October 3, 2017
House Financial Services Committee “Sustainable Housing Finance: An Update form the Director of the Federal Housing Finance Agency”
Key Topics & Takeaways
- Qualified Mortgage (QM) Rule: The Consumer Financial Protection Bureau’s (CFPB’s) Qualified Mortgage (QM) Rule was a frequent topic of discussion at the hearing, as well as the impact of the decision to exempt Fannie Mae and Freddie Mac from the debt-to-income requirements of that rule. Chairman Jeb Hensarling (R-Texas) asked others if this exemption was allowing Fannie Mae and Freddie Mac to underwrite risky loans, and if this exemption was crowding out private lending. Watt stated that there are loans outside QM standards that are safe and sound and that the exemption allows those borrowers to access credit.
- Credit Risk Transfer (CRT): The Federal Housing Finance Agency’s (FHFA) credit risk transfer program was a frequent topic of discussion. Numerous Representatives praised the program as innovative, and as something that has improved the soundness of Fannie Mae and Freddie Mac. Watt fielded questions about the total amount and type of CRT engaged in by Fannie Mae and Freddie Mac, and said that the agency’s goal is to expand the program as much as possible.
- Alternative Credit Scoring Models: Rep. Jim Himes (D-Conn.) and Watt had an exchange regarding the FHFA’s implementation of alternative credit scoring models for borrowers and whether a pilot program could be implemented. Watt said that FHFA is still gathering information about alternatives to traditional credit scores, and said that pilot program in this area would probably not work.
- The Honorable Melvin L. Watt, Director, Federal Housing Finance Agency
Chairman Jeb Hensarling (R-Texas)
In his opening statement Committee Chairman Jeb Hensarling (R-Texas) stated, “In Fannie and Freddie’s (collectively, the GSEs) nine-year conservatorship little has fundamentally changed. The GSEs are today as big as they were before the financial crisis.” Hensarling noted that the two most significant developments during conservatorship have been the credit-risk transfer programs (CRT) and the common securitization platform (CSP). Hensarling also highlighted issues that concerned him, saying “Those of us who worry about another taxpayer bailout should be worried about efforts to lower down-payment requirements, raise the debt-to-income ratio, and divert funds to a housing trust fund that lacks accountability—all the while taxpayers who paid to bail out the GSEs in 2008 remain in harm’s way.”
Ranking Member Maxine Waters (D-Calif.)
In her opening statement, Ranking Member Maxine Waters (D-Calif) stated that many technical weaknesses in the housing system have been addressed. For example, the GSEs have transferred credit risk comparable to that suffered by GSEs in the crisis, thereby protecting tax payers in the future. Waters concluded by stating that any housing finance reform proposal should include, among other features, equal market access for community banks and credit unions.
Rep. Sean Duffy (R-Wisc.)
In his opening statement Rep. Sean Duffy (R-Wisc.) stated that FHFA has failed to undertake significant reforms, and said that a crucial question to ask is whether or not housing finance is better off today than it was in the lead up to the 2008 crisis.
Rep. Emmanuel Cleaver (D-Mo.)
In his opening statement Rep. Emanuel Cleaver (D-Mo.) stated that Congress has failed to act on housing finance reform. Cleaver also highlighted the fact that the GSEs have paid $208 billion in dividends to the U.S. Department of Treasury and that Fannie Mae has not needed to draw assistance in six years.
Rep. Daniel Kildee (D-Mich.)
In his opening statement, Rep. Daniel Kildee (D-Mich.) discussed the potentially detrimental impact of bulk sales of foreclosed homes on homeowners within those communities. Kildee stated that bulk sales of foreclosed homes to those that do not live in the communities can hurt neighborhood renewal. Kildee stated that the disposition of properties should be executed in a way such that there is a positive impact on those that live around them and in the community.
Witness Opening Statement
The Honorable Melvin Watt, Director, Federal Housing Finance Agency
In his opening statement, FHFA Director Mel Watt stated that it is the role of Congress and not FHFA to decide on housing finance reform. Watt stated that FHFA, as conservator, will continue to ensure that the GSEs operate in a safe and sound manner. Watt highlighted the work that has been done to reduce the operational risk of the GSEs. Watt stated that guarantee fees have been increased to an appropriate level. Also, Watt noted that the retained portfolios of the Enterprises have been reduced over sixty percent since 2009.
