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26–521 PDF 2018

S. HRG. 115–56 

THE STATUS OF THE HOUSING FINANCE 

SYSTEM AFTER NINE YEARS OF CONSERVATORSHIP 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE CURRENT FINANCIAL AND OPERATIONAL PERFORMANCE OF FANNIE MAE AND FREDDIE MAC, AND EXPLORING OPPORTUNITIES FOR LEGISLATIVE REFORM 

MAY 11, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

TRAVIS HILL, Senior Counsel 

GRAHAM STEELE, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

ERIN BARRY, Democratic Professional Staff Member 

MEGAN CHENEY, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, MAY 11, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESS 

Melvin L. Watt, Director, Federal Housing Finance Agency ............................... 4 

Prepared statement .......................................................................................... 34 

Responses to written questions of: 

Senator Brown ........................................................................................... 39 

Senator Tillis ............................................................................................. 41 

Senator Menendez ..................................................................................... 48 

Senator Heitkamp ..................................................................................... 52 

Senator Warren ......................................................................................... 54 

Senator Cortez Masto ................................................................................ 58 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Memorandum dated May 24, 2017, to Melvin L.Watt from Alfred M. Pollard, 

General Counsel, regarding dividends ............................................................... 65 

FHFA’s Enterprise Non-Performing Loan Sales Report, December 2016, submitted by Melvin L. Watt .................................................................................... 67 

Letter submitted by the National Associaton of Federally-Insured Credit 

Unions ................................................................................................................... 101 

Letter submitted by the Credit Union National Association ............................... 104 

(III)

(1) 

THE STATUS OF THE HOUSING FINANCE 

SYSTEM AFTER NINE YEARS OF CONSERVATORSHIP 

THURSDAY, MAY 11, 2017 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

Today we will receive testimony from Federal Housing Finance 

Agency Director Mel Watt on the status of the housing finance system. 

Fannie Mae and Freddie Mac have now been in conservatorship 

for close to 9 years. In September 2008, then-Treasury Secretary 

Hank Paulson famously described the conservatorships as a ‘‘timeout.’’ 

Today Fannie and Freddie, along with the FHA, continue to 

dominate the mortgage market. Approximately 70 percent of the 

mortgages are backed by the Federal Government. 

While Fannie and Freddie are currently earning profits, if the 

housing market experiences a downturn, taxpayers could again be 

on the hook for billions of dollars. The status quo is not a viable 

option. 

A housing finance system dependent on two Government-sponsored enterprises in perpetual conservatorship is not a sustainable 

solution. Taxpayers today bear too much risk, and the Government 

plays too big a role in the mortgage market. 

A number of groups have released proposals for reform in recent 

months, including the MBA, the ICBA, the Milken Institute, several co-authors writing jointly for the Urban Institute, and many 

others. The Committee is considering all of these proposals, as well 

as other ideas about what the future system should look like. 

In the meantime, FHFA continues to serve as both conservator 

and regulator of the enterprises and as regulator of the Federal 

home loan banks. As conservator of the GSEs, FHFA is obligated 

to conserve and preserve the assets of Fannie Mae and Freddie 

Mac. 

FHFA has undertaken a number of initiatives in recent years, including some that began prior to Director Watt’s tenure. One 

2 

significant undertaking is the creation of the Common 

Securitization Platform. The Platform was originally intended to 

function like a market utility—independent from the enterprises— 

that would be used to issue both agency securities and private label 

securities. The Platform has instead been developed specifically for 

securities issued by Fannie Mae and Freddie Mac. One important 

question as we embark on housing finance reform is whether we 

should utilize the CSP or consider other alternatives, such as expanding the Ginnie Mae platform. 

Another important development in housing finance is the increased transfer of credit risk from the enterprises to the private 

sector. I encourage FHFA and the enterprises to continue to experiment with different forms of risk transfer, including both front-end 

and back-end structures. Transferring credit risk away from the 

Government and into the private sector is essential to protect taxpayers and to build a more robust and sustainable market. 

Increasing the amount of credit risk borne by the private sector 

will be a critical component of housing finance reform, regardless 

of which direction the Committee ultimately decides to take. I encourage Director Watt to consider other policies and options to 

incentivize further private sector participation and to help facilitate 

the transfer to a new system. 

Housing finance reform remains the most significant piece of unfinished business following the financial crisis, and it is important 

to build bipartisan support for a path forward. 

Three years ago, seven Republicans and six Democrats on this 

Committee voted in support of a comprehensive housing finance reform bill. A key priority of this Congress is to build on that bipartisan legacy and pass legislation that will create a sustainable 

housing finance system for future generations. 

I look forward to working with you, Director Watt, and your staff 

at the FHFA throughout this process. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Director Watt, welcome back. Nice to see you again. Thanks for your public service 

for so many years. 

I appreciate the Chairman’s calling this hearing and establishing 

a bipartisan Committee process by which we can consider the conservatorship of the Government-backed mortgage companies. Since 

the beginning of the year, there have been several articles claiming 

that housing finance reform is easy, some calling it an ‘‘easy win’’ 

for the Trump administration. 

As the Chairman and as any of us who were on the Committee 

in 2013 and 2014 know, restructuring a fifth of the economy is far 

from easy. That does not mean we should avoid considering how 

the housing market could operate better and how we could prevent 

emergency Government and emergency taxpayer intervention in financial markets in the future. 

Currently, an agreement between Treasury and the Federal 

Housing Finance Agency requires the Government-sponsored enterprises to reduce their capital cushions each year until the reserves 

reach zero in January 2018. At that point GSEs will be prohibited 

3 

from retaining any capital at the end of each following quarter, despite the fact that the companies back more than $5 trillion in the 

mortgage market. 

Director Watt has been raising his concerns about dangers of the 

capital levels at the GSEs for some time. We should remember he 

was one of the first members of the House of Representatives to 

warn about predatory lending prior to the housing crisis. 

Unlike those warnings about predatory lending, which the administration largely ignored at the time, I am hopeful we can protect taxpayers from what is an avoidable situation created by an 

agreement entirely within the Executive Branch. Some argue any 

adjustment to the retained capital levels is equivalent of supporting a return to the old structure of the GSEs. As arguments 

go, this is surely a straw man. There is no reason we cannot protect taxpayers and homeowners. Protecting taxpayers in the near 

term should be a shared and a bipartisan goal. 

The Committee should continue its work examining the gaps in 

the housing market that the housing crisis exposed: the originalto-distribute model of certain lenders, exotic products that put even 

prime borrowers at risk, private label securities that were not 

backed by GSEs and lax standardized terms and responsibilities for 

trustees, and a near complete breakdown in mortgage servicing 

and the ability of monoline mortgage insurers to fulfill their commitments. 

GSEs certainly made mistakes, too: chasing the market to purchase PLS, providing pricing discounts to lenders based on volume, 

using price advantages to achieve shareholder gains rather than 

passing those benefits on to borrowers, and/or lenders that served 

underserved communities. 

The GSEs’ mission is to provide a stable, liquid national mortgage market, including in rural, underserved, and low-income communities—something we should all want in any housing finance 

system. 

The affordable housing goals for single-family and multi-family 

housing, along with the duty-to-serve rule that was finalized in December, are key tools to continue prioritizing affordable access and 

prudent experimentation to safely reach underserved borrowers. 

Ultimately, the changes Congress makes will impact how expensive 

or affordable the 30-year fixed-rate mortgage will be in the future 

and who has access to it. 

Our decisions will impact how easily and quickly a growing family could sell their current home and buy a more expensive one. 

Our decisions will impact which lenders have access to the system 

and whether a home buyer can get a mortgage from a small community lender in her town. These decisions are not just about backoffice operations or faraway capital markets. They will have a substantial impact on households across the country, whether renters 

or homeowners. 

Director Watt, thanks for joining us as the Committee seeks to 

understand the current status of the GSEs and how we move forward without harming homeowners and buyers or putting taxpayers at greater risk. 

Chairman CRAPO. Thank you very much, Senator Brown. 

4 

And I, too, welcome you, Director Watt. We appreciate the service you have given and are continuing to give as we move forward 

to deal with the housing finance policy of our Nation. 

I want to remind all the Senators as we go into the question period to honor the 5-minute rule with regard to the question periods 

so that Senators who are in line can get their opportunities. 

Director Watt, I would ask you to feel free to give your full statement, and so would you please proceed at this time? 

STATEMENT OF MELVIN L. WATT, DIRECTOR, FEDERAL 

HOUSING FINANCE AGENCY 

Mr. WATT. Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank you for inviting me to testify. Your 

hearing topic confirms that you are well aware that the 

conservatorships of Fannie Mae and Freddie Mac have been unprecedented, especially considering that these enterprises support 

over $5 trillion in mortgages. 

Of additional importance is that taxpayer backing under the Pre- ferred Stock Purchase Agreement is now limited to $118 billion for 

Fannie Mae and $141 billion for Freddie Mac, and additional draws 

will reduce these commitments further. 

I will focus on three points in my opening statement. 

My first point is that FHFA has made numerous important reforms to the enterprises during conservatorship that are beneficial 

to the housing finance system and reduce risks to taxpayers. My 

written statement discusses a number of these reforms and provides links to detailed reports about them. Despite these reforms, 

I regularly hear assertions that Fannie Mae and Freddie Mac are 

the same today as they were when they were placed into conservatorship. It is essential for this Committee to be aware that 

these assertions are simply false and to ensure that the reforms already made are not disregarded. 

Despite the reforms already made, FHFA is fully aware that 

housing finance reform will involve many crucial decisions that go 

far beyond these reforms. So the second point I want to make unequivocally is that it is the role of Congress, not FHFA, to make 

the decisions that chart the path out of conservatorship and to the 

future housing finance system. 

Among the important decisions for Congress are the following: 

One, how much backing, if any, should the Federal Government 

provide and in what form? 

Two, what transition process should be followed to avoid disruption to the housing finance market and who should implement that 

process? 

Three, what roles, if any, should the enterprises play in the reformed housing finance system? And what statutory changes will 

be required to ensure that they play those roles effectively? 

And, four, what regulatory framework and authorities are needed 

in a reform system? And who will have that responsibility? 

I reiterate that it is the role of Congress to do housing finance 

reform, and I encourage you to do so expeditiously. 

My final point is to identify and discuss the most significant 

challenge FHFA faces while Congress moves ahead on reform. The 

challenge is that additional draws under the PSPAs would reduce 

5 

the amount of taxpayer backing and the foreseeable risk that resulting uncertainty could adversely impact the housing finance 

market. 

Unfortunately, this challenge is significantly greater today than 

it has been, and it will continue to increase if not addressed. When 

I first discussed this in 2016, each enterprise had $1.2 billion under 

the PSPAs as a buffer to shield against having to make additional 

draws of taxpayer support in the event of an operating loss in any 

quarter. On January 1, 2017, the PSPA buffer reduced to $600 million, and on January 1, 2018, it will reduce to zero. At that point, 

neither enterprise will be able to weather any quarterly loss without drawing further taxpayer support. 

GAAP accounting for any number of noncredit-related factors in 

the ordinary course of business regularly results in large fluctuations in enterprise gains or losses. We also know that lower corporate tax rates under tax reform would reduce the value of the enterprises’ deferred tax assets and result in short-term losses. 

Like any business, the enterprises need some buffer to shield 

against short-term operating losses. In fact, it is especially irresponsible for the enterprises not to have a limited buffer because 

a loss in any quarter would result in an additional draw of taxpayer support and reduce Treasury’s fixed-dollar commitments 

under the PSPAs. 

As conservator, we reasonably foresee that this could erode investor confidence and stifle liquidity in ways that could increase 

the cost of mortgage credit to borrowers. As conservator, FHFA 

cannot risk these consequences and meet our statutory obligation 

to ensure that each enterprise fosters ‘‘liquid, efficient, competitive, 

and resilient national housing finance markets.’’ 

Consequently, in our conservatorship role, FHFA will take actions as necessary to prevent additional draws of taxpayer support. 

Neither this Committee nor anyone else should view such actions 

either as interference with the prerogatives of Congress, as efforts 

to influence the outcome of housing finance reform, or as any step 

toward recap and release. We will take only such actions as necessary to avoid normal operating losses that would trigger a draw 

during conservatorship. 

Thank you again for the opportunity to testify, and as always, we 

stand ready to assist the Committee in any ways we are requested 

to do so. 

Chairman CRAPO. Thank you very much, Director Watt. I appreciate that commitment. 

My first question I would like to focus on private capital. Among 

the reforms that you listed in your written testimony more fully, 

you discuss some of the efforts that the agency has undertaken to 

increase the participation of private capital in the markets. Since 

FHA first started publishing its scorecard in 2012, an important 

component of the scorecard has been reducing taxpayer risk by attracting private capital and shrinking the footprint of the enterprises. Under your leadership, FHFA has overseen a significant increase in the amount of credit risk transferred to the private sector, which I applaud and encourage you to work to continue to 

increase. 

6 

In addition to the existing risk transfer deals that you have already engaged, what can FHFA and the enterprises do to reduce 

taxpayer risk and to attract more private capital to the mortgage 

markets? 

Mr. WATT. Well, of course, the first thing we do regularly is to 

not take loans that people cannot afford to pay. We have a defined 

credit box, and we try to encourage lenders to use that credit box. 

But we will not take a loan outside that credit box. 

The second thing we have aggressively done is had the enterprises innovate in the risk transfer space, moving first to secondloss positions or intermediary positions, but then moving to firstloss positions when it is financially feasible to do so. 

So I think the objective here is to make the whole system responsible and not obviously move back to the kinds of practices that 

were taking place prior to the crisis. 

Chairman CRAPO. I thank you very much for that, and as you 

know, achieving this objective will be one of the important things 

that we seek to do here as we work on legislation to resolve housing finance policy. 

I would like to go, as my final question to you in this round, to 

capital at the enterprises, your final topic that you discussed with 

us. On January 1, 2018, the capital buffers at the enterprises will 

draw down to zero, requiring Fannie Mae and Freddie Mac to draw 

on their lines of credit at the Treasury in the event of a quarterly 

loss. This reinforces to me why conservatorship is unsustainable— 

no capital, taxpayers on the hook for losses, and the Government 

effectively taking all the risk. 

While I understand that you have concerns with the GSEs operating with zero capital buffers and want to work to help address 

this issue, adding a small capital buffer does not change the need 

for a long-term solution to our housing finance reform. 

Unfortunately, suspending dividend payments will lead some to 

incorrectly believe that reform is not urgent and that maintaining 

the status quo is sustainable. 

I would encourage you to work with this Committee so that that 

does not occur. Could you please respond to that? 

Mr. WATT. First of all, let me just say I absolutely agree with 

you. We are going to try to avoid a draw at all costs because we 

think there are risks associated with it, and as conservator, our position is a little bit different than everybody else. I kind of liken 

it to the situation I faced several weeks ago when I went home and 

had a letter in my mailbox that said my car was subject to recall 

because of the airbag. Well, there were a number of people who 

were saying the risk of you driving that car is minimal, and I absolutely agreed with them. But I was the responsible party, and my 

family was going to have to ride in that car. And so in this situation, the cars that you all have given us are Fannie Mae and 

Freddie Mac. It is our responsibility to keep them safe and sound, 

to make them efficient while they are in conservatorship. And it is 

your responsibility to change cars if you want to after that, or 

whatever you decide to do. 

Chairman CRAPO. Well, let me ask a question this way: Do you 

believe that the FHFA has the authority to withhold dividend payments—— 

7 

Mr. WATT. I do, yes. 

Chairman CRAPO.——without the consent of Treasury and without—— 

Mr. WATT. I do, yes. 

Chairman CRAPO.——the Third Amendment? 

Mr. WATT. Yes. But I also want to assure you that my first option, obviously, would be to work with the Secretary of Treasury. 

These are contractual agreements. They are not legislative agreements. The PSPA is a contractual agreement between us and the 

Secretary of Treasury. So modest changes to the PSPA would be 

the first and most prudent way to address this issue. 

Chairman CRAPO. Understood. 

Mr. WATT. But if that fails, the responsibility for that risk falls 

back on me as the conservator of these enterprises, and we cannot 

afford to run that risk. 

Chairman CRAPO. Well, thank you. My time has expired, and so 

I would just like to ask if you and your staff, Could provide us with 

your legal analysis as to why you believe that you have the authority without getting agreement from the Secretary of Treasury and 

dealing with the Third Amendment? 

Mr. WATT. I would be happy to do that. 

Chairman CRAPO. Thank you very much. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman, and, Director Watt, 

again thank you. 

In your testimony, you talked about the potential and who knows 

what impending concerns you have about tax reform and shortterm losses. Let me start with that. The President’s proposed tax 

reform plan that would cut the corporate tax rate from 35 to 15 

percent, if the Finance Committee and others would come to that— 

we do not know yet, obviously. Moody’s estimates that would cost 

Fannie $15.6 billion and Freddie $5.7 billion. 

Since the Stock Purchase Agreement between Treasury and 

FHFA limits the GSEs’ retained capital this year, as you spoke 

about, and prohibits retained capital next year, talk to us about the 

impact the writedown would have on the GSEs in their financial 

ability, especially what it would do to impact access to mortgages 

in the broader housing market. You spoke about it sort of generally, if you would dig down a little deeper on tax reform and 

where that goes. 

Mr. WATT. So one of the things we obviously are monitoring on 

a regular basis are these discussions about tax reform because they 

would have, if they are adopted and depending on what is adopted, 

differential impacts. They could range in our analysis from a low 

of $5 billion up to $25, $26 billion. And, obviously, the extent of 

those tax reforms will have—and that is a short-term impact. This 

is not a commentary on the value of the reduction in the corporate 

tax rate. We are talking about the short-term impact of that corporate tax rate cut on deferred tax assets, which then has a shortterm impact on the enterprises’ losses. 

So one of the things we are regularly doing is talking to Treasury 

and monitoring what is happening in that tax cut space, because 

if we wait until that happens, it may be too late. Or it is possible 

that they could phase in the tax cuts over a period of time. Or it 

8 

is possible that something could be written in to protect enterprises 

in conservatorship. So all of those are possibilities, but they are 

possibilities at this point, and we have to be realistic about them 

and evaluate them, so we are constantly making that kind of evaluation. 

The other regular kind of fluctuations that lead to quarterly 

losses is just GAAP accounting principles, how you account for 

hedging against risk, and those are things that have nothing to do 

with whether you have extended good or bad credit. They are noncredit-related factors, but they bounce the enterprises’ losses 

around regularly. So going to zero in a buffer could in any quarter 

put us into a situation where we could end up having to make a 

draw. 

Senator BROWN. Thank you. Let me switch to sort of an Ohiospecific question, but one that could have impact moving forward 

in other places. In Ohio, investors in the GSE bulk sales use land 

contracts, as you know, known as ‘‘contract for deed,’’ to generate 

income off these properties. These contracts offer none of the protections of a mortgage because they are obviously not a mortgage. 

They often leave borrowers with properties that are uninhabitable. 

That happened in Cincinnati. It has happened in Cleveland. 

You have, my understanding, the authority to be able to do something, and my question is pretty simple. You will prohibit bidders 

on NPL sales from using contract for deed and prohibit it in any 

single-family rental deals going forward? 

Mr. WATT. We certainly will look at that, Ranking Member 

Brown. We have changed the requirements a couple of times, but 

we never change them retroactively. We always change them prospectively because people who have bought these nonperforming 

loans have bought them on a set of fixed assumptions and criteria 

and requirements that we have imposed on them. So it would have 

to be on a go-forward basis that we would do it. But we are actively 

looking at that issue right now. 

Senator BROWN. Thank you. 

Chairman CRAPO. Thank you. 

Senator Corker. 

Senator CORKER. Thank you. Mr. Watt, thanks for being here 

today, Congressman. What do we call you now? 

Mr. WATT. ‘‘Mel.’’ 

Senator CORKER. ‘‘Mel,’’ OK. 

[Laughter.] 

Senator CORKER. That is what I have always called you, but I did 

not want to do so in front of people without your permission. Thank 

you for coming today, and thanks for the job you are doing. 

