategic plan for the conservatorships, released in May, which has three goals: 1) maintain credit availability and foreclosure prevention activities in a safe and sound way; 2) reduce taxpayer risk by increasing the role of private capital in the mortgage market; and 3) build a new securitization structure for use by the GSEs and adaptable for use by the future mortgage market. He said each goal is fully aligned with his agency’s statutory mandates.
Next, Watt highlighted the FHFA’s focus on regulating the FHLBs and efforts, including a proposed rule to clarify their membership requirements. He said the rule was proposed because the FHFA has a responsibility to ensure banks fulfill their statutory mission to support housing finance in a safe and sound manner.
In closing, Watt emphasized that getting feedback from stakeholders is a crucial part of the agency’s policymaking process. He stressed that the FHFA would strongly consider comments made by members of the Committee and the public on all proposals.
Question and Answer.
Johnson asked about the interaction and impact of the proposed guarantee fee (g-fee) framework and the draft mortgage insurance eligibility requirements. Watt said both are being evaluated, and that one of the reasons that the comment periods were coordinated is because of the strong relationship between the two frameworks. He stressed that neither measure is intended to adversely affect the availability of credit, but rather seek to ensure that mortgage insurers have enough capital to perform their designated roles within the system. He warned that if counterparties cannot play their role, then the system falls back on the GSEs, and then to taxpayers.
Sen. Robert Menendez (D-N.J.) commended Watt for reconsidering the g-fee surcharge proposal of his predecessor, which he said would have penalized borrowers and increased costs for new borrowers in states already suffering from foreclosure backlogs. He asked for an update on the review. Watt said the comment periods for both g-fees and mortgage insurance have expired and the FHFA is in the process of evaluating both. He said he would expect the FHFA to bring further clarity on the matter in the first quarter of 2015.
Sen. Patrick Toomey (R-Pa.) pointed out that a report by the Financial Stability Oversight Council (FSOC) said higher g-fees are expected to help facilitate higher participation by the private sector in mortgage markets, and the FSOC recommended that FHFA raise g-fees. He asked if Watt disagreed with the FSOC opinion. Watt said he does not believe higher g-fees alone would bring back private capital, saying that risk transfers and providing greater certainty would also have a role in the process. He explained that all options are being considered in a responsible, deliberate way, but that saying higher g-fees along would bring private capital “flocking back” seems to be a “gross exaggeration.”
Toomey followed up by saying the FSOC seems to believe that as long as government guarantees are significantly underpriced, then no matter what the FHFA does, private capital will not return. Watt agreed that g-fees are “one factor,” but that raising them without evaluation would be inconsistent with his agency’s responsibilities.
Sen. Mark Warner (D-Va.) noted that many mortgage insurers were unable to perform their role in the last crisis. He asked whether insurance premiums should be considered in crafting capital standards. Watt called this a difficult issue because income, such as insurance premiums, is not generally considered capital.
Crapo reiterated his concern that the FHFA’s actions are a long-term return to the failed status quo. He admitted this may not be Watt’s intent, but added that there are some who would like to see a permanent conservatorship with taxpayers on the hook. Crapo stressed that Congress will create the next housing finance system, and asked if Watt would confirm that his ultimate role as conservator is to be the bridge-builder to the system that Congress creates. Watt answered that he “can certainly confirm that, and not only did I say it in my nomination hearings – I’ve said in consistently since then.” He confirmed that it is Congress’ role to determine the future state of the housing finance system, and denied any ambiguity about his own actions to this end.
Sen. Dean Heller (R-Nev.) said many members of the Committee are passionate about housing finance reform and that most have recognized that the current GSE model cannot remain. He noted that Housing and Urban Development Secretary Julian Castro has spoken on the need for reform, but that Watt has not commented on legislation. Heller asked if Watt would continue this “hands-off approach” or engage Congress. Watt said the FHFA’s role “is in the here and now,” and countered that it is Congress’ role to determine what the future should be and that the FHFA under him has cooperated fully as a resource to the Committee. However, he said that if the Committee is expecting him to have a specific position on what the future should be, “they will be sorely disappointed.” He insisted that if he gets embroiled in the debate, it “will make it more difficult to do the job of the present,” and said he would not give his independent opinion because people might then take it as the FHFA’s official position.
Menendez spoke about mortgage principal reductions for distressed and underwater homeowners and noted that despite “clear economic benefits,” former FHFA Acting Director Ed DeMarco refused to allow the reductions. Menendez said it is hard to understand DeMarco’s opposition and asked if Watt intends to revisit the policy. Watt said principal reduction has not been taken off the table, and that the FHFA is looking at whether there are ways to implement this policy responsibly. He called this “perhaps the most difficult issue I have faced.”
Sen. Elizabeth Warren (D-Mass.) said Congress explicitly included reduction of loan principal as an option for struggling homeowners and called it a win-win that helps families and the GSEs. She criticized Watt for saying “again and again” that the FHFA is looking into it and said that after nearly a year in office, he has not helped “a single family in this way.” She asked why it has not been a priority. Watt said it is an overstatement to say it is not a priority, and repeated that it is a difficult issue that must be resolved in a responsible way.
