May 23, 2018

Senate Banking, Housing, and Urban Affairs Committee “Ten Years of Conservatorship: The Status of the Housing Finance System”

Key Topics & Takeaways

  • FHFA Proposed Capital Rules: FHFA Director Mel Watt stated that the FHFA has developed their own conservatorship capital framework, which Fannie and Freddie use when making business decisions, and that the FHFA will soon be proposing a risk-based capital and minimum leverage capital rule to replace old capital standards. He continued that the proposed rule will provide “valuable transparency” to the public and will be a “catalyst for discussions” regarding appropriate capital requirements for the government-sponsored entities (GSEs), adding that public input they receive will help refine the capital framework
  • Conservatorship: Sen. Richard Shelby (R-Ala.) asked what the Director has learned during his tenure about conservatorship and the mistakes that led to it, to which Watt replied that having one foot in the public sector and one in the private sector “doesn’t work,” as taxpayers take the risk in the public sector and shareholders benefit in the private sector.
  • Single Security: Chairman Mike Crapo (R-Idaho) spoke about the FHFA announcement that the GSEs will begin issuing a single security through the Common Securitization Platform (CSP) and asked for the costs and benefits. Watt replied that there are risks involved with building any platform for issuing securities, but that the benefit will provide additional liquidity and standardization to the marketplace. When asked if the FHFA is on target to meet the June 2019 implementation date, Watt replied that Fannie and Freddie will both be operating and issuing the single security at that point. 

Witnesses

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo noted that reforming housing finance is a “top priority” for him and commented that Fannie Mae and Freddie Mac have now been in conservatorship for 10 years, stressing the need to find a “permanent solution.” He continued that Fannie and Freddie have been “busy” the past few years, with the announcement of pilot programs such as “Home One” and Fannie raising their maximum debt-to-income ratio. Crapo commented that Director Watt has had the task of juggling multiple mandates as both the conservator and regulator and called on Congress to reform housing finance as soon as possible.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown commented on the changes in activities of the government-sponsored entities (GSEs) since the financial crisis, to include reducing their portfolios and implementing plans to serve the “underserved” markets. However, he continued that there is still the problem of credit-worthy borrowers not being able to access sustainable credit in the housing market. Brown then pivoted to S. 2155, which passed the House on May 22, 2018, arguing that the legislation not only weakens the rules and regulations, but also makes it harder to recognize fair housing law violations.

Testimony

The Honorable Melvin L. Watt, Director, Federal Housing Finance Agency

In his testimony, Watt commented that this would likely be his last time before the committee during his tenure as Director and highlighted challenges the FHFA will have in the future. He explained the difficulty of managing and planning everyday operations for the GSEs in the future, as it is hard to know how far down the road to look, and cited GSE board turnover and transitioning from property owner to tenant as two examples of challenges. Watt then explained that the FHFA developed their own conservatorship capital framework, which Fannie and Freddie use when making business decisions, and that the FHFA will soon be proposing a risk-based capital and minimum leverage capital rule to replace old capital standards. He continued that the proposed rule will provide “valuable transparency” to the public and will be a “catalyst for discussions” regarding appropriate capital requirements for GSEs, adding that public input they receive will help refine the capital framework.

Question & Answer

Capital Standards
Crapo noted the comprehensive capital and liquidity requirements guarantors are subject to and asked Watt about the proposed FHFA capital rule. Watt echoed his comments on the proposed rule from his testimony and added that the proposed rule will allow the public and stakeholders to be involved in discussions so appropriate capital standards are set.

Sen. Bob Corker (R-Tenn.) asked if capital requirements for the GSEs should mirror those of the larger banks, to which Watt replied that there are differences in the risks being undertaken by the GSEs and banks, but that the comments they receive on the proposal should help start discussions in this area, adding that he does not want a “cookie cutter approach” to the capital rule.

Conservatorship
Crapo noted that in Watt’s written testimony he stated that the conservatorship is unsustainable and that there will be consequences for taxpayers and consumers if Congress does not refine the housing finance system. Watt replied that there is uncertainty with continuing the conservatorship, as it is difficult to plan, adding that “having this much of the economy in a conservatorship isn’t sustainable or a good idea.” He continued that to move into the future, a capital regime must be in place that will help make business decisions compatible with the safety and soundness of the system.

Sen. Richard Shelby (R-Ala.) asked what the Director has learned during his tenure about conservatorship and mistakes that were made, to which Watt replied that having one foot in the public sector and one in the private sector “doesn’t work,” as taxpayers take the risk in the public sector and shareholders benefit in the private sector.

Single Security
Crapo spoke about the FHFA announcement that the GSEs will begin issuing a single security and asked for the costs and benefits of the change. Watt replied that there are risks involved with building any platform for issuing securities, but that the benefit will be providing additional liquidity and standardization to the marketplace. When asked if the FHFA is on target to meet the June 2019 implementation date, Watt replied that Fannie and Freddie will both be operating and issuing the single security at that point.

Credit Scoring
Sen. Robert Menendez (D-N.J.) raised questions about updating the credit scoring model and the provision in S. 2155, to which Watt replied that he also had concerns initially but that “competition is good if you’re competing on the right things.”

Sen. Brian Schatz (D-Hawaii) echoed concerns over changing to a different scoring model, to which Watt replied that this is the “most difficult issue I’ve had to deal with,” adding that he has received the same level concern from respondents.

Pilot Programs
Sen. Patrick Toomey (R-Pa.) discussed some of the pilot programs, such as Freddie’s IMAGIN, which would assign a prearranged insurance company to provide mortgage insurance rather than being decided at the point of sale. Watt replied that this pilot program is being tested to see if it makes the market more efficient, and when asked if pilot programs are subject to public comments, Watt replied that there would “never be any pilot programs” if they were all subject to comment periods.

30-year Fixed Mortgage
Several Democrats voiced concern over the possibility of losing the 30-year fixed mortgage, to which Watt argued that not having the 30-year option will substantially increase monthly payments for mortgages and price people out of the market, adding that such a decision would have “real impacts.”

Housing Trust Fund
Sen. Chris Van Hollen (D-Md.) asked about the housing trust fund, to which Watt replied that FHFA does not administer the funds, part of them are administered by Treasury and the other part by Housing and Urban Development (HUD), adding that he does not track what happens to the funds.

For more information on this hearing, please click here.