I know we have had some conversations recently, and I just want 

to reiterate it is your belief, as we have had in multiple conversations, that the future of housing finance reform is totally Congress’ 

job to do, and you are relying upon us to make that happen. And 

I think you know there is sort of a lefty think tank and a righty 

think tank and some in-the-middle folks that appear to be coming 

together around some conclusions. And it is my sense that the 

Chairman and Ranking Member wish to take that up in the near 

future. And from your perspective, that is our job to do, and that 

is how we determine the future of these entities. 

9 

Mr. WATT. I absolutely agree, and I hope you heard me loud and 

clear, unequivocally, it is that role of Congress. Now, we have made 

some reforms to the enterprises, and I do not want those disregarded because they are important reforms that we have made 

during the conservatorship process. And I have outlined a number 

of them in my longer-form testimony. I did not have a chance to 

do it in the short period I had in giving an opening statement. But 

they are outlined specifically in my longer-form written testimony 

with links to the details about them. So, in a sense, you could think 

of that as GSE reform and think of the Committee’s responsibility 

and Congress’ responsibility as housing finance reform. I do not 

want to get into semantics here, but I just want—— 

Senator CORKER. I got it. We do not have any issues with the 

steps you have been taking, and we appreciate you informing us of 

those. 

We obviously had a recent conversation at the end of last quarter 

regarding the building up of capital within the entities, and the 

reason we did that was that was a pretty big change from where 

we have been. The two entities have $258 billion worth of capital 

available to them, so this whole notion of them running out of resources is just a baseless issue. And I do not know why that even 

at this time is being discussed because what it does, Mel, is it 

changes the dynamic of what has been happening. It makes it appear as if there is a different approach that is being taken by the 

Administration. The Administration is working with us, working 

with others to move ahead with reform. But all of a sudden, a unilateral step by you when they have got $258 billion in capital available—you know, I ran a pretty large company that I started, and, 

you know, our money went into overnight repos, and we kept no 

cash—none. Each day when we needed it, we drew it out. And, in 

essence, you have exactly that same type of thing available to 

Fannie and Freddie, $258 billion worth right now. And so to act as 

if drawing on this made-available credit when the U.S. taxpayers 

already are 100 percent the backing of these entities, it just creates 

a different direction, which sends a signal to the world that something different is occurring when it is not. So I hope we have established today that you have got $258 billion available. If you draw 

upon it—that is what it is for, by the way—it in no way affects the 

credit or anybody’s perception of the securities that are being put 

out. 

Mr. WATT. Senator, I hope you—I tried to address that as forthrightly as I could in my opening statement. I have addressed it repeatedly. But I hope you heard the analogy I used. You all gave 

me these cars to drive for 5 years. You said, ‘‘Keep them safe and 

sound.’’ You said, ‘‘Make them efficient.’’ If there is a risk that a 

draw or a reduction in the commitment that backs these enterprises would interrupt the market—it is small. I acknowledge that. 

I am not trying to overstate it. But if it happens, and what we say 

is it is reasonably foreseeable it could happen, it will not be you 

that they come to and talk to about it. It will be the conservator 

because we are the responsible parties for this during conservatorship. You are the responsible parties for it going forward. 

10 

Senator CORKER. Well, why don’t you go ahead and draw $10 billion on it right now and see? I am telling you, it is going to have 

no effect. 

Mr. WATT. Well, I do not need to draw $10 billion on it if—— 

Senator CORKER. Do it anyway. Do it anyway. 

Mr. WATT. Well, I would not do that and run that risk because 

that would expose me to the same risk that I am trying to avoid. 

I just do not understand why—well, we have had this conversation 

before. But believe me, I cannot afford to take that risk any more 

than I could afford to drive a car that has a recall on it with an 

airbag with my family in it. And I have tried to make that analogy 

for you. That is my responsibility, and I have to live up to that responsibility as conservator. That is what you all—that is why you 

all approved me in this Committee to do this job, and that is why 

the Senate confirmed me to do this job. 

So I do not know what else I can say about that. I cannot afford 

to assume that risk. You can afford to say it is theoretical. I cannot 

afford to say that I will assume it. 

Senator CORKER. Well, it is one of the most baseless arguments 

I have ever heard. Any company in America that had access to a 

$258 billion line of credit from the U.S. Government, backed by the 

U.S. Government, I do not think would be concerned about market 

fluctuations. But something has happened recently, and I do not 

know what it is, but—— 

Mr. WATT. It could get into a discussion about whether that is 

adequate or not adequate. I do not know for a $5 trillion portfolio. 

You know, you do not know what—you know, and I am not saying 

this is a large risk. I am just saying I cannot afford to take it as 

conservator because I have responsibility for it. That is the point 

I keep trying to make to you. 

Chairman CRAPO. Thank you. 

Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. 

A number of things. You talked about in your opening comments 

that you have been moving toward risk sharing with the private 

sector, and you have. Do you have a figure that would be appropriate as to how much of the portfolio should be put into private 

versus taxpayers? 

Mr. WATT. We have a goal of risk sharing on at least 90 percent 

of the single-family new loans that fit our criteria, and that is a 

substantial part of our portfolio. The goal, obviously, would be to 

transfer as much of it as you can. 

Senator TESTER. Do you think 90 percent is attainable? 

Mr. WATT. In normal times. Actually, we have exceeded that goal 

since we set that goal. But the problem is if you require it and 

there is a downturn and investors walk away, then you have made 

us have to adjust the price down so we are subsidizing the transfer, 

and we do not want to do that. That is why I say we always do 

it based on rational economic decisions. So I do not have any problem with the goal. The problem we have is when you write that 

and say you must do it, it really is an imposition into the market 

that is neither justified nor is it, in our opinion, reasonable to do 

that. 

11 

Senator TESTER. OK. So I think—I do not want to speak for everybody, but I think a fair number of folks around here want to see 

private capital go in to take the risk off the taxpayers. 

Mr. WATT. And we do, too, yes. 

Senator TESTER. So the question is—we want to make sure that 

you or whoever is in your position is as active as possible to get 

private equity into the entities. The question is: How should it be 

written so as not to tie your hands, but yet make sure that you 

maintain aggressiveness? 

Mr. WATT. I think it would be appropriate to set a goal and to 

give us flexibility based on the criteria that we have talked about. 

I mean, we share the goal of doing that, but you could easily get 

into a situation where you are requiring us to make non-economic 

decisions if you say you must do it regardless of the economic circumstances. 

Senator TESTER. OK. Do you think it is possible to have the 30- 

year note without an explicit Government guarantee? 

Mr. WATT. Senator, I think that is probably more into the housing finance reform area than it is for me to say, because I could 

just give you my personal opinion, which is not worth much. 

Senator TESTER. It is worth a lot. I value it. 

Mr. WATT. I really try to keep from doing personal opinions as 

opposed to expressing an opinion of our agency, and we have not 

developed an opinion on that. 

Senator TESTER. OK. Well, I mean, I think your opinion does 

mean a lot, quite frankly, because you are in the business a lot 

more than we are. We are depending on you in that regard. 

Mr. WATT. Let me put it like this: I have read a number of experts in this area who do not believe it would be possible to do. 

Senator TESTER. OK. 

Mr. WATT. And I—— 

Senator TESTER. OK. That is fine. 

Mr. WATT. I presume there are credible arguments on the opposite side, but I do not know. 

Senator TESTER. I want to talk about the buffer a little bit. The 

buffer I believe is an agreement through Treasury. 

Mr. WATT. It is, yes. 

Senator TESTER. OK. And you said it will be down to zero by 

2018, which is coming right up. And by your opening statement, 

you indicated that you think you need to have a buffer. 

Mr. WATT. Yes, sir. 

Senator TESTER. How much? 

Mr. WATT. Well, it could vary, because the objective is not to 

make a draw. 

Senator TESTER. OK. 

Mr. WATT. So we want to cover first the normal fluctuations in 

operations. We want to monitor what is happening on tax reform 

because that could have a major impact short term on our loss situation. 

Senator TESTER. So give me a ballpark figure on how much. 

Mr. WATT. It is just hard for me to do that, Senator, because—— 

Senator TESTER. So let me ask you this: Has Secretary Mnuchin 

or anybody from the Trump administration—have you approached 

them or have they approached you about a buffer amount? 

12 

Mr. WATT. We have had discussions with the Secretary of Treasury. You have him before you next week, and I think it would be 

more appropriate for him to talk about it. 

Senator TESTER. I will. Did he give you a number? 

Mr. WATT. Not a specific number, no. 

Senator TESTER. Would he be opposed to a buffer at all? Were 

they going to stay at the zero, or did they talk about it at all? OK. 

My 5 minutes is up. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Tester. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Thank you for holding this very important meeting. 

Director Watt, thanks for coming out this morning and sharing 

your thoughts and your views at the agency. 

Mr. WATT. Good to see you again. 

Senator SCOTT. You, too, sir. Not on an airplane, so this is good. 

Director Watt, you may know that South Carolina is a State 

where about 1.4 million people live in distressed communities, 

which is one of the reasons why I have spent a lot of time on what 

I call my ‘‘opportunity agenda,’’ looking for ways to help folks leave 

those distressed communities and really experience their economic 

potential. And much of climbing the economic ladder in this country, most of us actually would even suggest that living the American dream means owning your own home. And I think the reality 

of it is getting there is critically important, and I think there are 

ways for us to help folks get there and do it in a way that is logical 

and responsible. 

I know that there has been a lot of conversation around the fact 

that today we are seeing the lowest first-time home buyers since 

the 1970s. Multiple years in a row we saw a decline in first-time 

homeowners, and we know that those folks living in distressed 

communities are the folks who are disproportionately representing 

those folks who are not able to climb out and experience home ownership for the first time. 

We also know that the difference between the net worth of Americans can oftentimes be seen in the equity in that home, and renters’ net worth is somewhere around under $10,000, according to 

the Consumer Finance Report, and for those who own their home 

it is near $200,000, so at least 20 times more. 

And so the question is: How do we help those folks who are paying their rent on time, paying their utilities on time, use that data 

in evaluating their desire to own a home? There are, according to 

the statistics, about 26 million people who are credit invisible because the models that some use have not been updated to the latest 

model. I know that you have, I understand, been considering updating the credit scoring model that GSEs accept. Can you tell me 

how much progress you have made in that direction and what your 

thoughts are on going from what is for the most part an antiquated 

system that leaves so many millions of Americans without the creditworthiness to start the process of buying a home and what you 

think about heading toward that newer model sooner than later? 

Mr. WATT. Senator, we have set as an objective to try to get 

through this process by the end of this year. 

Senator SCOTT. Good. 

13 

Mr. WATT. But I will also tell you that we thought it was going 

to be a lot simpler than it has turned out to be. And the primary 

reason for that is anytime you start talking about changing the 

credit scoring models, you set off a whole sequence of events that 

are very costly for people to change. And changing back and forth 

between competing models is very difficult for the industry to do. 

So we have spent a lot of time trying to figure out what impact 

there would be to going to a new model. We know that new models 

will take into account different considerations. 

The enterprises themselves and their automated underwriting 

systems are trying to take some of those factors into account because, unlike what most people assume, the enterprises do not always rely on credit scores to make these decisions. They are factors 

in making these decisions, but they have independent evaluation 

tools called ‘‘automated underwriting systems’’ that can make these 

judgments. 

So we have been aggressively asking them to do the innovation 

that is necessary, but not be irresponsible because part of the reason that a lot of people are having this problem is that their credit 

was so damaged by bad loans that they got involved in before that 

they could not—they just have not been able to dig out. So it is a 

multifaceted problem. 

Senator SCOTT. The Chairman has just helped me realize that 

even on the Banking Committee 5 minutes is still 5 minutes. I am 

going to try to stretch that a little bit here. I will say two things. 

Number one, the fact of the matter is if you are paying your rent 

on time, your utilities on time, your cable on time, your cell phone 

on time, look, that is necessary information for making a credit decision. The primary, predominant way that someone buys a home 

is their credit score. About 76 percent of South Carolinians can be 

scored. If we were to go to the new model, we would see another 

16 percent of South Carolinians being able to be scored. 

Said differently, since the GSEs have such a large footprint in 

the market space, if you are not using the most current model, it 

is very difficult for 16 percent, nearly 900,000 South Carolinians, 

to be scored. 

Thank you. 

Mr. WATT. Thank you. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. 

Director Watt, I am going to shift gears a little and talk about 

servicing standards to start. How are you? I am the new Senator 

from Nevada. 

Mr. WATT. Good morning. 

Senator CORTEZ MASTO. Great to have you here. 

So servicing standards, FHFA has done quite a bit to improve 

servicing standards, but I remain concerned that we have not yet 

gotten to the core of the problem driving servicer misconduct. In 

2011, FHFA released a white paper looking to overhaul the way 

the GSEs pay servicers but did not complete work in this space. 

The legal settlements and GSE rules have raised servicing standards. Servicers still stand to profit from default and foreclosure, 

while modifications are costly. Servicers also still have an incentive 

14 

to extract fees from both homeowners and investors, and homeowners are powerless to fire their servicer if they are not satisfied. 

Do you agree that we still need to address the way servicers are 

paid so that they do not profit more from foreclosures than from 

keeping families in their homes? And then let me follow up with 

a second question. Is FHFA going to do further work in this space, 

or is this up to Congress if we are undertaking housing finance reform? 

Mr. WATT. The answer to your first question is yes, I agree that 

something needs to be done in this space. It is a serious concern. 

We cannot do it alone as the enterprises because lenders have 

servicers, and they are the bulk of the people who compensate 

servicers. So if we try to do it alone, we just would not be able to 

get there without their consultation. 

Now, I do not know that there is a legislative solution to it, but 

we are working aggressively with the industry to try to get through 

this problem. Servicing used to be just collecting mortgage payments. During the crisis, it became a much, much more difficult exercise, and the compensation did not necessarily follow the complexity of it. So the industry has got to catch up on that. 

Of course, now we are moving back to a more normalized time 

where it might not be as work-intensive as it was during the crisis. 

So all of those factors go into evaluating how much you are going 

to pay a servicer for servicing a loan. That is the collection of the 

money, which is easy if people pay it on time. It is just an accounting thing. But—— 

Senator CORTEZ MASTO. Right. Director, I do not mean to cut you 

off—— 

Mr. WATT.——if they default—— 

Senator CORTEZ MASTO. I get it because Nevada was ground zero 

for the foreclosure crisis, and I will tell you servicers are more interested in the fees and costs that they could get from the foreclosure than they were actually making sure that the loan was performing. So I think we need to address that compensation structure 

for servicers, and I am hoping you are committed to helping us do 

that. 

Mr. WATT. Certainly. If you can find a legislative solution, I 

would certainly work aggressively with you to try to help because 

there is definitely movement needed in this area. 

Senator CORTEZ MASTO. OK, great. 

Now, let me ask one other question because I know my time is 

running out. Community banks, some of the up-front credit risksharing deals undertaken by the GSEs in recent years have benefited large banks that use a vertical integration model. In other 

words, the big banks originate the loans, they securitize them, and 

then they sell the risk off to the market. 

One concern that has been raised about this structure is that if 

it is scaled up too much, you may end up choking off small lender 

access to the mortgage market. In other words, small lenders cannot compete because they do not have large-scale operations or 

securitization affiliates. 

As Congress contemplates the next phase for GSE reform, do we 

need to be mindful that credit risk-sharing deals, particularly those 

15 

involving up-front risk sharing, do not box out small and community-based lenders? 

Mr. WATT. We definitely need to be aware of that, and we are 

aggressively working on making sure that that does not happen, 

because one of the things we tried to do during conservatorship is 

make sure that large and small lenders are treated alike. 

Senator CORTEZ MASTO. Right. 

Mr. WATT. And that should also be true in the credit-risk transfer space. 

Senator CORTEZ MASTO. Thank you. And I know my time is up, 

but I will submit additional questions for your response as well. 

Thank you. 

Chairman CRAPO. Thank you. 

Senator Cotton. 

Senator COTTON. Thank you, Mr. Chairman. And, Mr. Director, 

welcome. It is good to see you on this side of the Capitol. Thank 

you for your service and for being here this morning. 

You and I recently discussed the issue of residential Property-Assessed Clean Energy loans, commonly referred to as ‘‘PACE 

loans’’—PACE liens, actually, since they get super lien status 

through local tax systems—and how they affect the housing market. Arkansas does not yet have these residential PACE loans, but 

many other States do. These loans are unusual not only because 

they are liens, but also because lenders are not following Truth in 

Lending Act requirements for disclosure. 

As a result, these loans are often high-interest, up to 12 percent 

for 25 years. They include home liens that jump priority even 

though these loans come after the mortgage. They contain no Federal disclosure or underwriting, and we have seen several examples 

of severe consumer abuse. For example, I am aware of a case of an 

86-year-old widow on Social Security dealing with severe dementia 

who was given a PACE loan without Federal disclosure or underwriting for more than $100,000, and she may now lose her home. 

To address this scandal, Brad Sherman in the House of Representatives and I have introduced legislation that would clarify 

that the Truth in Lending Act applies to PACE loans. I would like 

to discuss with you Fannie and Freddie’s position on these types 

of PACE liens. Do Fannie and Freddie purchase or refinance mortgages with PACE liens attached? 

Mr. WATT. We have a policy against doing that. The problem is 

that these liens are put on after our loans are already made, and 

they jump ahead of Fannie and Freddie’s lien position, which has 

been our primary concern. And, also, they show up in the tax office, 

not in the land registry office, so even after they are put on after 

we have bought the loans that were superior to them, they jump 

ahead. Then we do not get notice of that so that we can adjust for 

it. 

So there are multiple problems. Your bill would, I believe, address or start to address some of those problems, but our primary 

concern is that these so-called tax liens—you know, most people 

think of a tax as something that benefits a larger, wider group of 

people, not a single homeowner. And this runs counter to that theory because it treats them as a superior tax lien, which we have 

already taken into account anytime you make a loan. But then you 

16 

come back, and you might put a $25,000, $30,000 renovation for efficiency. It may be worth that. It may not be worth that. But we 

do not have any control over that, and it has really created a serious problem for the mortgage finance industry. And so we prohibit 

it, but there are limitations to even how we can even find out about 

them. 

Senator COTTON. Well, thank you very much for that, Director 

Watt. So my legislation and Representative Sherman’s legislation 

would address the consumer-facing problems that you have, oftentimes vulnerable consumers being exploited by predatory lenders 

by applying the Truth in Lending Act. But what I hear you saying 

is that even if that Act passed, you would still have these separate 

issues because, one, it is a super lien that takes over your first priority mortgage; two, it is retroactive, after those mortgages; and, 

three, as you say, it even occurs in oftentimes a separate record 

system, the tax system versus the land registry system. 

Mr. WATT. Right. 

Senator COTTON. But even if we address the consumer abuse, 

you would still have the problem of your financing system, which 

could create broader problems of liquidity in the mortgage market. 

Is that right? 

Mr. WATT. You are absolutely right. Now, I will give you another 

little piece of information. There is no rational reason, if you think 

about it, why a superior tax lien would be having an interest rate 

of 10, 11, 12 percent when a lien subordinate to it is going at 4 percent or 5 percent. That is the market rate. So there are preferences 

here that are really—it is just not something that is working in the 

marketplace. 

Senator COTTON. Well, thank you very much for protecting the 

taxpayers from what really is a scandalous program, Director Watt. 

We are trying to protect consumers, but as you say, there are real 

problems that the PACE loan system creates for taxpayers as well. 

I hope that you preserve that system. I have talked to your counterparts, Director Cordray and Secretary Carson as well, about this 

program to see what we can do to rein in these abuses. 

I thank you for your time. 

Senator BROWN. [Presiding.] Thank you, Senator Cotton. 

Senator Menendez. 

Senator MENENDEZ. Thank you. Director Watt, welcome. 

Mr. WATT. Thank you. 

Senator MENENDEZ. It was a privilege to serve with you in the 

House before. Your service is exemplary. 

As the Ranking Democrat on the Housing Subcommittee, I wanted to take this first opportunity that the full Committee has had 

on the question of housing finance systems to lay out a few principles that I think are important. 