Watt highlighted the CRT program as step FHFA has taken to increase private investment and reduce tax payer risk in the housing market. Watt stated, “The Enterprises have developed and continue to refine credit risk transfer (CRT) programs that transfer a meaningful amount of credit risk to private investors on at least 90 percent of their targeted, fixed-rate, single-family mortgage acquisitions.” Watt continually expressed his belief that it is the role of Congress, not FHFA, to enact housing finance reform. Watt concluded by describing work being done and assistance available for those impacted by the hurricanes.
Question and Answer
Qualified Mortgage (QM) Rule
Hensarling asked Watt about the GSE exemption to the Qualified Mortgage (QM) Rule, specifically, if there is anything FHFA can do to level the playing field regarding the QM rule and if the QM rule should apply to the GSEs. Watt stated that the reevaluation of the QM standard has started and could lead to a new QM standard. Hensarling asked if the GSEs are underwriting risky loans since they do not adhere to the QM standard, to which Watt stated that there are loans outside QM standards that are safe and sound and will allow those borrowers access to credit.
Duffy asked if the GSEs should adopt the QM rules as written, and Watt said no. Duffy argued forcefully that this allows the GSEs to benefit at the expense of private capital.
Rep. Andy Barr (R-Ky.) discussed a bill he has introduced, H.R. 2226, the Portfolio Lending and Mortgage Access Act, which would allow community banks and credit unions to offer loans outside the QM standards, but Watt declined to comment on the legislation.
Rep. Keith Rothfus (R-Penn.) noted that the market for private label mortgage-backed securities (MBS) is extraordinarily small, and asked Watt if there are any regulatory reasons for this. Watt said that many actors left the market after 2008, but that the QM rule played a role as well. Watt also noted that the GSEs follow all the QM guidelines except for the debt-to-income ratio. Rothfus asked if higher interest rates would imperil the soundness of these loans, and Watt said he did not think this would happen due to the mortgages being fixed-rate.
Rep. Steve Pearce (R-N.M.) asked if the Consumer Financial Protection Bureau’s QM rule and related policies have harmed access to finance for homebuyers in rural areas.
Credit Risk Transfer (CRT)
Rep. Blaine Luetkemeyer (R-Mo.) stated that there is a need for more front-end CRT transactions. Watt stated that FHFA is working to increase front end CRT transactions, if sustainable. Watt noted that back-end deals currently comprise 70 percent of CRTs.
Rep. Ed Royce (R-Calif.) also asked Watt about CRT, and noted that only 1.3 percent of the total GSE mortgage portfolio has had CRT. Royce brought up a bill he and Rep. Gwen Moore (D-Wis.) have introduced, HR 3556, the Taxpayer Protections and Market Access for Mortgage Finance Act of 2017, which would direct the FHFA to engage in more front-end CRT, which Royce said are more stable in times of market stress. Royce asked Watt for his thoughts on the bill and if he had a target for total amount of CRT. Watt declined to state a target amount of CRT.
Rep. Warren Davidson (R-Ohio) asked Watt several questions related to CRT transactions, specifically regarding risk diversification. Watt stated that the FHFA avoids geographic allocations to help minimize the potential downside of the transactions. Regarding potential market size for CRT, Watt stated that FHFA believes the market has room for growth but is uncertain if the market will grow during adverse economic times.
Alternative Credit Scoring Models
Rep. Jim Himes (D-Conn.) asked if FHFA would be willing to authorize a pilot program for allowing competing, alternative credit score models for assessing the viability of home loans. Himes noted that Congress has urged the FHFA to act on this issue in the past, and that more inclusive and competitive credit scoring models already exist, but that FHFA has said that no alternative credit scoring model will be authorized before 2019. Watt said it would be “very difficult” to conduct such a pilot program because anything in the pilot would be ineligible for CRT. Watt also said that other competitive concerns, such as preventing lenders from using models to boost volume at the expense of creditworthiness. Watt said that FHFA is gathering information about industry-wide concerns about alternative credit score models, and said that the GSEs are already using information beyond credit scores to increase access to home loans.
Common Securitization Platform (CSP)
Rep. David Scott (D-Ga.) asked Watt to describe the progress of the CSP and the creation of a single, fungible MBS for both GSEs. Watt outlined the program and said this would eliminate the trading differential between the two securities. Watt said that the move would save taxpayers money and that it will be implemented in 2019.