Warren pushed Watt further, saying that he has accomplished many other difficult, technical actions and asked him when he would finally have an answer on principal reduction. Watt replied that “it won’t be as long as it has been.”
Common Securitization Platform
Sen. Bob Corker (R-Tenn.) repeated Crapo’s concern that the common securitization platform under development may be designed “as part of some proprietary arrangement where only Fannie and Freddie” would benefit from it. He asked for assurances that the platform would be able to be used by any other enterprises that might enter the market. Watt assured Corker that scenario is “certainly” the FHFA’s intention. He further stated that designing a platform for the future system without knowing what the system will be is an “extremely risky and costly venture.” He explained that the agency’s feeling is that if the system is designed to work for the current system, it will also work in the future.
Corker asked again that Watt confirm that the common securitization platform will not be a proprietary product for the GSEs. “I can assure you of that,” Watt answered.
Corker brought up the To Be Announced (TBA) market, which he called a “very constructive step,” and asked if it is correct that the FHFA is working with SIFMA to create a single security that would work very well with the legislation that came out of the Committee. Watt answered that the FHFA is “absolutely working very closely with SIFMA. They are the most important player in the TBA market, and for us to try to do this without close consultation with them would be irresponsible.”
Crapo said the reduction in down payment requirements, from five percent to three percent for loans going through the GSEs, would result in higher risk for taxpayers and asked for clarity on accompanying new taxpayer protections. Watt said the details of the plan would come out in early December, adding that there would be “compensating factors,” such as mortgage insurance, to be taken into account. Watt said FHFA is not making credit available to borrowers that cannot be reasonably and accurately predicted to make payments.
Housing Trust Fund
Sen. Jack Reed (D-R.I.) pointed out that payments from the GSEs into the Housing Trust Fund have been suspended, and noted that he joined in a letter asking for payments to be restored. Reed asked for an update. Watt said the issue will be addressed directly before the end of the year, but that letters were also received from senators on the opposite side, illustrating that the FHFA is “walking the line” between safety and soundness and access to credit. He further explained that statutory provisions indicate when contributions can be suspended, and the agency is evaluating whether circumstances have changed to justify restarting the payments.
Menendez also supported the restoration of GSE contributions to the Housing Trust Fund and called it critical to GSE reform.
Credit Scores
Warner asked whether the FHFA has looked into use standards other than FICO credit scores. Watt said the agency is exploring this on an ongoing basis and considering whether the GSEs can evaluate credit worthiness through their own processes.
Sen. Jeff Merkley (D-Ore.) asked why the FHFA’s seller service guidelines still use FICO’s 2004 credit score model when newer models more effectively weigh borrowers’ debt obligations. Watt said the cost of changing to a new model is large and that complicated systems would have to be adjusted. He said the agency would try to get through an analysis of new FICO models and alternative scoring models to come up with a better system before adjusting operational practices.
FHLB
Johnson asked how many FHLB members would not meet ongoing mortgage participation requirements under the proposed membership rule. Watt replied that a preliminary review indicated that less than 100 members would not meet the requirements, out of a total membership of some 7,500 entities. He continued that this is a very small number given the total size of membership, but added that the agency is still taking comments on the proposed rule and will take any feedback into account to minimize adverse consequences
Access to Credit
Johnson noted that the credit box continues to narrow and asked what administrative steps the FHFA could take to improve access to credit. Watt emphasized that the FHFA’s actions are focused on normalizing the expectations of participants in the mortgage market by bringing certainty and clarity back. He explained that uncertainty causes lenders to increase the cost of credit. Included among these actions are efforts to ensure that relationships between the GSEs and FHLBs with small lenders are just as effective and efficient as with larger lenders.
Deficiency Judgments
Sen. Sherrod Brown (D-Ohio) asked about deficiency judgments and the use of debt collectors by the GSEs to pursue families that have lost their homes to foreclosure and how the FHFA ensures that this only happens to borrowers who can afford to repay their debt. Watt said this is the subject of a thorough review, and the agency is exploring whether the costs of this practice are greater than the revenues. He said there has been no conclusion yet.
Warren was also highly critical of the deficiency judgments, pointing out that in 2011 the GSEs pursued 35,000 borrowers with a collective unpaid balance of $2.1 billion, but was only able to recover $4.7 million before expenses. She said the practice is not benefiting Fannie and Freddie while hurting families, and needs to be “severely cut back.”
Putbacks
Brown asked about a round of changes to further restrict the FHFA’s ability to “putback” defaulted loans to lenders, questioning whether the agency still has tools to hold irresponsible lenders accountable. Watt said the FHFA has been very careful about retaining its authority, and assured that the agency will retain the ability to putback loans throughout the life of a loan.
For more information on this event, please click here.