One is to have a system that ensures broad affordability and access, including for those homeowners in high-cost States like New 

Jersey, strong mortgage servicing standards that work to keep borrowers in their homes and foreclosure prevention options that 

provide homeowners with sustainable modifications; of course, the 

protection of taxpayer dollars; equitable access for lenders of all 

sizes so we do not overly concentrate the market in the largest institutions; and clear obligations to serve low- and moderate-income 

17 

borrowers and support the development and preservation of affordable housing. I am going to look forward to work toward those 

goals with those who have similar views. 

My home State of New Jersey continues to struggle with underwater foreclosures, and from 2007 to 2016, 85,000 New Jersey residents lost their homes to foreclosure; 3.2 million homes around the 

country still have underwater mortgages, including more than 9 

percent in New Jersey. 

In 2014, FHFA announced that it, Freddie Mac, and later Fannie 

Mae would sell off delinquent loans in bulk in order to reduce risks 

to taxpayers and to help families stay in their homes. The enterprises have sold off more than 11,000 loans in New Jersey, and 

there are recent plans to do more. 

So I was extremely pleased in March to see New Jersey Community Capital win the bid on a community impact pool of 158 loans 

in the New Jersey and New York area. In my mind, it is clear that 

community-oriented organizations like New Jersey Community 

Capital, with vested interests in the neighborhood improvements, 

can achieve outcomes that mutually benefit borrowers, distressed 

communities, and the enterprises themselves. 

So what I want to know from you is what FHFA and the enterprises can do to provide greater access to loan sales for communityoriented institutions like New Jersey Community Capital who are 

better positioned to help borrowers stay in their homes. And I understand that Fannie Mae is prohibited from entering into direct 

sales of assets, but it could offer pools for nonprofit bidders, for example. Given the proven track record of an entity like New Jersey 

Community Capital, such pools would ensure greater community 

benefits and outcomes for loans sold through the program. 

So I would like to hear what you think could be done better, and 

I would like to encourage FHFA to push Fannie Mae to pursue 

loan sales exclusively for nonprofits. 

Mr. WATT. So this is an area we have done a lot of work in, and 

to be clear, one purpose was to get risk off of the enterprises’ books. 

But a more important purpose was to get these loans into the 

hands of people who had more ability than we had, Fannie and 

Freddie had, because of our statutory limitations to do the kind of 

innovative community preservation and stabilization work. 

So we have always had as an objective trying to get these loans 

to people who are responsible, which is why we have gone back and 

changed the criteria for bidders to write in certain requirements 

that they have to comply with, whether they are community-based 

or whether they are big purchasers. 

So what we did is we have reduced substantially the size of the 

pools because the biggest impediment to nonprofits is just that nonprofits generally are nonprofits, they do not have money. And so 

you need money to buy these nonperforming loans off of our books. 

We are statutorily obligated not to give them away. We cannot do 

that. So reducing the—— 

Senator MENENDEZ. And that is not what I am arguing for. 

Mr. WATT. Yeah, I understand. Reducing the size of the loan pool 

was very critical. In fact, I think eight or nine of the community 

loan pools have been won by the organization in your State. 

18 

And I will tell you what else we have done. We have met with 

local governments who were writing to us or State governments 

who were writing to us saying you should quit selling these loans 

to big Wall Street firms. And our response to them is, OK, if you 

would buy them, you have a vested interest in community stabilization, you are closer to the community, we can identify the 

loans in your State, and you could help the nonprofits, or you as 

an entity, as a State or local government, could get into this space. 

And we are close to dealing with the State of New York because 

the bulk of these loans really are in Florida, New Jersey, New 

York—you know, five States are where the bulk of them are. 

So we are trying to be as aggressive and innovative in this space 

as we can be because we share the objective of getting them and 

having these decisions about stabilizing communities made as close 

to the neighborhoods as the decisions can be made. 

Senator MENENDEZ. Well, we look forward to working with you 

and suggesting some other ideas to achieve that. It is also not only 

about community stabilization; in many cases, it is also about the 

reality of communities of color being able to have a place to continue to call home. 

Thank you, Mr. Chairman. 

Senator BROWN. Thank you, Senator Menendez. 

We are going to work through the roll call, which just began, and 

Senator Crapo will return shortly. Senator Tillis? 

Senator TILLIS. Thank you, Senator Brown. Mel, it is good to see 

you. You would not remember this or necessarily know it, but the 

first Congressman I ever met was you in 2004 when I was a 

Cornelius commissioner, and you were very gracious and attentive 

in our discussions we had in your office. I remember that well, and 

I appreciate your indulgence there, and your indulgence now. 

Mr. WATT. I am still one of your constituents. 

Senator TILLIS. I know you are. 

[Laughter.] 

Senator TILLIS. Born in Steele Creek. And, Mel, I think that you 

are right in the position that you took that we have got to come 

up with the solution. But I have to believe that the work that you 

have done—you mentioned in response to one question that you 

have implemented enterprise reforms—that the best way for us to 

get to a bipartisan something that ultimately comes out of Congress is to be very much instructed by the views of the White 

House and the views of your organization in terms of boundaries 

or priorities. Do you agree with that? And what would you envision 

as a good first step so that—we have seen proposals over the past 

couple of years. They have not moved forward—but to kind of get 

a universe of what the good ideas are and maybe some things that 

would not be based on your on-the-ground experience? Could you 

talk a little bit about that? 

Mr. WATT. Senator, I have gotten a lot of criticism because I took 

FHFA out of the housing finance discussion because it seemed to 

me that our role was to manage the enterprises in conservatorship 

in what I affectionately called ‘‘the here and the now.’’ And so we 

have never developed an agency position on these things. But I 

agree with you, if somebody asked us to do that, we have a lot of 

experience. It is just not in our statutory mandate. And I have not 

19 

wanted to—you know, people get critical when I get out there and 

start advocating for certain principles in housing finance because 

I have not been asked to do that and it is not part of my statutory 

mandate. 

Senator TILLIS. I admire the fact that you are staying within the 

lanes. That is not necessarily always the case in every agency, so 

I appreciate that. But in this case, you have expertise that I think 

would be very helpful, and rather than drilling down on the details 

in 2 minutes and 30 seconds left, the—— 

Mr. WATT. If you all asked me to do it, I would try to be a lot 

more aggressive in that space, yes. 

Senator TILLIS. I think it would be helpful, particularly as it relates to when you have discussions about where do we go forward 

with GSE reform, the end state of Fannie or Freddie or some newly 

combined institution, those sorts of things I think could be very, 

very helpful to get your insights on the role that you have played 

over the past few years. 

Mr. WATT. Yes. 

Senator TILLIS. And we are going to need that help. 

I do have one question that really just relates to the delay, the 

recent delay in pushing back the—I think it is the underlying CSS 

system under CSP, but it is being pushed back into 2019. There 

are some who have expressed concern that there may not be a commitment to moving forward with that, but I think that even in your 

written testimony, you said ‘‘when,’’ you did not say ‘‘if.’’ So it is 

your intention; it is just a matter of your working through technical 

difficulties—— 

Mr. WATT. Absolutely. This is a major, major undertaking to 

build that platform, and we have learned a lot, and we have tried 

to stay on a schedule. But nobody should read that we are not committed to the CSP. 

Senator TILLIS. And with the delay, do you feel like the pushback 

to 2019 is an achievable—how would you rate the soundness of 

that implementation? Because, as you know, the industry—a lot of 

other stakeholders have to invest a lot of time in it, and planning, 

and I am just trying to get some idea of whether or not that needs 

to be relooked or if that is a relatively sound date moving forward 

for planning purposes. 

Mr. WATT. I think it is sound, and I think we actually built a 

little leeway into the timeline because we did not want to go back 

and re-extend again. So we built in some time. We just added actually 6 more months. 

Senator TILLIS. The end of 2018 to mid-2019? 

Mr. WATT. Right. So I think we will be ready, and it is critically 

important and it is absolutely necessary to get to a single security 

which will save the taxpayers a lot of money, will help support the 

TBA market, and increase liquidity in the market. So there is no 

question about that. We are absolutely committed to it. 

Senator TILLIS. Well, thank you. And with the Chair and the 

Ranking Member, we will be discussing how we can actually engage you to get you to a point where we are fully harvesting your 

knowledge and expertise and opinions on how we move forward, because it is going to be critically important if we are going to get 

20 

a bipartisan solution that actually fulfills what I think is our obligation to move forward with reform. 

Thank you. 

Mr. WATT. Thank you. 

Chairman CRAPO. [Presiding.] Thank you, Senator Tillis. 

Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. And I want to 

say to my dear friend, Congressman Watt and Director Watt, how 

pleased we are to have you here and what a fine job that you have 

done in this position. We are grateful for your service to our country. 

Mr. WATT. Thank you. 

Senator DONNELLY. The first thing I want to ask you is on the 

quarterly dividends to Treasury—and I know you are going to start 

putting a buffer in as well that you had talked about a little bit 

earlier. Do you expect that that flow will be positive for the foreseeable future as you look at the markets? 

Mr. WATT. I expect it to, yes. But, you know, there are some factors that I outlined in my opening statement that could adversely 

impact that, and especially when it is done on a quarterly basis, 

those fluctuations can be exaggerated. 

Senator DONNELLY. One of the areas for my State that is important is manufactured housing, and I have encouraged your agency 

to finish the duty-to-serve rule for many years because I believe it 

will increase affordable home ownership, particularly in rural 

areas. The pilot chattel program for manufactured housing is a 

good start, but I encourage you to expand those efforts, and I am 

encouraged that the duty-to-serve is making progress. 

How do you see that rule impacting manufactured housing, particularly with chattel lending? 

Mr. WATT. I think having a duty-to-serve rule and approaching 

it in the way we are approaching it is the responsible way to do 

it, to do piloting in this area, because it is an area that Fannie and 

Freddie have not been involved in, certainly not in the last 8, 10 

years during conservatorship. And so it is a specialized market, 

and we have to get involved in it in a responsible way. And I believe that if we do that, the standards for the industry will actually 

be raised. And so we are just pushing the two enterprises to look 

at ways to do this responsibly. Do not just wade in there as some 

people wanted us to do and try to do the same thing in the chattel 

space that we do in the fixed housing space, right? Because there 

are different challenges and different obstacles and there are different risks associated with it. And we have to responsibly assess 

those risks and be able to meet them and price them appropriately. 

Senator DONNELLY. When you look at affordable home ownership, which I know has always been one of your cornerstones, various legislative proposals we have heard have been offered that 

would change the GSEs from the current status. One of my fears 

is that if the wrong changes are made, it could endanger the American dream for middle-class families who could be priced out of a 

mortgage loan. 

Do you share concerns around the 30-year fixed-rate mortgage 

that those changes could make that more difficult or could lead to 

higher interest rates or make it harder to borrow? 

21 

Mr. WATT. Well, I think the 30-year fixed-rate mortgage has become a standard for American homeowners, and it is important to 

retain that. How it gets retained or what is necessary to retain it 

I think is a subject that this Committee and Congress will have to 

address. But I do think that it is an expectation that the American 

people have because it has always been there. 

Senator DONNELLY. What are the changes to the current system 

that worry you the most in terms of maintaining accessibility and 

affordability that you have heard? 

Mr. WATT. Well, I mean, I think a lot of the plans that I have 

seen have some elements of trying to protect affordability, and I do 

believe that that is important to do, and I think the American people believe that it is important to do. So how that gets done and 

how it gets structured in housing finance reform I think is more 

in the housing finance reform space than it is in the conservatorship space. 

Senator DONNELLY. I want to commend you for your leadership, 

for your steering this into a very stable, solid position, that you 

have done a strong job in trying to follow the mandates that are 

there, and you have taken a terrific leadership position. And, 

again, I want to just say how grateful I am for your friendship as 

well. 

Mr. WATT. Thank you so much. 

Senator DONNELLY. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Donnelly. 

And, Director, you may have seen everyone disappear here. 

There is a vote going on. 

Mr. WATT. I was aware of that. 

[Laughter.] 

Chairman CRAPO. I do expect some Senators to return, and while 

we are waiting for some of them, I will take another turn at questions. 

I want to return to the issue that Senator Corker discussed with 

you. As I understand it, according to the Preferred Stock Agreements, Treasury has committed to buying senior preferred stock to 

ensure that Freddie and Fannie maintain a positive net worth. And 

there is currently $258 billion of Treasury assistance under these 

agreements that can be accessed. 

Senator Corker—I do not want to speak for him, but as I understand his point, he is saying that the markets know that this 

agreement is in place and that this option for the conservatorship 

is available if there is a problem, as you have described potentially 

could come. I understand you to have concern about whether—well, 

I guess what are your concerns about using that option to deal with 

a problem if there is an issue that arises? 

Mr. WATT. I think, Senator, Mr. Chairman, when you say the 

markets know, I think if you ask most people out in the public, 

there is actually the opinion that there is an unlimited guarantee 

to this space, and that is not true. And if you continue to erode the 

amount of the backing, I think that becomes more apparent to investors, and it runs the risk that it could start to have an impact. 

And that is all I have said, and so I think it is important not to 

draw more because if you draw more, it will reduce that explicit 

dollar amount of backing. It is already out of whack because—— 

22 

Chairman CRAPO. And create some unease in the market. 

Mr. WATT. Right. It is already out of whack because if you look 

at it, Freddie is substantially smaller than Fannie, but Freddie actually has more backing than Fannie does. 

Chairman CRAPO. So let me ask you, in that context then, what 

is the solution? Is it to stop sweeping as much—would you recommend that the Treasury agreement for the sweep be adjusted so 

that the buffer could be created? Or what would you think would 

be the appropriate way to protect against this—— 

Mr. WATT. Well, I think there are several options that we can 

look at that are—they are not legislative options because the PSPA 

is a contractual agreement. And I think the appropriate conversations about those options really need to take place between us and 

the Secretary of Treasury. 

The problem is that if the Committee sends to the Secretary of 

Treasury the message that this is a no-no to have those discussions 

or to try to resolve this in a coordinated way, then it leaves it to 

us to have to unilaterally deal with it, which is something that I 

would prefer not to do. 

Chairman CRAPO. Which gets back to the dividend question in a 

sense. 

Mr. WATT. Right. But there are ways to address this by minor 

adjustments to the PSPA, and that is not a move toward recap and 

release. It is not an invasion of the prerogatives of this Committee. 

It is not an invasion into housing finance reform. But we have to 

have that leeway to do it, and if the two of us do not have it—it 

is a bilateral agreement. If the two parties cannot dance, then I 

have to—I may have to dance by myself. 

Chairman CRAPO. So if I understand—— 

Mr. WATT. And that is not a pleasant position to be in. 

[Laughter.] 

Mr. WATT. And it may not be pretty. But—— 

Chairman CRAPO. You have a good way of putting it. 

Mr. WATT. But I have the ultimate risk here, is the point that 

I keep trying to make, which is why I made the analogy to my 

automobile and the collision bag. Right? I mean, you know, somebody has to assume that ultimate risk, and right now, unless we 

can assume it together, it falls on—— 

Chairman CRAPO. When you say ‘‘we,’’ you are referring to you 

and Treasury? 

Mr. WATT. That is correct. 

Chairman CRAPO. So, first of all, let me say I appreciate what 

you have reiterated several times in this hearing, and I want to restate it, that any of the moves that you ultimately make, whether 

it be agreements with Treasury, whether it be a unilateral move, 

which I do not believe you should make, that those are not moves 

toward recap and release. 

Mr. WATT. And I made one important point today. 

Chairman CRAPO. That point is made, and I appreciate it being 

made. 

Mr. WATT. All right. 

Chairman CRAPO. I also believe that this conversation puts a 

highlight or an exclamation point on the other point—one of the 

other points that you have made today, which is that we need to 

23 

move expeditiously to resolve this issue here in Congress with 

appropriate housing finance reform. I think this really highlights 

that concern. 

That being said, I just want to delve a little deeper and clarify. 

I am hearing you say that you feel—and tell me if I am understanding you wrongly—that you feel that a draw on—or an action 

under the current agreements to sell additional preferred stock to 

Treasury, to keep that buffer in place should we end up in a problem, is a less preferable option or it would be received less favorably in terms of its market impact than an adjustment to those 

agreements entered into mutually between you and the Secretary 

of Treasury. Is that right? 

I guess my question is this: It seems to me that we have some 

preferred stock purchase agreements in place. If accessing the 

terms of those agreements is going to create market unease, would 

adjusting those agreements not also create market unease? 

Mr. WATT. Not to deal with a short-term loss situation. This is 

just about dealing with a short-term possibility of a loss. And I do 

not think the market would react to that. I think, you know, from 

everything I have heard, Senator, this reducing buffer was designed to put pressure on Congress to do housing finance reform. 

It was a 3-year, $3 billion down to—you know, it just went down. 

But if it gets to zero, there is no buffer there. There is no operating 

reserve that we can rely on. We would have to make the draw. 

Chairman CRAPO. Well, I understand that. 

Mr. WATT. And that would be, I think—it could be, and I should 

not say it would be. It could be unsettling to the market, and we 

cannot as conservator afford to have that happen because then you 

start to adversely affect the pricing of mortgages; you run the risk 

of having liquidity issues in the market. I mean, you know, it is 

just—— 

Chairman CRAPO. I understand. 

Mr. WATT. Now, it may be far-fetched. It may be—and people can 

talk about it in theoretical terms. But—— 

Chairman CRAPO. But you are concerned about the actual—— 

Mr. WATT. Right. 

Chairman CRAPO. Well, let me just say I tend to agree with Senator Corker, and perhaps the conversations you have had with me 

and him today can help to allay that worry in the marketplace, 

that your utilization of the terms of the existing agreements should 

not create any undue concern. 

That being said, I understand your point, and I think it just 

highlights that both you and the Secretary of Treasury need to 

work at this, and we in Congress need to work on getting a permanent solution in place. 

Mr. WATT. You do need to understand, Mr. Chairman, though, 

that a term of the existing agreement gives us the authority to either declare or not declare a dividend. So I—— 

Chairman CRAPO. And you are going to send me some legal authority on—— 

Mr. WATT. That is not what I am lobbying to do. I think a better 

solution to this would be a joint solution. 

Chairman CRAPO. I agree with that, and that is what I was getting to in my earlier questions. Thank you for that. 

24 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

I am going to go back to the 30-year fixed-rate mortgage. Do not 

sigh so heavily. I think I just want yes-or-no questions, Mel. 

Do you believe that a Federal backstop is necessary to ensure a 

30-year fixed-rate mortgage? 

Mr. WATT. I am sighing because our agency has not developed 

a position on that, and so any opinion I could give would be my 

personal opinion. And I have, since I took this position, just assiduously stuck to the notion that I should not be expressing my personal opinions as opposed to agency opinions. 

Senator HEITKAMP. I will tell you one of the greatest challenges 

we have in my State is housing, whether it is rural housing, whether it is affordable housing across the board, I have done economic 

roundtables, economic development roundtables. Number one, 

housing, access to housing, affordable housing. We cannot have 

rural development without housing. We cannot have economic development without housing. We need a workforce, and the workforce that comes to North Dakota needs to make sure that they can 

afford their house and afford a place to live and live in good neighborhoods. 

So I understand the sigh, and I probably know what it means. 

But the next question is, in the absence of a Federal backstop, 

what options would the middle-class family have for getting access 

to a home loan? 

Mr. WATT. Again, I think this Committee would have to define 

those options. And I want to go back and re-emphasize my position 

again. My responsibility as conservator is to manage in the state 

that we have now, and that is what I try to stick—‘‘stick to my 

knitting,’’ as they say. I think when you get into defining what will 

be necessary in the future, that is housing finance reform, and I 

think it is the Congress’ responsibility to do that. 

So I do not mean to sound like I am trying to avoid the questions 

that you are asking. I just do not want to be criticized, and once 

I left Congress, I did not think it was my prerogative anymore to 

express personal opinions about how legislative things needed to be 

done, and especially as long as I am the Director of an agency 

which has not developed an agency position on it. 

Senator HEITKAMP. When will you develop an agency position on 

this? 