Enterprise Capital Buffer
A frequent source of discussion throughout the hearing was the declining capital buffer at the GSEs (which currently stands at approximately $600 million). Watt repeatedly defended his ability to withhold making payments from the GSEs to the Treasury under the terms of the Preferred Stock Purchase Agreement (PSPA) and said that prudent management requires the GSEs to retain some capital buffer instead of allowing the buffer to disappear (possibly requiring a draw later from the Treasury from the GSEs credit line.).
Republicans generally criticized this decision, and Rep. French Hill (R-Ark.) asked if such an action would slow down Congress’s ability to enact housing finance reform. Hill also pointed out that the GSEs have a full faith and credit guarantee, which should obviate the need for a capital buffer. Watt defended his ability to withhold payments to the Treasury but indicated his preference was to work out an arrangement with the Treasury Department.
Several Democrats, including Rep. Carolyn Maloney (D-N.Y.), asked Watt for his views on future FHFA contributions to the Capital Magnet Fund and the Housing Trust Fund in the event of the GSEs capital buffer reaching $0. Rep. Michael Capuano (D-Mass.) criticized the buffers in their entirety, which are funded by guarantee fees, as an effective tax on middle-income homeowners to help the federal government make its “books look good.”
Down Payment Assistance
Hensarling asked how to ensure that the people these programs are trying to help are not hurt, and ensure they have homes they can afford to keep. Hensarling noted that the down payment requirements for some loans are as low as three percent. Hensarling asked what FHFA is doing to ensure these loans are sustainable. Watt stated that those loans represent about three percent of the enterprise new issuance portfolio, and the default rates are in line with the default rates of QM loans, approximately one percent.
Rep. Randy Hultgren (R-Ill.) asked Watt if down payment assistance could introduce “moral hazard” into the housing finance system. Watt said he did not believe so, and defended pricing the guarantee fees for those mortgages as if they were held to traditional standards. Hultgren asked if the FHFA would make its capital model public, and Watt said the FHFA is working on a response to a Senate inquiry related to the same question and would send that answer to Hultgren, as well.
Rep. Mia Love (R-Utah) said she was concerned that the FHFA’s down payment assistance programs are creating a risk of people buying homes they cannot afford. Watt argued that there is no direct correlation between down payment size and the safety of a given home loan, and noted that during the financial crisis, people with no equity in their homes disproportionately continued to make their mortgage payments.
Rep. Steve Stivers (R-Ohio) asked Watt for his view on whether the GSEs, after leaving conservatorship, should be designated as systemically important financial institutions (SIFIs) and be regulated as such. Watt said the entities would “certainly qualify” as SIFIs and said that the FHFA is providing the necessary oversight for the entities right now instead of the Federal Reserve. Watt said the entities would need a capital reserve that was 2-3 percent of total assets, but that CRT could help preserve the soundness of the GSEs.
Rep. Tom Emmer (R-Minn.) asked for examples of work that has been done to prepare the GSEs for the end of conservatorship. Watt referenced pages three through five of his written testimony and drew a distinction between GSE reform and housing finance reform. Watt, as did routinely throughout the hearing, stated that the decision to reform is ultimately up to Congress.
Rep. Robert Pittenger (R-N.C.) asked Watt if he is preparing to scale back the GSEs to allow private capital to play a larger role in housing finance. Watt said that a decision on the future role of the GSEs is up to Congress.
Stivers asked Watt to explain the criteria the FHFA uses when it assesses guarantee fees on mortgages, and if there is a role for the private sector in assessing the size of the fee. Watt said that the FHFA has factored all the necessary administrative costs into the fee, and said that FHFA uses private sector evaluations, “the same standards anybody else would.”
Rep. Nydia M. Velázquez (D-N.Y.) asked Watt to describe the steps FHFA is taking for those impacted by the hurricanes. Watt stated that FHFA has programs in place for those that are impacted. He continued that FHFA has public announcements on the FHFA website and has provided outreach to members of Congress. Specifically, Watt explained that those impacted by the hurricanes may be eligible to stop making mortgage payments for 90 days and those payments would be picked up on the backend of the payment cycle.
For more information on this hearing, please click here.