Mr. WATT. Well, we would not unless you all ask us to do—if you 

ask us to do it, because it is not in our statutory mandate now to 

do future—— 

Senator HEITKAMP. So maybe we can get to this in a different 

way, and I would ask you whether your agency has conducted any 

analysis of what complete privatization would mean for access to 

mortgage credit and corresponding impact on middle-class families. 

Mr. WATT. I do not think our agency has conducted formal research on that. We are aware of literature, and we obviously have 

people in our agency who probably have great expertise and could 

develop such a position. 

Senator HEITKAMP. Well, I think that is the point. The point is 

your agency does have great expertise. No one in Government 

knows what is happening in the mortgage market, knows what is 

25 

happening in affordable housing—and I include HUD in this— 

knows what you know. You see it every day. You have the metrics. 

We need advice. We need information. And we are going to have 

a choice here. We are going to have a choice on whether we are 

going to take that all-important provision of the American dream, 

which is home ownership, and make it completely inaccessible for 

middle-class families. And that is a major initiative for us, and it 

is a major concern. 

And so at some point here, we do need to have some analysis 

using the data you have on what works and what would not work. 

We can listen to the mortgage bankers. We can listen to the lending community who express great concern about complete privatization. I think we had a proposal here, you know, starting out 

Corker-Warner, then it became Crapo-Johnson. But I think we 

have got to have your advice, and so you cannot play coy on this, 

and I know you—— 

Mr. WATT. Well, we are not being coy. 

Senator HEITKAMP. I am not saying that as a pejorative. 

Mr. WATT. Yeah. 

Senator HEITKAMP. I am just saying you have got to engage and 

give us advice and data that is going to help us make decisions. 

Mr. WATT. We regularly give technical advice. Any proposal that 

comes out, we will say, look, if you do this, it will have this impact. 

Senator HEITKAMP. So I just asked you if we completely 

privatized, what is the impact? 

Mr. WATT. Well, if that is a proposal that is out there—— 

Senator HEITKAMP. It is out there. 

Mr. WATT. Well, it is out there—— 

Senator HEITKAMP. It is called the ‘‘CHOICE Act.’’ 

Mr. WATT. I am not sure it is out there on this side of the Capitol. It may be out there on the other side of the Capitol. 

[Laughter.] 

Senator HEITKAMP. I am over my time, Mr. Watt. I am sure we 

will have more conversations about this in the future. 

Chairman CRAPO. Thank you. And, Senator Schatz, I apologize. 

I skipped over you. I apologize for that. You got here earlier than 

some of the other Senators, so it is your turn now. 

Senator SCHATZ. Thank you, Mr. Chairman. 

Director Watt, I want to talk to you about the role of Fannie and 

Freddie in financing multi-family housing and the importance of 

this sector for providing affordable housing. Multi-family housing is 

often overlooked when we talk about housing finance reform. 

I am aware that FHFA has been making an effort over the past 

few years to realign Fannie and Freddie’s activities with their core 

mission under the law of helping underserved communities such as 

low-income and rural communities. This includes their work on financing multi-family housing. 

Have you seen progress in motivating GSEs to finance more affordable multi-family housing for low-income families? 

Mr. WATT. Yes. When we capped the amount that they could do 

in the upper end and said you cannot do any more because then 

you would be taking business away from the private sector, they 

turned a substantial amount of attention to the affordable space. 

26 

And so, yes, we have seen substantial progress in that area, and 

I think you will continue to see progress. 

I am glad you focused on this because a lot of the questions 

sometimes assume that our responsibility as FHFA and Fannie and 

Freddie’s responsibility is only in home ownership. It is actually in 

access to affordable housing, and we are supposed to be agnostic 

really about whether it is home ownership or rental. Obviously, because most people think the American dream involves home ownership, there is more emphasis on that. But we are playing an active 

role in the affordable rental space, and the private sector is playing 

a very active role in the other part of the rental space. We control 

the amount that Fannie and Freddie play in that space. 

Senator SCHATZ. So there is a lot of talk on this Committee and 

elsewhere, when we talk about housing finance reform, about the 

sort of macro aspects of this, and I want to drill down on what we 

can do to build more multi-family units, apartment buildings, rentals, whatever it may be, because it strikes me that Heidi and I 

have the same problem, and yet our States are so different. And 

I see Chris Van Hollen from Maryland nodding as well. This is a 

problem in every State, rural and urban, and in every part of every 

State. 

And so the question I have is: Is there more that you can do administratively to push in this direction to sort of reorient your 

agency? And then the other question I have is: Is there any statutory impediment that we might be able to work on as we do reform? 

Mr. WATT. I do not think we have statutory impediments in this 

area. The one thing we have done to get more aggressive in this 

space, especially in rural communities, is the duty-to-serve rule, 

which obligates the enterprises to take aggressive steps to serve 

underserved areas. And a lot of the problems in this space are in 

underserved rural areas because Fannie and Freddie have not been 

backing manufactured housing. They do not do chattel lending. So 

the duty-to-serve rule is forcing them to look at in a responsible 

way how they might be able to do more with manufactured housing, which is a major part of the housing stock, especially in rural 

areas. 

So if we do not do something in that space, then we are missing 

an opportunity to support housing for people in rural areas. So we 

finally got—you know, the legislation was out there since 2008. A 

run was made at putting a rule out there in 2010, and then it was 

put on the back burner. We finally have finalized the duty-to-serve 

rule, and the first plans, proposed plans, for the GSEs have come 

forward in the last 2 weeks, in fact. 

Senator SCHATZ. Thank you. 

Chairman CRAPO. Thank you. 

Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. Director Watt, 

it is great to see you. 

Mr. WATT. Good to see you. 

Senator VAN HOLLEN. Thank you for your service in the Congress and your good stewardship at FHFA. And I want to thank 

you for exercising good and prudent judgment on behalf of the mission that you have been entrusted with. 

27 

We all know that families across the country were absolutely 

devastated by the financial meltdown. Five million Americans lost 

their homes, and the recovery has been uneven. And if you look at 

my State of Maryland, if you look at Baltimore City, Prince 

Georges County, and some of our rural areas, they are still not 

fully back on their feet. They are facing challenges of access to 

credit, foreclosure mitigation, neighborhood blight. 

Can you talk a little bit about the tools you have at your disposal 

to address these issues? And if you could also take a moment to 

discuss the progress we may be making with the Neighborhood 

Stabilization Initiative in Baltimore City. 

Mr. WATT. Well, we started Neighborhood Stabilization with Detroit, Chicago, and one other, and then we expanded it substantially, and one of the places we expanded it to was Baltimore because—and we just went down the list of the most vulnerable 

neighborhoods. We did not do this, you know, just off the top of our 

head. It was done very scientifically. 

So I think what that does is it gives Fannie and Freddie more 

latitude in how they dispose of properties in vulnerable neighborhoods. It gives them the opportunity to work with nonprofits who 

are in the community, and in some cases, where it is going to cost 

them more to go through a foreclosure process than the property 

is worth, it gives them even the opportunity to contribute housing. 

It has to be a financial decision, obviously. 

So I think we are making progress in all of the cities that we— 

and they are primarily cities because they were high-concentration 

areas that got hit very, very hard in the crisis. 

Senator VAN HOLLEN. Yes, thank you, and I look forward to 

working with you and your team on that, especially in Maryland. 

A question about the National Housing Trust, because one of the 

things the State of Maryland and some of our counties have used 

very effectively is the idea of housing trusts. And, of course, to be 

effective, housing trusts really require a source of dedicated revenue so that they can make decisions with their development partners and allow these projects to be capitalized in a timely manner. 

Last year, we saw, I believe, the first installment of funds from 

the National Housing Trust fund dollars. Can you talk about the 

importance of that fund and give us a sense of how you think it 

is going to be capitalized going forward? 

Mr. WATT. Well, it is on the statutes now, and it was suspended 

administratively, and I took a lot of heat for reinstating it. But it 

was a statutory mandate, and I did not see a reason not to follow 

the statute, as I told this Committee when I appeared before it in 

my confirmation process. And since that has occurred, in 2016 $382 

billion—million, I am sorry, million dollars not billion—has been 

contributed to the trust fund in 2016, and $455 million has been 

contributed in—based on 2016 earnings because it is always a year 

behind. So we do not have any control at FHFA about what happens with the funds after they go over there. They go part to HUD 

and part to Treasury. So we do not have any control over the disposition that has been made of those funds, but we did have the 

authority to make the decision to fund, to reverse the decision that 

had been made not to fund the Housing Trust Fund. And we made 

it, and I think it hopefully has served a useful purpose. 

28 

Senator VAN HOLLEN. Well, I want to thank you for making that 

decision. As you pointed out, that was consistent with the statute. 

I appreciate your moving forward, and I just want you to know 

that Maryland is using its allocation of those funds effectively. So 

thank you. I appreciate it. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Good to see you 

again, Director Watt. 

I am glad this Committee is tackling housing finance reform 

again. I will push the same point I have pushed since I joined the 

Senate in 2013. We need to end the Government conservatorship 

of Fannie Mae and Freddie Mac, and we need to do so in a way 

that protects taxpayers, establishes an explicit and paid-for Government guarantee, and provides more affordable housing options 

for people in Massachusetts and all across the country. 

Now, on that question of access, Director Watt, as you know, the 

CFPB’s current mortgage rules define certain loans as qualified 

mortgages, or QM, and offer lenders legal immunity for loans that 

meet the QM standards. But the CFPB also grants QM status to 

any mortgage that is eligible for purchase by Fannie Mae or 

Freddie Mac, which means that the underwriting criteria at Fannie 

and Freddie help define the scope of the QM rule and, accordingly, 

have a huge impact on the kinds of families that can get access to 

mortgage credit. 

Despite all of this, Fannie and Freddie’s underwriting algorithms 

and criteria are kept secret. So can you explain why it is reasonable to keep this information hidden given its importance both to 

the economy and to appropriate oversight of the mortgage market? 

Mr. WATT. I do not know that I can explain that to you, Senator, 

but I can have our agency explain it to you as we understand it. 

But I am not sure that I have focused on that as an issue. 

Senator WARREN. Well, let me suggest it this way then: I think 

it is an issue, and instead of explaining it to me, what I would really like to do is get a commitment as soon as we can that we would 

make this information public. 

Mr. WATT. Well, I would not make that commitment without 

knowing why it is not public and so—— 

Senator WARREN. I am glad to pursue that—— 

Mr. WATT.——that would be part of what we would be—— 

Senator WARREN. But I want to be clear. As long as these entities are in conservatorship and as long as their standards are setting the boundaries of our consumer Federal protection issues, I 

think it is important that they be public. We cannot exercise oversight without them. 

So let me ask another question, and that is about principal reduction. In the 2008 bank bailout, Congress required FHFA to 

adopt a plan, and I am going to read here, that ‘‘seeks to maximize 

assistance for homeowners and minimize foreclosures.’’ And Congress specifically required FHFA to consider principal reduction to 

achieve those goals. That was in 2008. And for years, FHFA did 

nothing, and people kept losing their homes. 

29 

And when you were nominated to run the agency in 2013, you 

said you would tackle principal reduction. I asked you about it 

repeatedly, but for 2 years after you were sworn in, you did not 

move an inch on this. 

Finally, in April of 2016, you announced a principal reduction 

program. That is 8 years and literally millions of foreclosures later. 

Even then, you used eligibility criteria that were so demanding 

that, by your own calculations, only 33,000 borrowers in the entire 

Nation would qualify for principal reduction. 

And, worse, you did not actually require services to reduce the 

loan principal for those 33,000 eligible borrowers. You only required them to ‘‘solicit borrowers eligible for a principal reduction 

modification’’ no later than October 15th of 2016. 

All right. We are now nearly 7 months past that October deadline. I have looked at FHFA’s quarterly foreclosure reports. I cannot find any information about how this program is working, so I 

just want to know: How many of those 33,000 eligible borrowers as 

of today have actually gotten a principal reduction? 

Mr. WATT. I cannot give you the exact number, but I can tell you 

it is a small number. The 33,000 is a small number, and I have 

tried to explain why that is so. We—— 

Senator WARREN. I get that the 33,000 is a small number. What 

portion of the 33,000—can you give me a ballpark? 

Mr. WATT. I will provide it to you. I just do not have it at my 

fingertips. 

Senator WARREN. Do you have a ballpark? Half? 

Mr. WATT. No, I do not think it is half. Actually, I think—— 

Senator WARREN. A quarter? 

Mr. WATT. I think our projections indicated that it would be 

more in the range of 15 to 20 percent would be who would likely 

be able to do this. 

Senator WARREN. So after Congress mandated a plan to maximize—— 

Mr. WATT. Well, you did not mandate that—wait a minute. 

Senator WARREN. We did in 2008. It is written in the statute. It 

says maximize—— 

Mr. WATT. But there is also a statute that—a countervailing provision in the statute that says we cannot do certain things that are 

not economically feasible. So the analysis I did—— 

Senator WARREN. I am sorry—— 

Mr. WATT.——to get to—— 

Senator WARREN. I am sorry, Director Watt—— 

Mr. WATT.——the 33,000 got to the people that we could do with 

justice to both statutes. 

Senator WARREN. For years—for years—people lost their homes 

because FHFA would not enforce the part of the bill that says give 

some relief to homeowners. And study after study showed that it 

was economically feasible to do that, and instead millions of people 

lost their homes. 

Mr. WATT. Senator, that is just not true now. What we did not 

do was principal reduction, but there are millions and millions of 

people that we have provided relief for whose homes were in jeopardy. So to say that we have not done anything in that space, just 

30 

because we did a modest principal reduction program, is just not 

true. 

Senator WARREN. Well, but you did not do the principal reduction program—— 

Mr. WATT. We did not do the principal reduction—— 

Senator WARREN.——for years and years and years—— 

Mr. WATT.——and I have explained that to you multiple times in 

this Committee why. 

Senator WARREN. You know, actually, it is interesting. You did 

not start out explaining it. You started out saying you would do it. 

I asked you in this hearing room over and over. I asked you originally at your confirmation hearing and at follow-up oversight, and 

you did not say we have already done something else. You said you 

would do principal reduction. 

Mr. WATT. Senator, I do not believe—— 

Senator WARREN. And now you—— 

Mr. WATT.——if you go back and look at the record, either at my 

confirmation hearing or at any point in this hearing, in the hearing 

where we discussed this, that I made that commitment to you. I 

said I would look at it, I would do it in accordance with the statute, 

and that is exactly what I have done. 

Senator WARREN. And now you are down to a few thousand people. You know, after the crisis, the money just flew out the door 

for the banks, billions and billions of dollars, as fast as people could 

sign the checks. But money for people, many of whom had been 

ripped off by those same banks, it was just one message of delay 

and no and we have to balance this other thing out, handwringing 

about moral hazard, excuses not to help people—— 

Mr. WATT. I certainly hope you are not blaming me for that. 

Senator WARREN. You were in charge for at least—— 

Mr. WATT. I did not create that situation. I tried to stop it when 

I was a Member of the House by getting people to quit making 

loans to people who could not afford to repay them. I mean, I was 

the—— 

Chairman CRAPO. We need to move on. 

Mr. WATT.——original author of the bill. So I do not know—I 

agree that all of those things have taken place, but to make it 

sound like for some reason I am responsible for that I think is unfair and untrue and unjust—— 

Senator WARREN. So let me say, Mr. Watt—— 

Mr. WATT.——and all of the ‘‘un’s’’ that I can think of. 

Senator WARREN. Mr. Watt, Mr. Watt, the people who preceded 

you certainly share the blame. They did nothing. But when you 

came in—you have been driving this bus since 2013, and on principal reduction, by your own numbers, at best a few thousand people have gotten help. And I think that is shameful. 

Chairman CRAPO. We need to move on. I have let this go on a 

bit so the two of you could get it out, but it is—— 

[Laughter.] 

Chairman CRAPO. It is out. Now it is Senator Reed’s turn. Senator Reed. 

Senator REED. Well, thank you, Mr. Chairman. 

Director, in your testimony you state, and I quote: 

31 

Like any business, the enterprises need some kind of buffer to shield 

against short-term operating losses. In fact, it is especially irresponsible for 

the enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the 

fixed dollar commitment the Treasury Department has made to support the 

enterprises. 

By ‘‘additional draw of taxpayer support,’’ what I hear you saying 

is that you want to prevent further taxpayer bailouts. Is that accurate? 

Mr. WATT. Well, there is that risk that additional draws could be 

misinterpreted by, and we have to guard against that risk, yes. 

Senator REED. So, in effect, what you want to do is have a buffer 

in your organization so that you can respond to changing conditions 

in the market and avoid—— 

Mr. WATT. That is correct. And not even changing conditions in 

the market, because we monitor closely changing conditions in the 

market. These are noncredit-related factors that are driving losses 

sometimes that have nothing to do with whether we are responsible or not. They are basically accounting the way you have to account for things and the timing of the accounting process. So it is 

really not even about losses. It is more about accounting things. 

Now, if tax reform were done, depending on the extent of the corporate tax reduction, there would be a dramatic impact, depending 

on—I mean on it, and we can calculate that. So that would be one 

of the factors that we would be monitoring regularly to see what 

is happening in that space. But this is a risk that—I do not want 

to make it sound like it is a likely thing to happen, because I think 

that could be misinterpreted. But as conservator, we do not have 

the luxury of assuming that risk. And you were not here earlier 

when I used the example of when I got the notice that the airbag 

on my car needed to be replaced, and everybody was telling me, 

‘‘Oh, no, that is not a problem. You are not going to have’’—but I 

was the responsible party in my family, and now I am the responsible party. I am driving these cars. Until Congress changes the 

cars that I am driving, I have to drive these cars, and I have to 

make them safe and guard against those kind of even remote risks 

that we have. 

Senator REED. Thank you. There was a discussion, obviously, of 

the principal reduction, but there are a number of loans—I am told 

59,000 nonperforming loans—which Fannie and Freddie have sold 

to the private sector, and they are subject either to some type of 

remediation or other efforts. Could you tell us what you have done 

to improve the borrower and neighborhood outcomes? I know principal reduction is one, but are there other things you have done? 

Mr. WATT. I wish Senator Warren was still here to hear this. 

One of the reasons we did nonperforming loan sales was that the 

private sector who buys these loans has substantially more flexibility than Fannie and Freddie have statutorily to do principal reduction. And it is part of the waterfall in the nonperforming loan 

sales program. They are required to consider that as an option if 

it would improve the ability of borrowers to perform on their loans 

and get those loans reinstated at some reduced interest rate or 

longer term or reduced principal amount. All of those things are in 

the nonperforming loan requirements that we have adopted. We 

could not do any more than we did as Fannie and Freddie, but we 

32 

could transfer the loans to the private sector, and they have substantially more flexibility, and that was one of the bases on which 

we did that. 

Senator REED. Just a final point, Mr. Director, that there is—we 

get, all of us get feedback from borrowers that they have not been 

helped. Can you—and I presume you have sort of some metrics 

about the different types of measures that have been taken, and, 

again, as you described, a lot of it is within the purview of the 

banks or the holders of the notes because they have more flexibility. But if you can give us a complete picture, I think that would 

help us in terms of, if it is principal reduction or interest reduction—the ultimate number, I think, is how many people are still 

in their homes and can stay in their homes even though, you know, 

they have had difficulty. 

Mr. WATT. That is the objective. 

Senator REED. Yes. 

Mr. WATT. We do keep metrics on all of those things because 

they are required to report—the buyers of these nonperforming 

loans are required to report to us on the outcomes, because there 

are requirements that they assume when they purchase the loans, 

and the only way we can monitor compliance is to know what the 

actual performance is. And their results are substantially better 

than the results that we would have gotten had we maintained 

those nonperforming loans on the books of Fannie and Freddie. 

Senator REED. I think that could be helpful. I think one other— 

and you may not keep this metric, and I do not require a response, 

but if you have data that shows what happens when they foreclose 

and—you know, because if there is an incentive to foreclose because you can sell the exact same property at a much higher 

price—— 

Mr. WATT. I think we have removed that incentive, but, yes, we 

can provide that. 

Senator REED. Thank you, Director. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you very much, Senator Reed. 

And, Director Watt, that is the end of the questions. You have 

been here essentially 2 hours and given us your time and responded openly and honestly to these questions. 

Did you want to say anything else, Senator Brown? 

Senator BROWN. Thank you, Director. 

Chairman CRAPO. Before we wrap it up, let me just say to all 

Senators, we will have 7 days—and as you know, there will be 

some additional questions in writing that I ask you to respond to 

promptly, Director Watt, one of which is the one I have already 

asked about the legal justification for believing that you unilaterally can issue dividends. 

Mr. WATT. Yes. 

Chairman CRAPO. With that, I again want to thank you. We are 

obviously heavily interested in and engaged in this issue, and we 

will continue to work with you as we move forward to develop the 

best housing policy we can develop for this country. 

Mr. WATT. Thank you very much. 

Chairman CRAPO. Thank you, Director Watt. 

This hearing is adjourned. 

33 

[Whereupon, at 11:58 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

34 

PREPARED STATEMENT OF MELVIN L. WATT 

DIRECTOR, FEDERAL HOUSING FINANCE AGENCY

MAY 11, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank 

you for your invitation for me to discuss the critically important and timely hearing 

subject ‘‘The Status of the Housing Finance System After Nine Years of Conservatorship’’ and to answer any questions you may have about the work we are 

doing at the Federal Housing Finance Agency (FHFA). 

As the Members of this Committee are well aware, since September 6, 2008, 

Fannie Mae and Freddie Mac (the Enterprises) have been operating in 

conservatorships under the direction and control of FHFA and with backing of the 

U.S. taxpayers with explicit dollar limits as set out in the Senior Preferred Stock 

Purchase Agreements (the PSPAs) with the U.S. Department of the Treasury. As 

a result of prior Enterprise draws totaling $187.5 billion against the PSPA commitments, the PSPA commitment still available to Fannie Mae is now limited to $117.6 

billion and the commitment still available to Freddie Mac is $140.5 billion. Additional draws will reduce these commitments further; however, dividend payments 

do not replenish or increase the commitments under the terms of the PSPAs. 

September 6 of this year will mark the beginning of the tenth year that the Enterprises have been in conservatorships. These conservatorships have been unprecedented in scope, complexity, and duration, especially when you consider that the Enterprises support over $5 trillion in mortgage loans and guarantees. Since January 

6, 2014, when I was sworn in as Director of FHFA, the conservatorships of the Enterprises have been under my direction. 

I pledged to the Members of this Committee during my confirmation hearing that 

I would carry out my responsibilities as Director in accordance with the statutory 

mandates given to FHFA as regulator and conservator. I have consistently tried to 

do just that. I have found that FHFA and the Enterprises operate with responsibilities that make it impossible to satisfy everyone and sometimes make it impossible 

to satisfy anyone. However, I believe that most stakeholders would agree that we 

have responsibly balanced and met FHFA’s multiple statutory mandates to manage 

the Enterprises’ day to day operations in what I often refer to as ‘‘in the here and 

now.’’ These statutory mandates obligate us to: 

• Conserve and preserve the assets of the Enterprises while they are in conservatorship; 

• Ensure that the Enterprises provided meaningful assistance to the millions of 

borrowers who struggled to save their homes in the midst of the economic and 

housing crisis, as required in the Emergency Economic Stabilization Act; and 

• Oversee the prudential operations of the Enterprises and ensure that they continue to carry out their ongoing statutory missions in a safe and sound manner; 

in a manner that fosters liquid, efficient, competitive, and resilient national 

housing finance markets; and in a manner that is consistent with the public 

interest. 

Many Reforms of the Enterprises Have Taken Place Through Conservatorship 

I have said repeatedly, and I want to reiterate, that these conservatorships are 

not sustainable and they need to end as soon as Congress can chart the way forward 

on housing finance reform. However, it is important for all of us to recognize that 

the conservatorships have led to numerous reforms of the Enterprises and their operations, practices, and protocols that have been extremely beneficial to the housing 

finance markets and have reduced exposure and risks to taxpayers. 

It is critically important for the Members of this Committee to be well aware of 

these reforms because you will have the responsibility to ensure that the reforms 

are not disregarded or discarded because of assertions some will make that the Enterprises now are the same or mirror images of the Enterprises that FHFA placed 

into conservatorship almost 9 years ago. I can assure you that such assertions would 

be unfounded. 

We have reported extensively on some of the important reforms we have made 

and on our conservatorship priorities in our 2014 Conservatorship Strategic Plan; 

in our annual scorecards, including the 2017 Scorecard; and in our regular status 

updates, including three reports released earlier this year—2016 Scorecard Progress 

Report, Credit Risk Transfer Progress Report, and An Update on the Implementation 

of the Single Security and the Common Securitization Platform. 

Let me highlight some of the most important changes and reforms that have 

taken place during the conservatorships. 

35 

1. Board leadership and management: When the Enterprises were placed 

into conservatorship, FHFA replaced most members of their boards of directors and many senior managers. Both through conservatorship and through 

our onsite regulatory oversight of the Enterprises, FHFA has required Fannie 

Mae and Freddie Mac to make a number of changes to improve risk management, update many of their legacy systems, prioritize information security 

and data management, and better address other areas of operational risk. 

FHFA has also taken steps to prohibit certain activities, such as lobbying, by 

either Enterprise. The Enterprises’ board of directors and senior management 

have taken great strides to implement these improvements in coordination 

with FHFA. 

2. Alignment of certain Enterprise activities: While some aspects of their 

pre-conservatorship competition resulted in negative consequences or in a 

race to the bottom, FHFA has aligned many practices and policies on which 

the Enterprises are no longer allowed to compete, such as loss mitigation 

standards and counterparty eligibility standards. However, based on expectations established in conservatorship and regularly emphasized by FHFA to 

the Enterprises’ boards and managements, we expect them to compete vigorously to find and implement innovative ways to make the housing finance 

markets more efficient and liquid, on customer service provided to Enterprise 

seller/servicers, and on the quality of their business practices. 

3. Sound underwriting practices: The Enterprises are required to emphasize 

sound underwriting practices in their purchase guidelines, and these practices 

facilitate responsible access to credit and sustainable home ownership for 

creditworthy borrowers. The Enterprises’ serious delinquency rate on singlefamily loans is at its lowest level since May 2008. 

4. Appropriate guarantee fees: Guarantee fees have been increased by two 

and a half times since 2009. The guarantee fees are set to reflect the cost of 

covering credit losses in the event of economic stress or a housing downturn 

and the administrative expenses of running the companies. While the Enterprises cannot retain capital under the PSPAs, we also set their guarantee fees 

under the assumption that they are earning an appropriate return on capital. 

FHFA regularly reviews the Enterprises’ guarantee fees to ensure that they 

remain at appropriate levels. 

5. Smaller portfolios for core business purposes: The retained portfolios of 

the Enterprises have been reduced over 60 percent since 2009 and both Enterprises are ahead of schedule to meet the 2018 maximum portfolio limits 

established in the PSPAs. The Enterprises’ multiyear retained portfolio plans 

to achieve these reductions have focused on selling less liquid assets and investment assets, in addition to prepayments that have occurred over time. 

Their retained portfolios are now focused on supporting the core business operations of the Enterprises, including aggregation of loans from small lenders 

to facilitate securitizations and holding delinquent loans in portfolio so investors can be made whole, servicers can facilitate loan modifications, and borrowers can stay in their homes whenever possible. 

6. New single-family credit-risk transfer programs share credit risk 

with private investors: The Enterprises have developed and continue to refine credit-risk transfer 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. The Enterprises are also developing their 

single-family CRT programs with the objective of cultivating a mature and robust credit-risk transfer market, including by building and expanding a diverse investor base that will increase the likelihood of having a stable CRT 

market through different housing and economic cycles. 

7. New securitization infrastructure: Through a joint venture formed by the 

Enterprises under FHFA’s direction, the Common Securitization Platform 

(CSP) is now operating and all of Freddie Mac’s existing single-family, fixedrate securitizations are being processed using the CSP. All parties are now 

well down the multiyear path toward the CSP becoming the infrastructure 

used by both Enterprises to issue a common single mortgage backed security. 

When fully implemented, we believe these changes will facilitate deeper liquidity in the housing finance market, support the to-be-announced market, 

and eliminate costly trading differences between the Enterprises’ securities. 

The Enterprises are developing the CSP with an open architecture such that 

it will be usable by other market participants. 

36 

8. Responsible access to credit supporting sustainable home ownership: 

The Enterprises have worked closely with FHFA on a number of initiatives 

designed to support responsible access to credit and sustainable home ownership. For example, they undertook a multiyear process to revamp their Representation and Warranties Framework to reduce uncertainty and support access to credit throughout the Enterprises’ existing credit boxes. We are also 

requiring the Enterprises to conduct analyses about access to credit barriers 

and to develop pilots and initiatives to improve access to credit in a safe and 

sound manner. Another recent area of focus has been implementing the Enterprises’ statutory duty to serve three underserved markets—manufactured 

housing, affordable housing preservation, and rural housing. The Enterprises 

posted their first draft Duty to Serve Plans for public input just this week. 

9. Multifamily market liquidity and affordable rental housing: The Enterprises’ multifamily programs, which performed well during the crisis while 

other parts of the housing market struggled, continue to share a substantial 

amount of credit risk with private investors and continue to provide needed 

liquidity for the multifamily market with major emphasis on affordable rental 

housing and underserved markets. 

10. Loss mitigation, foreclosure prevention, and neighborhood stabilization: The Enterprises have worked with FHFA to develop effective loss mitigation programs that minimize losses to the Enterprises and allow borrowers 

to avoid foreclosure whenever possible. This has included aligning the Enterprises loss mitigation standards and developing updated loan modification 

and streamlined refinance products to follow the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP). 

The Enterprises are also effectively pursuing efforts to stabilize neighborhoods, including through the Neighborhood Stabilization Initiative. 

11. Level playing field for lenders of all sizes: The Enterprises have eliminated volume-based discounts for larger lenders, which has leveled the playing field for lenders of all sizes—small, medium, and large. This new approach, along with supporting the ability of small lenders to purchase loans 

through the cash window, has significantly increased the percentage of Enterprise acquisitions from smaller lenders during conservatorship. 

Congress Urgently Needs To Act on Housing Finance Reform 

While many reforms of the Enterprises’ business models and their operations have 

been accomplished through conservatorship, FHFA knows probably better than anyone that these conservatorships are not sustainable and we also know that housing 

finance reform will involve many tough decisions and steps that go well beyond the 

reforms made in conservatorship. So I want to reaffirm my strong belief that it is 

the role of Congress, not FHFA, to make these tough decisions that chart the path 

out of conservatorship and to the future housing finance system. 

Among the important decisions Congress, not FHFA, will need to make as part 

of housing finance reform are the following: 

• How much backing, if any, should the Federal Government provide and in what 

form? 

• What process should be followed to transition to the new housing finance system and avoid disruption to the housing finance market, and who should lead 

or implement that process? 

• What roles, if any, should the Enterprises play in the reformed housing finance 

system and what statutory changes to their organizational structures, purposes, 

ownership and operations will be needed to ensure that they play their assigned 

roles effectively? 

• What regulatory and supervisory structure and authorities will be needed in a 

reformed system and who will have responsibility to exercise those authorities? 

I reaffirm my belief that it is the role of Congress, not FHFA, to make those housing 

reform decisions and I encourage Congress to do so expeditiously. 

FHFA Must Continue To Meet Its Obligations While Housing Finance 

Reform Takes Place 

The final thing I want to discuss is the most significant challenge FHFA faces as 

conservator while Congress continues to move ahead on housing finance reform. I 

first discussed this challenge publicly in a speech I delivered at the Bipartisan Policy Center on February 18, 2016. The challenge is that additional draws of taxpayer 

support would reduce the amount of taxpayer backing available to the Enterprises 

under the PSPAs and the foreseeable risk that the uncertainty associated with such 

37 

draws or from the reduction in committed taxpayer backing could adversely impact 

the housing finance market. Unfortunately, the challenge is significantly greater 

today than it was last year and will continue to increase unless it is addressed. Let 

me explain why that is so. 

At the time I delivered my speech at the Bipartisan Policy Center in 2016, each 

Enterprise had a $1.2 billion buffer under the terms of the PSPAs to protect the 

Enterprise against having to make additional draws of taxpayer support in the 

event of an operating loss in any quarter. Under the provisions of the PSPAs, on 

January 1, 2017, the amount of that buffer reduced to $600 million and on January 

1, 2018, the buffer will reduce to zero. At that point, neither Enterprise will have 

the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support. 

This is not a theoretical concern. GAAP accounting for any number of noncredit 

related factors in the ordinary course of business regularly results in large fluctuations in Enterprise gains or losses. Some of these noncredit related factors include 

interest rate volatility; the accounting treatment of derivatives used to hedge risks; 

reduced income from the Enterprises’ declining retained portfolios; and the increasing volume of credit-risk transfers which, while supporting our objective of transferring risk and opportunity to the private sector, also transfers current revenues away 

from the Enterprises. We also know that a short-term consequence of corporate tax 

reform would be a reduction in the value of the Enterprises’ deferred tax assets, 

which would result in short-term, noncredit related losses to the Enterprises. The 

greater the reduction in the corporate tax rate, the greater the short-term losses to 

the Enterprises would be. In addition to the regular and ongoing prospect of noncredit related losses, even minor housing market disruptions or short periods of 

distress in the economy could also cause credit-related losses to the Enterprises in 

a given quarter. 

Like any business, the Enterprises need some kind of buffer to shield against 

short-term operating losses. In fact, it is especially irresponsible for the Enterprises 

not to have such a limited buffer because a loss in any quarter would result in an 

additional draw of taxpayer support and reduce the fixed dollar commitment the 

Treasury Department has made to support the Enterprises. We reasonably foresee 

that this could erode investor confidence. This could stifle liquidity in the mortgagebacked securities market and could increase the cost of mortgage credit for 

borrowers. 

FHFA has explicit statutory obligations to ensure that each Enterprise ‘‘operates 

in a safe and sound manner’’ and fosters ‘‘liquid, efficient, competitive, and resilient 

national housing finance markets.’’ To ensure that we meet these obligations, we 

cannot risk the loss of investor confidence. It would, therefore, be a serious misconception for Members of this Committee, or for anyone else, to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support 

either as interference with the prerogatives of Congress, as an effort to influence 

the outcome of housing finance reform, or as a step toward recap and release. 

FHFA’s actions would be taken solely to avoid a draw during conservatorship. 

Thank you again for the opportunity to address this Committee. Please be assured 

that FHFA and the Enterprises stand ready to assist the Committee in any ways 

we are asked to do so. I look forward to answering your questions. 

(39) 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM MELVIN L. WATT 

Flex Mod Program that replaces HAMP for the GSEs 

Q.1. Director Watt, Ohio was one of the hardest hit States during 

the Great Recession and servicing problems were one of the many 

challenges facing homeowners as they struggled to keep their 

homes with reduced work hours and lost jobs. FHFA and the GSEs 

are rolling out the flex mod—a new streamlined modification program that limits the paperwork required of borrowers. 

How will FHFA track the performance of servicers in implementing this program? 

A.1. FHFA requires Fannie Mae and Freddie Mac (‘‘the Enterprises’’) to monitor the performance of each of their servicers. Both 

Enterprises have scorecards they use to monitor servicer performance on multiple metrics, including efficiency rates for home retention and liquidation, various roll and transition rates from one 

stage of delinquency to another, and performance of loans receiving 

permanent modifications. FHFA receives quarterly reports on aggregate modification performance that includes information on the 

number of serious delinquencies for each of the top servicers and 

their performance on reducing those delinquencies through loss 

mitigation options, including Home Affordable Modification Program (HAMP) and other foreclosure alternatives. FHFA also publishes a quarterly foreclosure prevention report that illustrates the 

performance of their modification programs in the aggregate. The 

report can be found on FHFA’s website at: https://www.fhfa.gov/ 

AboutUs/Reports/Pages/Foreclosure-Prevention-Report-February2017.aspx and is transmitted to Congress as part of the monthly 

Federal Property Manager’s Report. Further, servicers will have to 

report their FlexMod activities to the Enterprises. FHFA plans to 

publish information on FlexMod in the future. Most modifications 

in the future will be through FlexMod. 

Q.2. How will FHFA monitor the performance of the program within and across various borrower characteristics? 

A.2. FHFA receives quarterly reports on modification performance 

from the Enterprises that include loan modification characteristics, 

such as the payment reduction amount, re-default rates, and delinquency at the time of modification, and publishes a monthly and 

quarterly foreclosure prevention report that illustrates the performance of their modification programs in the aggregate. The report 

also includes information associated with borrower characteristics 

such as credit scores at loan origination and the top five reasons 

for borrower delinquency. The report can be found on FHFA’s 

website at: https://www.fhfa.gov/AboutUs/Reports/Pages/Foreclosure-Prevention-Report-February-2017.aspx. 

40 

OIG Report 

Q.3. An article in Bloomberg on May 11, 2017, highlighted the 

inspector general’s findings regarding the disclosure of a personal 

relationship of Fannie Mae’s CEO. How is FHFA addressing the inspector general’s concerns and what actions have you taken? 

A.3. We completed our review of the FHFA Inspector General’s report and other relevant information, and reported the disposition 

that FHFA as conservator made of this personnel matter to the Inspector General on June 21, 2017, within the timeframe committed 

FHFA and the board of directors are continuing to evaluate 

changes that may be desirable to the conflict of interest policies 

and procedures of Fannie Mae to clarify roles and responsibilities 

and to improve accountability and performance of those responsibilities, taking into account industry best practices and lessons 

learned from this experience and other sources. 

Credit Risk Transfers 

Q.4. Director Watt, in a speech before the North Carolina Bankers 

Association, you stated that it is very expensive to transfer the first 

50 basis points of expected credit losses and the GSEs retain the 

first 50 basis points. As the Committee considers reforms to the 

housing finance system, credit-risk transfers are cited as an opportunity to have private capital stand in front of a catastrophic Government guarantee. 

• Can private capital take the first loss position regarding credit 

risk without significant increases in cost? 

• Do you have an estimate of what the cost might be? 

A.4. Prior to this year, the Enterprises experimented with selling 

the first 100 basis points of credit losses to investors. As a result 

of feedback we have received from market participants and from 

credit-risk transfer transactions to date, FHFA has learned that 

selling the first 50 basis points of credit loss is generally not economically sensible. This is the case because investors, like the Enterprises, know that there will be some degree of expected credit 

losses for any portfolio of mortgages no matter the economic conditions. The Enterprises set guarantee fees, in part, to cover these 

expected credit losses. Selling this first loss exposure is akin to the 

Enterprises purchasing an insurance policy that has no deductible, 

and as a result, investors charge more for providing credit-risk protection for expected credit losses. 

Based on this information, FHFA and the Enterprises have determined that, generally, it is preferable for Fannie Mae and 

Freddie Mac to retain the first 50 basis points of expected losses 

in most CRT transactions. This means that the Enterprises have 

begun selling credit losses between 50 to 100 basis points. Early indicators have not only reflected better pricing for CRT deals, but 

greater competition for credit protection beginning at 50 basis 

points, rather than zero basis points. In the terminology used in 

the industry, this is using an attachment point of 50 basis points, 

rather than an attachment point of zero. The detachment point for 

CRT transactions, or the point at which investors stop bearing 

credit losses, is generally 3.75 or 4 percent of the unpaid principal 

balance of the mortgages included in the transaction. FHFA’s most 

41 

recent progress report on credit-risk transfer, which includes estimated credit costs for CRT transactions with first dollar loss, is 

available here: https://www.fhfa.gov/AboutUs/Reports/Report 

Documents/CRTProgressReportlDec2016.pdf. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM MELVIN L. WATT 

Q.1. What are you doing to bring additional pools of capital to bear 

in the U.S. mortgage markets, specifically on the expected or firstloss portion to further protect taxpayers and ensure greater market 

discipline that can temper bubble and bust cycles in the future? 

• Observers note that FHFA has been pushing to get private 

capital into the mortgage space to protect the taxpayers 

through credit-risk transfers, but why have we not seen any 

indications that you are looking at other forms of private capital like having the GSEs sell new stock? Are there other ways 

that we can attract private capital into the space? 

A.1. The Credit Risk Transfer (CRT) programs have reduced the 

Enterprises’ overall risk, and therefore, the risk they pose to the 

taxpayers by transferring to private investors a substantial amount 

of the credit risk the Enterprises assume in targeted loan acquisitions. From the inception of the CRT program through the first 

quarter of 2017 the Enterprises have transferred a portion of the 

credit risk on $1.6 trillion of unpaid principal balance with a combined amount of risk, or in industry terminology risk in force, of 

about $54 billion. Through CRT and primary mortgage insurance, 

the majority of the underlying mortgage credit risk on mortgages 

targeted for CRT has been transferred to private investors. 

A key principle of the CRT program is to create a broad and diversified investor base through different transaction structures. For 

example, both Enterprises developed very successful offerings to 

the reinsurance market in addition to their debt issuance transactions. In addition, each Enterprise is making strides through 

their front-end transactions at attracting capital from lenders and 

the private mortgage insurance industry. With respect to first loss, 

FHFA and the Enterprises have determined that, generally, it is 

preferable for Fannie Mae and Freddie Mac to retain the first 50 

basis points of expected losses in most CRT transactions. This 

means that the Enterprises have begun selling credit losses between 50 to 100 basis points. Early indicators have not only reflected better pricing for CRT deals, but greater competition for 

credit protection beginning at 50 basis points, rather than zero 

basis points. As a result of feedback we have received from market 

participants and from credit-risk transfer transactions to date, 

FHFA has learned that selling the first 50 basis points of credit 

loss is generally not economically sensible. This is the case because 

investors, like the Enterprises, know that there will be some degree 

of expected credit losses for any portfolio of mortgages no matter 

the economic conditions. The Enterprises set guarantee fees, in 

part, to cover these expected credit losses. Selling this first loss exposure is akin to the Enterprises purchasing an insurance policy 

that has no deductible and, as a result, investors charge more for 

providing credit-risk protection for expected credit losses. Recent 

42 

proposals by the Enterprises to make a REMIC tax election for certain CRTs is an example of innovation that may expand the private 

investor base to include real estate investment trusts (REITs) and 

international investors. 

Pursuant to the Senior Preferred Stock Purchase Agreements, 

the Enterprises are not permitted to issue equity without the permission of the Department of the Treasury, and FHFA is not actively considering equity issuance at this time. 

Q.2. How can we expand the credit box, or can we expand the credit box—which will increase expected losses, without having capital 

there to absorb losses over the housing cycle? 

• Is it possible to, tabling the issue of subprime lending, to serve 

prime borrowers if the GSEs do not have capital? As we move 

forward in housing finance reform, how do we put Fannie and 

Freddie in a position to achieve success without alienating the 

sources of capital that were in the marketplace pre and post 

conservatorship? 

A.2. A variety of stakeholders and observers have generally agreed 

that lenders are not taking full advantage of the existing credit 

box, so it is not clear that expanding the credit box is necessary 

to increase access to credit, or would be successful in doing so. As 

an example, the weighted average FICO credit score for loans delivered to the Enterprises last year was 748 for Fannie Mae and 

743 for Freddie Mac, respectively, although borrowers could qualify 

for mortgages with much lower credit scores and these mortgages 

would be well within the Enterprises’ current credit box. 

Since entering conservatorship, the Enterprises have continued 

to serve prime borrowers with a limited capital cushion. In addition 

to CRT protection, the Enterprises benefit from the $258 billion remaining funding commitment from the Treasury, as set forth by 

the Senior Preferred Stock Purchase Agreements. Our concern is 

that drawing further on this capital cushion could be destabilizing 

in the market and that the prospect of further draws is substantially increased without a capital buffer. 

Q.3. During the debate of GSE reform, we hear a lot about protecting the taxpayer and ensuring that the taxpayer bears the lowest risk possible. Can we protect taxpayers by only having the 

GSEs cut back on business risk, and if that is the only way, will 

they be able to serve the market moving forward without capital/ 

what is the right level of capital for them to be able to move out 

of conservatorship and re-engage in the marketplace? 

A.3. FHFA supports the Enterprises in their efforts to strike a balance between maintaining reasonable access to credit while protecting the taxpayer and operating in a safe and sound manner. 

Credit risk remains the largest business risk the Enterprises face. 

Their CRT programs specifically target credit protection for losses 

in a stress scenario similar to the Great Recession. The CRT program complements but does not replace the need for permanent 

capital outside of the current conservatorships in a reformed housing finance system. FHFA looks to Congress to enact housing finance reform, which would inform determinations on appropriate 

capital standards. 

43 

Q.4. What powers does FHFA need, beyond those presented in 

HERA in order to protect taxpayers, and what additional powers 

does the FHFA need to execute on housing finance reform? 

A.4. As supervisor of Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks, FHFA has comprehensive authority to regulate 

and examine its regulated entities. However, unlike other Federal 

supervisors of financial institutions, including banks and savings 

and loans, FHFA does not have authority to examine contractual 

providers of services to its regulated entities. This authority would 

support safety and soundness supervision by ensuring a better understanding of regulated entity exposure to counterparty risks. 

FHFA has previously proposed consideration of an amendment to 

its statute to provide FHFA the same examination authority over 

third-party service providers as is currently provided to the Federal 

Reserve Board, the Office of the Comptroller of the Currency, and 

the FDIC. That authority is set forth in section 7 of the Bank Service Company Act, at 12 U.S. C. § 1867. 

Any additional powers necessary in the context of housing finance reform would be dependent upon specific legislative proposals that define the participants and activities within a reformed 

housing finance system. 

Q.5. The Federal Home Loan Banks, during and since the crisis, 

have been an important part of the housing finance ecosystem. Can 

you give me your thoughts on the general condition of the FHLBs, 

and their housing finance role through their support of portfolio 

lending and with their mortgage purchase programs? Is it important to keep the FHLBs in mind as we approach broader housing 

finance reform? 

A.5. The FHLBanks are currently in a safe and sound financial 

condition. All 11 FHLBanks have strong earnings while serving the 

primary mission they were created to serve—helping provide liquidity to mortgage loans. The FHLBanks, in aggregate at yearend 2016, had over a trillion dollars in assets, over 70 percent of 

which were advances or whole mortgage loans. The FHLBanks 

have made annual contributions to their Affordable Housing Programs averaging over $300 million for the past 5 years. 

Consistent profitability of the System has also allowed the 

FHLBanks to add $7.8 billion to their accumulated retained earnings over the last 5 years. Two thousand sixteen also saw advances 

grow by $71.2 billion to $705.2 billion at year-end The concentration of advances to large members does warrant attention. Though 

the large members tend to drive the volume of advances, the vast 

majority of the over 7,000 FHLBank members are smaller institutions and advances to smaller borrowers have increased Systemwide. 

The FHLBanks’ Acquired Member Asset Programs (AMA) provide members with an alternative means (alternative to Fannie 

Mae and Freddie Mac) of moving mortgage loans they originate off 

their balance sheets. The FHLBanks purchased $12.5 billion of 

AMA mortgage loans in 2016 and held a total of $47.6 billion in 

total unpaid principal balance (UPB) on their balance sheets at 

year-end They expect the volume of purchases through the AMA 

programs to rise in the coming years. 

44 

It is important to keep the FHLBs in mind as Congress approaches broader housing finance reform. The FHLBanks provide 

a range of important services and products that add value to their 

members through helping them liquefy their mortgage assets. They 

are particularly important to small members, most of which have 

limited capacity to access capital markets and, therefore, rely on 

FHLBank advances to help fund their housing finance operations. 

Q.6. Less often discussed is the role of Fannie Mae and Freddie 

Mac in providing liquidity to the multifamily market in addition to 

the single-family financing market. With the home ownership rate 

in America dropping from 68 percent prior to the Financial Crisis 

down to 62 percent today, affordable rental housing is an extremely 

important topic for many Americans. Can you comment on the 

GSE’s multifamily programs and how successfully they are working 

to insure a supply of affordable rental housing in America? 

A.6. The Enterprises’ multifamily programs continue to support affordable rental housing through various initiatives and with strong 

performance. As part of the FHFA Conservatorship Scorecard, 

FHFA has established a cap on multifamily origination to protect 

against crowding out private capital, and the Enterprises are encouraged to focus on certain underserved markets, through exclusions from the cap. These exclusions include targeted affordable 

housing with use restrictions on affordability, green, manufactured 

housing communities, rural developments affordable to those making 80 percent or less in area median income (AMI), seniors, housing for those making 80 percent AMI or less, and small multifamily 

properties of 5–50 units affordable to 80 percent AMI or less. Both 

Fannie Mae and Freddie Mac did well over a third of total multifamily business in underserved markets in 2016 and are on track 

to do even more business in these markets in 2017. 

Q.7. One of the major differences between the GSE ’s single-family 

and multifamily businesses is that in the single-family business, 

after a loan is originated by a private mortgage banker or commercial bank, it gets sold to the GSEs, and then the taxpayers assume 

100 percent of the risk for that loan; whereas in the multifamily 

businesses, after the loan is originated by a private mortgage banker or commercial bank and sold to the GSEs, private capital remains in the first-loss position on the loans, and absorbs the first 

15 percent of any future credit losses. Can you expand on the loss 

sharing models in the single-family and multifamily businesses of 

the GSEs, and explain why U.S. tax payers assume 100 percent of 

the risk in the single-family businesses, while private capital absorbs the first 15 percent of losses in the multifamily businesses 

and shares credit risk with the GSEs? 

A.7. Both the single-family and multifamily business models at Enterprises leverage credit-risk sharing, but in different ways. You 

are correct that the multifamily programs at both Fannie Mae and 

Freddie Mac have successfully shared credit risk with private investors for a number of years. In recent years, their single-family 

programs have followed suit. 

45 

Multifamily 

At Fannie Mae, lenders typically share in the risk of loss on 

loans that default through standard Delegated Underwriting and 

Servicing (DUS) or pari passu loss sharing. In the standard DUS 

approach, the lender is responsible for the first loss up to 5 percent 

of the existing unpaid principal balance (UPB); on the next 20 percent of UPB, the lender is responsible for 25 percent and Fannie 

Mae 75 percent; for any remaining loss, the lender is responsible 

for 10 percent and Fannie Mae 90 percent. Standard DUS risk 

sharing limits lender loss to 20 percent of the original UPB. Under 

pari passu, the lender shares all losses with Fannie Mae 1⁄3–2⁄3; 

lender losses are not capped. In contrast, Freddie Mac leverages a 

senior-subordinate securitization structure (K–Deal) to transfer 

risk to private investors. Freddie Mac guarantees senior bond investors, and mezzanine and subordinate bonds are unguaranteed 

Senior bonds are publicly offered to investors through placement 

agents, and mezzanine and subordinate bonds are privately offered 

The K–Deal structure has broad market acceptance. In 2016, 

around 89 percent of Freddie Mac’s multifamily mortgage purchases were designated for securitization. We believe that the market benefits from the presence of both Fannie Mae and Freddie 

Mac’s proven credit-risk sharing models for multifamily loans. 

Single-Family 

Since the conservatorships of Fannie Mae and Freddie Mac, taxpayers assumed the majority of the risk associated with the Enterprises’ single-family businesses. However, there are mitigants in 

place to minimize this risk. First, on loans with loan-to-value ratios 

greater than 80 percent credit support is required, which is usually 

in the form of private mortgage insurance with the mortgage insurers bearing the first loss. Second, for nonperforming loans the Enterprises offer foreclosure prevention options. Third, when foreclosure becomes the only option, the Enterprises leverage their real 

estate-owned sales functions to minimize losses. 

Since 2012 FHFA has also initiated development of a credit-risk 

transfer program intended to reduce the Enterprises’ overall risk 

and, therefore, the risk they pose to taxpayers while in conservatorship. From the beginning of the Enterprises’ single family 

CRT programs in 2013 through December 2016, Fannie Mae and 

Freddie Mac have transferred a portion of credit risk on $1.4 trillion of unpaid principal balance (UPB), with a combined Risk in 

Force (RIF) of about $49 billion, or 3.4 percent of UPB. In addition, 

from 2013 through 2016, the Enterprises have purchased singlefamily loans with primary mortgage insurance. These loans have a 

total UPB of $731 billion and RIF of $186 billion. Through CRT 

and mortgage insurance, the majority of the underlying mortgage 

credit risk on mortgages targeted for CRT has been transferred to 

private investors or shared with private mortgage insurers. 

Q.8. One of the initiatives that FHFA has been working on with 

the GSEs is the Single Security Securitization platform. It is my 

understanding that due to pricing differences between Fannie Mae 

and Freddie Mac securities (with Fannie’s pricing ‘‘tighter’’ or better), that the single securitization platform is simply an initiative 

46 

to enhance liquidity in the securitization markets and lower the 

cost of borrowing for all GSE customers. First, is that correct? And 

second, am I correct to think that the single securitization platform 

is simply an initiative to gain scale and enhance pricing for Freddie 

Mac securities, and NOT an effort by FHFA to merge Fannie Mae 

and Freddie Mac into one enterprise? Could you expand on that 

question, and give us your thinking of the advantages (or disadvantages) of having two GSEs? 

A.8. FHFA’s 2014 Strategic Plan/or the Conservatorships of Fannie 

Mae and Freddie Mac includes the strategic goal of developing a 

new securitization infrastructure for the Enterprises for single family mortgage loans. To achieve that strategic goal, the Enterprises, 

under FHFA’s direction and guidance, have formed a joint venture, 

Common Securitization Solutions (CSS). CSS’s mandate is to develop and operate a Common Securitization Platform (CSP) that 

will support the Enterprises’ single-family mortgage securitization 

activities, including the issuance by both Enterprises of a common 

single mortgage-backed security (to be called the Uniform Mortgage-Backed Security or UMBS). These securities will finance the 

same types of fixed-rate mortgages that currently back Enterpriseguaranteed securities eligible for delivery into the ‘‘To-Be Announced’’ (TBA) market. 

The development of and transition to the new UMBS constitute 

the Single Security Initiative. The first objective of the Single Security Initiative is to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed 

by fixed-rate loans. The second objective is to maintain the liquidity of this market over time. The Single Security Initiative should 

also reduce the cost to Freddie Mac and taxpayers that has resulted from the historical difference in the liquidity of Fannie 

Mae’s Mortgage-Backed Securities (MBS) and Freddie Mac’s Participation Certificates (PCs). 

The CSP and the Single Security Initiative are not efforts by 

FHFA to merge Fannie Mae and Freddie Mac into one enterprise. 

Having two enterprises allows for competition in services and products offered to lenders and servicers, which helps to promote innovation in the mortgage market. These initiatives are consistent 

with FHFA’s statutory obligation and the Enterprises’ charter obligations to ensure the liquidity of the Nation’s housing finance markets. 

Q.9. After the financial crisis, Fannie Mae and Freddie Mac lost 

billions of dollars due to credit losses. Can you break-out the total 

credit losses between the single-family and multifamily businesses 

of the GSEs, and give us your opinion whether the loss sharing 

model that Fannie and Freddie have in their multifamily businesses, where private capital sits in front of tax payer capital, had 

anything to do with the dramatically lower loss levels in the GSE’s 

multifamily businesses? 

A.9. From 2008–2012, Fannie Mae incurred single-family credit 

losses of $75.7 billion, which represented approximately 2.8 percent 

of Fannie Mae’s single-family mortgage credit book of business of 

$2.7 trillion at the beginning of 2008. During the same period, 

Fannie Mae also incurred multifamily credit losses of $1.4 billion, 

47 

which represented approximately 0.8 percent of Fannie Mae’s multifamily mortgage credit book of business of $184 billion at the beginning of 2008. 

Similarly, from 2008–2012, Freddie Mac incurred single-family 

credit losses of $50.3 billion, which represented approximately 3.8 

percent of Freddie Mac’s single-family credit guaranty portfolio of 

$1.7 trillion at the beginning of 2008. During the same period, 

Freddie Mac also incurred multifamily credit losses of $0.3 billion, 

which represented approximately 0.4 percent of Freddie Mac’s multifamily guaranty and loans portfolios of $69 billion at the beginning of 2008. 

The loss-sharing model at Fannie Mae and Freddie Mac may 

have had an impact on the lower level of multifamily credit losses; 

however, additional factors also had an impact. For instance, the 

deterioration in national multifamily fundamentals was less severe 

than that experienced in the single-family market, in part because 

borrowers who were unable to maintain their mortgage payments 

became renters, increasing demand for multifamily units, and the 

multifamily deterioration did not last as long. Also, the credit quality of the Enterprises’ multifamily portfolios, as reflected in significantly lower delinquencies, was better than that of their respective 

single-family books of business. 

Q.10. It is my understanding that in Fannie Mae and Freddie 

Mac’s single-family businesses, as long as a mortgage is ‘‘conforming’’, or meets their lending criteria, that any mortgage originator in America can sell them a loan. Yet in the multifamily businesses, Fannie Mae and Freddie Mac have only 25 approved ‘‘vendors’’ who can sell them mortgages. These are well capitalized 

mortgage finance companies and banks that are leaders in their industry, get audited by the GSEs on a regular basis, and are well 

capitalized companies to be able to absorb any credit losses should 

the loans they originate go bad. Why wouldn’t the ‘‘approved vendor’’ model that Fannie and Freddie have in their multifamily businesses be a good idea for their single-family businesses? 

A.10. The Enterprises have established counterparty requirements 

for both their Single-Family and Multifamily Businesses. The 

counterparty requirements are used as minimum standards to approve new seller-servicers, but also as requirements that existing 

seller-servicers must maintain to remain in good standing. Minimum single-family seller-servicer requirements include the following: 

• Principal business purpose is origination, selling, and/or servicing of mortgages 

• Demonstrated ability to originate, sell, and/or service mortgages 

• Adequate facilities and staff experienced to originate, sell, and/ 

or service mortgages 

• Proper licensure (in good standing) or other authorization to 

conduct business 

• Net worth of at least $2.5 million + 0.25 percent of the unpaid 

principal balance (UPB) of the seller/servicer’s total one- to 

48 

four-unit residential mortgage portfolio. Additional minimum 

capital and liquidity requirements apply to maintain eligibility 

• Internal audit and management control systems to evaluate 

and monitor the overall quality of its loan production and servicing 

• Written procedures for the approval and management of vendors and other third-party service providers 

• Fidelity bond and an errors and omissions policy 

Additional criteria may be imposed based on the individual circumstances of seller-servicer’s financial condition, organization, 

staffing, servicing experience, and other relevant factors. 

Q.11. What percentage of the Credit Risk Transfer transactions are 

done with off-shore re-insurers? Are you concerned that two entities in conservatorship are doing an excessive amount of business 

with tax avoiding off-shore reinsurers? Could you please report 

back to this Committee the amount of CRT business that Fannie 

and Freddie are doing with reinsurers who enjoy tax advantages 

over United States domiciled entities? 

• How does FHFA rationalize the GSEs’ heavy reliance on ratings from credit rating agencies for reinsurance transactions 

when ratings were proven completely ineffective in predicting 

counterparty strength in the most recent downturn? 

A.11. About 20 percent of the credit risk transferred through the 

CRT program has been taken in by approximately 50 reinsurers, 

some of whom operate through off-shore entities. The reinsurers 

who are domiciled off-shore bring international capital sources to 

support the U.S. housing market. It should be noted that some risk 

has also transferred to private mortgage insurers’ affiliates that 

also utilize off-shore entities in CRT transactions with the Enterprises. The Enterprises use ratings as one of several inputs into a 

comprehensive process to evaluate institutional risk. The Enterprises require all reinsurance entities, regardless of credit standing, to put up capital as collateral for the risk exposure they have 

accepted. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ 

FROM MELVIN L. WATT 

Q.1. Ensuring access to affordable, sustainable home ownership 

and mortgage credit has been a priority for me as I know it has 

been for you. To help address this issue, one important step the enterprises have taken to help address this issue is the 97 percent 

LTV loan that helps creditworthy borrowers who can afford a mortgage but don’t have the resources for a substantial down payment 

purchase a home. How have these mortgage loans, in their first 2 

years, performed relative to conventional down payment loans? 

A.1. The Enterprises’ 97 percent loan-to-value (LTV) programs, announced in December 2014, represent a very small proportion of 

the overall single-family book. Since program inception, Fannie 

Mae has acquired approximately $15 billion in unpaid principal 

balance (UPB) or 82,000 loans; Freddie Mac has acquired approximately $4 billion in UPB or 24,000 loans. By comparison, at March 

49 

31, 2017, the Enterprises’ Single-Family Books of Business total 

$2.822 trillion for Fannie Mae, and $1.779 trillion for Freddie Mac. 

The Enterprises’ high-LTV programs were developed with compensating factors to mitigate the increased risk associated with 

higher LTV loans. The table below compares 60- and 90-day delinquencies for the Enterprises’ 97 percent LTV programs and total 

single-family acquisitions since the launch of the higher LTV programs (i.e., 97 percent LTV) in December 2014. For both 60- and 

90-day delinquencies, the Enterprises’ 97 percent LTV programs 

perform behind aggregate portfolio levels but are still at very low 

levels. 

Q.2. With the expiration of the Home Affordable Modification Program at the end of last year, FHFA has introduced the Flex Mod 

as a replacement. While Flex Mod streamlines the modification application process, I am concerned that by not considering the current income, some families who should qualify for a modification 

will not be able to receive relief under this program. For homeowners who are at risk of not getting an affordable modification 

under the new program, can FHFA explore referring them to housing counseling programs and giving the programs access to the Enterprises’ exceptions process so that families who should qualify 

have access to an affordable modification? 

A.2. Lessons learned from the crisis demonstrate the importance of 

early intervention in creating an affordable, sustainable modification and avoiding foreclosure. All eligible borrowers who choose to 

engage with their servicer prior to 90-days delinquency on their 

mortgage and complete a loan modification application will be considered for a modification that may include an income-based component. After 90-days delinquency the servicer will proactively solicit the borrower with a streamlined modification offer regardless 

of whether the servicer has received a loss mitigation application 

from the borrower. To accept this offer, all the borrower needs to 

do is to make three timely payments, regardless of income. Since 

the borrower is not required to provide information on income in 

a streamlined modification, it would not be possible for the Enterprises to add an income-based component. A borrower can submit 

a loan modification application at any time, and the servicer is permitted to evaluate their current income in determining eligibility 

for a loan modification. 

To encourage borrowers to work with housing counselors, the Enterprises share information on how to contact a HUD-approved 

housing counselor, including on the Enterprises’ websites, on the 

uniform borrower application form for loan modifications, and on 


26521001.eps
50 

other model forms and letters they make available to servicers. Additionally, both Enterprises have Borrower Contact Units (BCUs) 

that serve as a direct escalation channel within each Enterprise to 

assist borrowers on a wide range of mortgage-related issues. Counselors working with borrowers are also able to access BCUs to escalate issues. The exceptions process is the mortgage servicers’ channel for escalating requests for exceptions to eligibility rules for loan 

modifications within each Enterprise. FHFA has been working 

closely with borrower advocacy groups on the role of housing counseling in the post-crisis loss mitigation framework and has found 

housing counseling to have a strong correlation with borrower 

success. 

Q.3. I am concerned that after the 2008 financial crisis and ensuing Great Recession, home ownership is at 41 percent for African 

American households and 47 percent for Latino households, while 

the home ownership rate for white households is 71 percent. One 

way in which to expand home ownership among these underserved 

communities would be to expand access to pre-purchase housing 

counseling, which prepares potential home buyers for safe and sustainable home ownership. Can FHFA and the enterprises leverage 

the deep presence of housing counseling agencies in these communities to develop public education programs to build awareness of 

housing counseling and its benefits, create incentives for people to 

go to housing counseling, and create underwriting standards that 

acknowledge the improved performance of people who have been 

counseled? 

A.3. The 2017 Conservatorship Scorecard directs the Enterprises to 

continue to improve the effectiveness of pre-purchase counseling 

and home ownership education through technology and data analysis. The Enterprises also offer pricing incentives to borrowers to 

attend housing education as part of the 97 percent LTV program. 

The Enterprises have also included a Home Ownership Education 

and Housing Counseling Section in the redesigned Uniform Residential Loan Application (URLA). This section asks whether the 

applicant received home ownership education or housing counseling, the format by which the home ownership education or housing counseling was conducted, and by whom. Additionally, the Enterprises are in discussions with housing counselor groups on the 

broader use of updated case management software and exploring 

the ability to access preliminary underwriting results on borrowers. 

Expanding the use of technology will enable counselors to educate more future borrowers and potentially reduce the operational 

costs involved in counseling. 

The Enterprises have also been working with FHFA to add questions to the National Mortgage Database surveys, the American 

Survey of Mortgage Borrowers and the National Survey of Mortgage Originations to gain more information on consumers who utilize housing counseling services and its effectiveness. Gathering 

data through the surveys and the URLA will provide more opportunities to measure the effectiveness of housing counseling and potentially garner future support. 

Q.4.a. Can you provide details on how Fannie Mae reached the decision to guarantee $1 billion in debt from Blackstone’s single-famVerDate Nov 24 2008 15:20 Dec 22, 2017 Jkt 046629 PO 00000 Frm 00054 Fmt 6601 Sfmt 6601 S:\DOCS\26521.TXT SHERYL
51 

ily rental arm, Invitation Homes? As I understand it, many of the 

rental homes owned by Invitation Homes were purchased during 

the height of the foreclosure crisis. 

A.4.a. Single-family rental units are a growing segment of the rental market and can provide affordable housing alternatives to families in need of more space than a traditional multifamily apartment 

can provide. The transaction between Fannie Mae and Invitation 

Homes was structured with the goal of mitigating potential risks, 

with generally low leverage, strong debt service coverage, geographic diversity requirements to offset potential market risk, and 

robust market-standard ongoing reporting. 

FHFA will consider the impact of single-family rentals on home 

ownership, as well as other policy implications, in the approval of 

any future Enterprise transactions or single-family rental initiatives. The securitization has Invitation Homes in the first-loss position for up to 5 percent. Wells Fargo, the lender, shares losses with 

Fannie Mae. The transaction will not result in any counterparty 

exposure that is inconsistent with Fannie Mae and FHFA ’s current guidelines. FHFA and Fannie Mae will be carefully monitoring 

the performance and results of this transaction. 

On average, Invitation Homes has put in approximately $24,000 

in rehabilitation costs across its portfolio to improve the asset quality and increase stability in markets across the country. In the 

overall single-family rental market, the institutional investors own 

less than 2 percent of the assets. 

Q.4.b. Does FHFA plan to continue financing institutional investor 

purchases of single-family homes? 

A.4.b. The Enterprises are exploring single-family rentals transactions on a very limited basis, which must be approved in advance 

by FHFA. FHFA has permitted Freddie Mac to explore one or more 

limited transactions in the detached, single-family rental market 

and expects them to announce small transactions soon. These efforts will help FHFA study alternative options for serving families 

who choose to live in single-family rental properties and inform our 

thinking on what role, if any, the Enterprises should play in the 

single-family rental market. 

Q.4.c. Could this same type of financing from Fannie Mae also be 

applied to programs run by community-oriented nonprofits like 

New Jersey Community Capital that use their resources to purchase pools of underwater mortgages and provide homeowners the 

opportunity to become current on their loans? 

A.4.c. The Enterprises have the ability to increase quality rental 

affordability through lowering financing costs in the single-family 

rental space for operators, such as nonprofits. However, at this 

time, the Enterprises are still exploring single-family rentals transactions to test and learn, on a limited basis, which must be approved in advance by FHFA. Such initial transactions could include 

purchases of loans owned by nonprofits. Some nonprofits are also 

active in the single-family rental market through purchases of 

NPLs and through the NSL. 

52 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP 

FROM MELVIN L. WATT 

Q.1.a. Duty to Serve Rural Areas: Recently the GSEs submitted 

their draft ‘‘underserved market plans’’ to the FHFA. In part, these 

plans attempt to address affordable housing in rural and underserved areas, including Indian Country, which would impact many 

areas in my home State of North Dakota. 

• One simple step that I’d like to get your feedback on, is whether it makes sense to have a dedicated rural lending office within the GSEs—or their future replacement—that is purely 

focused on lending in rural America and Indian country, given 

the distinct differences between these areas and the urban 

mortgage market? 

A.1.a. FHFA appreciates the differences between rural and urban 

mortgage markets, as well as the differences among or between 

rural markets. In fact, Fannie Mae has proposed assigning staff in 

one or more of the high-needs regions within the broader rural 

market. Earlier this year, Freddie Mac sponsored its first Borrower 

Help Center in southwest Mississippi in an effort to support rural 

homeowners. This suggests that having to meet the requirements 

of the Duty to Serve Rule is already leading the Enterprises to increase specialization and recommend other ways and business 

strategies to ensure compliance. FHFA believes that it should 

evaluate business strategies that the Enterprises propose, rather 

than mandate particular business strategies as a governmental 

function. This approach will nonetheless maintain FHFA’s prerogative to address concerns in rural and underserved areas. 

Q.1.b. In October 2016, I sent you a letter requesting that you 

allow the GSEs to get back into the Low Income Housing Tax Credit market for high-needs rural areas including Indian Country. I 

was pleased that the FHFA moved forward with this recommendation and included it in their instructions to the GSEs. Aside from 

improving access to LIHTCs, what other steps can the GSEs take 

to help improve housing options in Indian Country? 

A.1.b. Both Enterprises include proposals to use Low-Income Housing Tax Credit (LIHTC) equity investments to serve Indian Country in their proposed Duty to Serve Plans, which were released for 

public comment on May 8, 2017. However, allowing the Enterprises 

to invest in LIHTC equity more generally remains an open question that FHFA is considering as Conservator for the Enterprises. 

As you suggested in your comment letter, the Duty to Serve final 

regulation indicates that should FHFA as Conservator allow the 

Enterprises to re-enter the LIHTC equity investment market, then 

those LIHTC equity investments in rural areas would be eligible 

for Duty to Serve credit. The Proposed Evaluation Guidance further indicates that such investments specifically serving high-needs 

rural regions or high-needs rural populations, including Indian 

Country, may be eligible for greater Duty to Serve credit. 

Other steps the Enterprises could pursue to improve housing 

options in Indian country may include targeted outreach, loan 

product changes, and loan purchase activities. For instance, the 

Enterprises could provide technical/assistance to local lenders and 

originators to help them better understand the requirements for an 

53 

Enterprise to purchase a mortgage loan in Indian Country. The 

special challenges for lending in Indian Country are among the 

issues that make it more difficult for an Enterprise to purchase Indian Country mortgage loans, such as land titling issues, barriers 

to foreclosure and valuation concerns. The Enterprises could also 

help facilitate culturally and linguistically appropriate home buyer 

education for people living in Indian Country. Under the Duty to 

Serve Rule, the public is encouraged to look through the Enterprises’ proposed Plans and provide input on whether they would 

likely improve housing options in Indian Country in a meaningful 

way, or whether other or additional strategies are appropriate. 

Q.1.c. A recent Fannie Mae white paper on lending in rural America pointed out some interesting statistics about rural borrowers. 

On average, rural borrowers have lower incomes, are more likely 

to be self-employed workers, and tend to have higher debt-to-income ratios than urban borrowers. Yet in States like North Dakota—where there is a high share of loans originated in rural 

areas—rural borrowers tend to have strong credit scores, averaging 

around a 750 FICO score. 

• In light of these facts, do you believe that the qualified mortgage rule has limited lending in rural America by excluding 

otherwise well-qualified borrowers who reliably pay their debts 

yet may be self-employed or otherwise have slightly higher 

debt-to-income ratios? 

A.1.c. The ability to repay (ATR) rules require lenders to consider 

and verify a number of different underwriting factors, such as a 

mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be 

able to pay back the loan. Lenders are presumed to comply with 

the ATR requirement when they make a Qualified Mortgage (QM) 

loan, which must meet further underwriting and pricing standards. 

These requirements generally include a limit on points and fees to 

3 percent of the loan amount, along with various restrictions on 

loan terms and features (for example, no negative amortization or 

interest-only payments and a loan term of 30 years or less). QM 

loans also generally require that the borrower’s total or ‘‘back-end’’ 

debt-to-income (DTI) ratio does not exceed 43 percent. However, 

the 43 percent DTI cap does not currently apply to loans with Government-backed insurance or guarantees (e.g., Federal Housing Administration (FHA) and Veterans Administration (VA) loans), loans 

that are eligible for purchase by Fannie Mae and Freddie Mac 

(through the so-called ‘‘GSE patch’’), and portfolio loans made by 

‘‘small creditors.’’ The Enterprises’ debt-to-income ratio eligibility 

maximums exceed the standard QM DTI threshold of 43 percent, 

and the Enterprises’ automated underwriting systems will evaluate 

borrower applications with DTI ratios up to 50 percent. In addition, 

the Enterprises have standards in their selling guides to underwrite self-employed borrowers. As a result, we believe that the GSE 

patch permits the Enterprises to purchase creditworthy rural loans 

to borrowers with DTIs over 43 percent and to self-employed borrowers. 

Q.2. Appraisals: As you know, one hurdle for rural lending is the 

challenge lenders face in attaining appraisals. In a rural setting, 

54 

there are fewer comparable properties nearby. That makes it more 

difficult to measure the home value. And there are more variations 

in land. What can the FHFA do to help the GSEs better address 

this challenge? Do you think that it’s time, as part of GSE reform, 

to take a look at structural reforms to our appraisal system? What 

areas could be addressed to provide better outcomes for rural areas 

that struggle with access to qualified appraisers? 

A.2. Fannie Mae and Freddie are leveraging technology to provide 

new tools and certainty to lenders on key aspects of the origination 

process including on appraised values to make the process more 

efficient. FHFA continues to work closely with the Enterprises to 

address challenges to appraising in rural markets. In 2014, FHFA 

directed Fannie Mae and Freddie Mac to provide guidance and 

clarifications to lenders and appraisers on acceptable appraisal 

practices in rural markets. The guidance allows for the use of distant, dated, and/or dissimilar comparable sales, with appropriate 

explanation in the appraisal report, in recognition of challenges appraisers encounter in performing appraisals in rural markets. 

FHFA continues to work with the Enterprises, the Appraisal Subcommittee, and the Appraisal Foundation to address issues that 

contribute to challenges to obtaining appraisal for properties in 

rural markets. 

Q.3. Access to the secondary market for small lenders. The 

ability of small community-based institutions to provide consumers 

with competitive pricing and product offerings depends significantly on their ability to access the secondary mortgage market. 

• One option we explored as part of Corker-Warner was expanding the role of the Federal Home Loan Banks to serve as an 

aggregator for small lenders. What are your views on allowing 

the FHLBs to expand in this area? 

A.3. The FHLBanks, through the FHLBank of Chicago as a Mortgage Partnership Finance (MPF) program provider, already provide 

member institutions with an aggregation service. The MPF Xtra 

product serves to aggregate loans originated by small members for 

sale to Fannie Mae. The MPF Direct is a jumbo loan product that 

allows member institutions to sell these loans to the MPF provider 

who concurrently sells the loans to Redwood Trust, Inc., for 

securitization, and MPF Government MBS, a program intended for 

small and midsized institutions, allows these institutions to sell 

Government guaranteed loans to their local FHLB, which sells 

them to FHLB Chicago to be pooled into Ginnie Mae securities. 

In 2016, FHLBank members delivered $3.7 billion of mortgages 

under the MPF Xtra program, $158 million under MPF Direct, and 

$438 million under MPF Government MBS. These programs have 

worked well and are continuing to be expanded. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM MELVIN L. WATT 

Q.1. The CFPB’s mortgage rules define certain loans as Qualified 

Mortgages, or QM, and offer lenders legal immunity for loans that 

meet the QM standards. But the CFPB rule also grants QM status 

to any mortgage that is eligible for purchase by Fannie Mae or 

55 

Freddie Mac. That means the underwriting criteria at Fannie Mae 

and Freddie Mac help define the scope of the QM rule—and accordingly, have a huge impact on the kinds of families that can get access to mortgage credit. 

Despite all of this, Fannie and Freddie’s underwriting algorithms 

and criteria are secret. 

• Can you explain why it’s reasonable to keep this information 

hidden given its importance to both the economy and to appropriate oversight of the mortgage market? 

• Will you work with my office to make this information public? 

A.1. The Enterprises use underwriting criteria to educate all their 

lender counterparties to ensure a mutual understanding of borrower qualification and sustainability. The Enterprises’ underwriting criteria are public and published in their respective Selling 

Guides, which can be found on the following websites: https:// 

www.fanniemae.com/singlefamily/originating-underwriting and 

http://www.freddiemac.com/singlefamily/guide/. 

The Enterprises’ respective automated underwriting systems are 

proprietary tools that take the information provided by lenders 

and, subject to the published underwriting criteria, assess borrower 

credit risk and reach a determination of whether the Enterprise 

would purchase a loan. While the proprietary models that perform 

the risk assessment are not shared with the public, the factors 

used to run the models are and can be found in the Selling Guides 

referenced above. 

The maximum threshold for the DTI ratio is probably the most 

noticeable difference between standard QM requirements and the 

Enterprises’ requirements (the ‘‘GSE Patch’’). The standard QM 

maximum DTI threshold is 43 percent and the GSE Patch is higher 

and looks to the GSE guidelines, making it possible for more borrowers to qualify for a mortgage. When using the automated underwriting systems, the proprietary models can assess the probability 

of default based on the variety of factors used to underwrite a 

mortgage. For example, Fannie Mae’s Desktop Underwriter will 

evaluate borrower applications with DTI ratios up to 50 percent, 

which was discussed in a guide announcement released in May. 

Also, FHFA regularly examines the automated underwriting 

systems to ensure that the models are calibrated and governed consistent with risk management standards set forth in FHFA supervisory guidance (see Advisory Bulletin 2013–07, ‘‘Model Risk 

Management’’ (November 20, 2013). 

FHFA will work with your office to review the public information 

available in the Enterprises’ Selling Guides while respecting the 

proprietary nature of the Enterprises’ automated underwriting systems. 

Q.2. In April 2016, FHFA announced a principal reduction program. At the time, the agency stated that roughly 33,000 borrowers 

qualified for principal reduction under the terms of the program. 

The agency also stated that, rather than requiring servicers to reduce the loan principal for those 33,000 eligible borrowers, 

servicers were only required to ‘‘solicit borrowers eligible for a Principal Reduction Modification no later than October 15, 2016.’’ 

56 

• Can you tell me, as of today, how many of these 33,000 eligible 

borrowers have actually received a principal reduction? Please 

provide State-by-State data, if available. 

• Does FHFA plan to take additional steps to encourage more 

borrowers to take advantage of this program and receive a 

principal reduction? If so, please describe them. 

A.2. Nationwide, the Enterprises estimate that 1,089 borrowers 

have received a Principal Reduction Modification (PRM). Additionally, the Enterprises estimate that another approximately 1,100 

borrowers have received loan modifications with principal forbearance and are likely to be eligible to have this forbearance converted 

to principal reduction. Please note that this data is subject to 

change as it is updated regularly. Based on current information 

available from the Enterprises and servicers, State-by-State data is 

as follows: 


26521002.eps
57 

Under the Principal Reduction Modification program, eligible 

borrowers could receive a principal reduction one of two ways. 

First, an eligible borrower could accept and complete a Principal 

Reduction Modification offered by his or her servicer. Second, an eligible borrower could accept any trial loan modification with a first 

payment due date between May 1 and December 1, 2016; following 

successful completion of the modification trial period, the principal 

forbearance component of the modification would be converted to 

principal forgiveness. The above estimates include borrowers in 

both of these circumstances. 

The Principal Reduction Modification program leveraged the Enterprises’ existing streamlined modification, which simplified the 

implementation process for the Enterprises and servicers and 

eliminated the need for borrowers to submit complex documentation regarding their income or assets. Servicers were required to 

solicit all borrowers for a Principal Reduction Modification, informing them that they were eligible for principal forgiveness and of the 

modified payment amount on their mortgage. In their offer letters, 

borrowers were informed that in order to earn a Principal Reduction Modification they needed to make three on-time trial payments and fulfill the requirements of the Trial Period Plan. As described below, FHFA and the Enterprises took a number of other 

steps to encourage all eligible borrowers to take advantage of the 

program. 

Since the height of the crisis, a number of factors have resulted 

in a substantial decrease in the population of seriously delinquent, 

underwater Enterprise loans, including those borrowers eligible for 

the Principal Reduction Modification program. These factors include loan-to-value ratios caused by rising home prices, improving 

borrower performance, other successful modification and refinance 

programs provided by the Enterprises, properties entering REO/ 

short sales, third-party sales, and Enterprise sales of nonperforming loans (NPLs). The number of underwater homeowners with 

an Enterprise loan dropped by over 80 percent from 2012 to 2016. 

The Enterprises owned or guaranteed about 800,000 loans with 

mark-to-market loan-to-value ratios over 100 percent without capitalizing arrearages as of January 2016. Of these loans, payments 

on approximately 720,000 were current or less than 90-days delinquent and approximately 76,000 of these loans were seriously delinquent (i.e., 90-days or more delinquent). 

At the time of program announcement, the Enterprises estimated 

that approximately 33,000 borrowers were eligible for a Principal 

Reduction Modification nationwide. A borrower’s actual eligibility 

for principal reduction is determined by the borrower’s servicer and 

the Enterprises can only estimate eligibility for this program. 

FHFA and the Enterprises were aware that the population of eligible borrowers would decrease in the period between program 

announcement and servicer implementation of the program. 

FHFA does not have final estimates of the decline in the population eligible for the Principal Reduction Modification program, 

but the population of eligible loans did decrease substantially from 

the time of announcement through the end of last year. At the 

same time that FHFA announced the Principal Reduction Modification program, FHFA also required buyers of Enterprise NPLs to 

58 

evaluate all deeply underwater borrowers for modifications that 

include options for principal reduction and/or arrearage forgiveness, thus increasing the likelihood that these borrowers would receive principal reductions after an NPL sale. 

Servicers were able to solicit eligible borrowers for Principal Reduction Modifications through December 31, 2016, when the program eligibility expired In the period between program announcement and this date, FHFA and the Enterprises undertook an array 

of activities to reach eligible borrowers and encourage them to take 

advantage of the Principal Reduction Modification program. These 

included: 

• The Enterprises, with FHFA’s oversight, continually monitored 

servicer solicitation of borrowers, implementation of the program, and strategies to reach eligible borrowers. 

• FHFA and the Enterprises created a number of borrower-facing tools, which are available at https://www.fhfa.gov/ 

PolicyProgramsResearch/Policy/Pages/PrincipalReductionModification.aspx. 

• FHFA and the Enterprises offered PRM Program training to 

servicers and to key housing organizations, including HUD 

intermediaries, numerous State Housing Finance Agencies, the 

National Urban League, and to participants in the 

NeighborWorks National Training Institute Workshop. 

• Fannie Mae offered assistance through its Mortgage Help Networks, as did Freddie Mac through their Borrower Help Centers. 

• FHFA and the Enterprises participated in local foreclosure prevention events that reached borrowers directly, including by 

partnering with HOPE NOW. 

• The Enterprises each conducted two direct mailings to borrowers who did not respond to the initial PRM solicitation. 

• Fannie Mae’s Mortgage Help Network conducted a phone campaign to nonresponsive borrowers, while Freddie Mac’s Borrower Help Center conducted a phone campaign to all eligible 

borrowers. 

Because the eligibility deadline for the Principal Reduction Modification program has passed, FHFA and the Enterprises do not 

have further outreach plans. However, FHFA and the Enterprises 

will continue to oversee and monitor the program to ensure that eligible borrowers have their forbearance amounts converted to forgiveness under the terms of the program. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM MELVIN L. WATT 

Q.1. During your oral testimony, I asked you about mortgage servicing compensation and the need to alter compensation structures 

to better align incentives between Fannie Mae and Freddie Mac 

(the Enterprises) and servicing companies. 

• Does FHFA intend to follow-up on the Agency’s 2011 white 

paper on this topic? 

59 

• If so, what does FHFA intend to do and what is the timeline 

for action? 

A.1. FHFA’s 2017 Conservatorship Scorecard directs the Enterprises to identify challenges with the current mortgage servicing 

business model as well as opportunities to support a deep, liquid, 

stable, and robust market. In 2017 the Enterprises have begun conducting a mortgage servicing market analysis, which will include 

several topics, including servicing costs and compensation; mortgage servicing business models and strategies; advances and reimbursement practices; financing of mortgage servicing rights; operational requirements; the role of third-party vendors in mortgage 

servicing, and servicing transfers. 

As part of this effort, FHFA and the Enterprises will engage industry stakeholders, including servicers, mortgage servicing rights 

investors, and consumer advocacy groups, through a market survey 

and robust stakeholder interviews beginning in the third quarter 

of 2017. The Enterprises will subsequently provide FHFA with recommendations in support of a deep, liquid, robust mortgage servicing market. FHFA recognizes that servicing compensation has 

broad implications for the housing finance system and that industry stakeholders have various viewpoints on this subject. FHFA is 

aware that any change to compensation, if FHFA concludes that 

one is called for, would require a multi-year approach that considers the timing of competing initiatives affecting the mortgage 

servicing industry. 

Q.2. Last month, the Consumer Financial Protection Bureau 

(CFPB) sued the mortgage servicing firm Ocwen for allegedly failing borrowers at every stage of the mortgage servicing process. 

• What is the total number and unpaid principal balance of 

Fannie Mae and Freddie Mac-guaranteed loans serviced by 

Ocwen? 

• What steps had FHFA taken to mitigate the risks to the Enterprises related to Ocwen prior to the CFPB’s lawsuit? 

• Does FHFA need any additional statutory authority in order to 

appropriately oversee bank or nonbank mortgage servicers? 

A.2. The size of the Enterprises’ portfolios currently serviced by 

Ocwen is confidential, nonpublic information, but it represents a 

relatively small share of the Enterprises’ outstanding unpaid principal balance. In 2015 Fannie Mae and Freddie Mac, as part of 

their counterparty risk management, began reducing their exposure to Ocwen through transfers of servicing. In addition to significantly reducing the volume of loans serviced by Ocwen, Fannie 

Mae and Freddie Mac instituted contingency plans which included 

more frequent monitoring of Ocwen’s servicing operations and financial condition, more frequent discussions with Ocwen senior 

management, and the programmatic transfer of servicing on delinquent loans to another servicer. FHFA has issued supervisory guidance directing its regulated entities to identify high-risk and highvolume counterparties and establish contingency plans to manage 

counterparty risk exposures (see Advisory Bulletin 2013–01, ‘‘Contingency Planning for High-Risk or High Volume Counterparties,’’ 

(April 1, 2013)). Additionally, both Fannie Mae and Freddie Mac 

60 

hold partial collateral on their exposure to Ocwen in addition to the 

asset value of the mortgage servicing rights. 

On March 10, 2016, the Government Accountability Office (GAO) 

published a report entitled ‘‘Nonbank Mortgage Servicers: Existing 

Regulatory Oversight Could Be Strengthened’’ (GAO–16–278; available at: http://www.gao.gov/assets/680/675747.pdf), which stated 

‘‘Congress should consider granting FHFA explicit authority to examine third parties that do business with’’ the Enterprises. In response, FHFA generally agreed with GAO’s conclusion that 

servicers should be subject to consistent regulations and that there 

is a need for parity among financial institution regulators in oversight authority for the business counterparties of their regulated 

entities (see p. 94, Appendix VI: Comments from the Federal Housing Finance Agency). The Financial Stability Oversight Council has 

also recommended that FHFA be granted this authority in its last 

two annual reports and FHFA has included a similar recommendation as part of its own Annual Reports to Congress. 

Q.3. Nevada has long led the Nation in underwater homes—where 

borrowers owe more on their mortgage than the property is worth. 

At the height of the crisis, nearly 70 percent of Nevadans were underwater on their mortgages. Even today, Nevada leads the Nation 

with nearly 19 percent of borrowers with a home mortgage being 

underwater. 

• FHFA announced a modest principal reduction pilot in April 

2016. Do you know how many Nevadans received principal reductions pursuant to the April 2016 pilot? What is the average 

loan-to-value ratio of a Nevada borrower that received a modification pursuant to this pilot? 

A.3. Under the Principal Reduction Modification program, eligible 

borrowers could receive a principal reduction one of two ways. 

First, an eligible borrower could accept and complete a Principal 

Reduction Modification (PRM) offered by his or her servicer. Second, an eligible borrower could accept any trial loan modification 

with a first payment due date between May 1 and December 1, 

2016, following successful completion of the modification trial period, the principal forbearance component of the modification would 

be converted to principal forgiveness. The estimates below include 

borrowers in both of these categories and do not include Enterprise 

borrowers who have received principal reductions in conjunction 

with Nevada’s Hardest Hit Fund, which is a separate program. 

The Enterprises estimate that 20 Nevada borrowers have received permanent principal reduction modifications, and an additional 21 Nevada borrowers have received loan modifications with 

principal forbearance and are likely to be eligible to have this forbearance converted to principal reduction. The weighted average 

loan-to-value ratio of these borrowers is 142 percent. Please note 

that this data is subject to change and may be revised in the 

future. 

Since the height of the crisis, a number of factors have resulted 

in a substantial decrease in the population of seriously delinquent, 

underwater Enterprise loans, including those borrowers eligible for 

the Principal Reduction Modification program. These factors include loan-to-value ratios caused by rising home prices, improving 

61 

borrower performance, other successful modification and refinance 

programs provided by the Enterprises, properties entering REO/ 

short sales, third-party sales, and Enterprise sales of nonperforming loans (NPLs). 

At the time the principal reduction program was announced, the 

Enterprises estimated that approximately 33,000 borrowers were 

eligible for a Principal Reduction Modification nationwide. A borrower’s actual eligibility for principal reduction is determined by 

the borrower’s servicer and the Enterprises can only estimate eligibility for this program. FHFA and the Enterprises were aware that 

the population of eligible borrowers would decrease in the period 

between program announcement and servicer implementation of 

the program. FHFA does not have final estimates of the decline in 

the population eligible for the Principal Reduction Modification program, but the population of eligible loans did decrease substantially from the time of announcement through the end of last year. 

At the same time FHFA announced the Principal Reduction 

Modification Program, FHFA also required all buyers of Enterprise 

NPLs to start evaluating all deeply underwater borrowers for modifications that include options for principal reduction and/or arrearage forgiveness, thus increasing the likelihood that these borrowers 

would receive principal reductions after an NPL sale. 

Q.4. Ensuring clear communications with borrowers with limited 

English language proficiency can make consumers more comfortable with mortgage borrowing, and can help grow our economy. 

Also, during the foreclosure crisis, Nevadans for whom English was 

not their first language often had difficulties securing loan modifications, especially when their servicing kept being transferred 

from one company to another. 

• In an October 2016 speech, you stated a commitment to ‘‘finding a way forward’’ on language access issues at the Enterprises. Can you elaborate on your plans and commit to a timeframe for action? 

A.4. The 2017 Conservatorship Scorecard directs the Enterprises to 

support access to credit for borrowers with limited English proficiency by assessing the impact of language barriers throughout 

the mortgage life cycle. In May 2017, FHFA released a Request for 

Input (RFI) to solicit input on access to credit for borrowers with 

limited English proficiency, including current industry efforts, potential legal implications and concerns, operational impacts, and 

suggestions for process improvements. The RFI can be found at 

FHFA’s website here: https://www.fhfa.gov/Media/PublicAffairs/ 

PublicAffairsDocuments/LanguagelAccesslRFI.pdf. 

Based on the results of the RFI and other research and data 

gathering efforts, the Conservatorship Scorecard requires the Enterprises to develop a multi-year plan, appropriate to their role in 

the housing finance market, to improve access to credit for borrowers with limited English proficiency. 

Q.5. I appreciate the goal of Credit Risk Transfers deals, in terms 

of trying to shift risk away from taxpayers by selling-off credit risk 

to private investors. But I want to understand the long-term implications for borrowers and neighborhoods. 

62 

• Are loans that participate in Credit Risk Transfers eligible for 

innovative strategies for community stabilization? For example, can these loans be sold off through the Neighborhood Stabilization Initiative? 

• We know how difficult it was for borrowers to secure loan 

modifications when it was just Fannie and Freddie that owned 

their loan. As we involve more private sector investors in Enterprise-guaranteed loans through Credit Risk Transfers, has 

FHFA considered how it may complicate loss mitigation? 

A.5. Mortgage loans included in Credit Risk Transfer (CRT) transactions are eligible for the same community stabilization relief 

measures as loans not covered by CRT, including loss mitigation 

programs such as loan modifications. Under the current design of 

CRT structures, the Enterprises continue to own the credit risk on 

the mortgages and their servicing guidelines continue to apply. In 

fact, most servicers are unaware of whether any individual loan is 

part of a CRT transaction. When a loan becomes delinquent, 

servicers are instructed to apply an array of loss mitigation options 

to reduce the possibility of a credit loss as directed in the Enterprises’ servicing guides. The Neighborhood Stabilization Initiative 

focuses on selling properties that are in the REO channel to nonprofits who can ensure that the properties remain affordable. NSI 

is not affected by CRT. 

Q.6.a. One point I frequently hear from Nevada constituents is 

that the inventory of single-family homes available for purchase is 

woefully low. I say this to raise concerns about FHFA recently allowing Fannie Mae to guarantee a $1 billion loan for a single-family rental landlord, Invitation Homes, which owns nearly one thousand properties in Nevada. Before you approve any additional deals 

of this nature, will you consider the possible impact on home ownership in the impacted markets and submit a cost-benefit analysis 

to Congress before the deal is consummated? 

A.6.a. Following the mortgage crisis, single-family rentals have become an increasing component of the rental market for low- and 

moderate-income families. According to the Joint Center for Housing Studies, there are now approximately 15.5 million detached single-family rental units in the United States comprising approximately 37 percent of the total rental housing stock. Single-family 

rental properties can provide affordable housing alternatives to 

families in need of more space than a traditional multifamily apartment can provide. The Enterprises have historically engaged in the 

single-family rental market by financing loans to investors of 10 or 

fewer single-family properties, and the majority of single-family 

rental assets are owned by smaller owners. Institutional owners, 

such as Invitation Homes, own less than 2 percent of the total single-family rental housing stock. FHFA reviewed the Invitation 

Homes transaction, and approved the transaction with conditions. 

FHFA will consider the impact of single-family rentals on home 

ownership, as well as other policy implications, in the approval of 

any future transactions or single-family rental initiatives by the 

Enterprises. 

Further, FHFA is reaching out to participants in this market and 

gathering data to assess how single-family rentals impact home 

63 

ownership. Because data on the houses and tenants living in single-family rental homes is not readily available, at this time, FHFA 

does not anticipate having the data to support a cost-benefit analysis, but FHFA will provide a detailed analysis in support of any 

further action the Agency approves in this space with the information available. 

Q.6.b. If FHFA is going to permit any future deals of this nature, 

will you work with mission-driven landlords in communities that 

commit to promoting rental affordability? 

A.6.b. FHFA is currently conducting additional research on owners 

of single-family rental houses and will gather information about 

the effect of the Invitation Homes transaction on the single-family 

rental market, and FHFA and Fannie Mae will carefully monitor 

the results of this transaction. FHFA has also permitted Freddie 

Mac to explore one or more limited transactions in the detached, 

single-family rental market and expects them to announce their 

transactions soon. 

FHFA’s priority is to understand the single-family rental market 

and determine if there are areas of needed liquidity in this relatively untested market where the Enterprises could improve access to affordable rental housing. FHFA will consider mission-driven landlords and affordability for tenants of low- and moderate-incomes as primary factors in any approved single-family rental 

strategy going forward. 

Q.6.c. If FHFA is going to permit any future deals of this nature, 

will you impose affordability restrictions or require landlords to 

adopt certain ‘‘best practices’’ in terms of tenant protections? 

A.6.c. The reporting from both Enterprises, and strategies developed by the Enterprises for FHFA review, will enable FHFA and 

the Enterprises to engage with stakeholders in the coming months 

to better understand challenges, and possible opportunities, consistent with our objective to provide affordable rental housing. This 

will allow us to assess what role, if any, the Enterprises should 

play in the market, and what, if any, best practices should be 

required. 

Q.7. To follow-up on a question from Ranking Member Brown during your testimony, will you commit to expressly prohibiting buyers 

of Enterprise-guaranteed nonperforming loans or Enterprise-owned 

foreclosed properties (i.e., REOs) from using contract-for-deed arrangements with borrowers on a prospective basis? If so, please 

stipulate your precise timeframe for making this change. 

A.7. FHFA is working with the Enterprises to limit the utilization 

of contract-for-deed and lease-to-own arrangements in future sales 

of Enterprise-owned REOs. Fannie Mae has already implemented 

a prohibition on both contract-for-deed and lease-to-own agreements to REO buyers, with exceptions for certain qualified nonprofits and for-profit entities that responsibly use this tool to support home ownership. Fannie Mae also introduced a REO investor 

surveillance program to monitor large REO purchasers. Freddie 

Mac is considering similar actions. 

Fannie Mae and Freddie Mac are committed to encouraging sales 

of foreclosed homes to firms that engage in the responsible 

64 

acquisition and resale of REO properties, including to nonprofits 

through the Neighborhood Stabilization Initiative. 

FHFA is presently working to modify the existing nonperforming 

loan sale requirements to restrict or prohibit the use of contractfor-deed arrangements on loans Fannie Mae or Freddie Mac sell 

through their programs except to nonprofit entities. 

Q.8. The guidelines FHFA adopted for the purchase of lenderplaced insurance do not address the practice in which insurers provide servicers with free or below-cost services (that are unrelated 

to providing the lender-placed insurance) and then recapture the 

cost of those services through premiums. Insurance tracking is the 

biggest example. As a result, it appears that the Enterprises pay 

twice for those services, once through the servicing fee that is intended to cover such services, and again when they pay lenderplaced insurance charges that appear to be inflated by the insurer 

to recapture the cost of the free/below-cost services they provided. 

The State of New York has adopted regulations to restrict this 

practice after finding that it unfairly raises the cost of lenderplaced insurance. Has FHFA researched the impact of this practice 

on the cost of force-placed insurance charged to homeowners? What 

is FHFA doing to address this problem? 

A.8. FHFA began working with the Enterprises in 2012 to address 

concerns about certain practices related to, and the cost of, lenderplaced insurance (LPI). 

The 2015 Conservatorship Scorecard directed the Enterprises to 

continue to engage in efforts to reduce the costs of LPI. FHFA continued to review the Enterprises’ LPI arrangements during the 

year and directed the Enterprises to establish an aligned, threetiered minimum deductible for LPI coverage. This raised 

deductibles in order to lower premium costs. These efforts built on 

changes to the Enterprises’ servicing guides, effective June 1, 2014, 

that prohibit Enterprise servicers from receiving commissions or 

similar incentive-based compensation from LPI carriers. FHFA reviewed servicers’ practices related to tracking and recognizes they 

are an element of inflated costs, but concluded that the above 

measures were more effective means of reducing the Enterprises’ 

LPI expenditures. As an insurance regulator, New York State’s Department of Financial Services is in a better position to issue regulations related to specific insurance industry practices such as 

tracking. 

At FHFA’s urging, the Enterprises have developed more robust 

internal reporting metrics for LPI. These new internal metrics give 

insight into and quantify the costs of LPI to borrowers and enhance 

the Enterprises’ capacity to manage LPI costs. 

These and other efforts have helped to lower premiums and improve oversight of LPI expenses. Lower LPI premiums have been 

reflected in the claims for reimbursement that servicers have submitted to the Enterprises. For example, the average amount of a 

claim for reimbursement submitted to Fannie Mae fell from almost 

$4,000 for the 2009 coverage year to under $1,400 for the 2014 coverage year, a decrease of 64 percent. 

65 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD


26521003.eps

@ Federal Housing Finance Agency 

MEMORANDUM 

May24, 2017 

TO: Melvin!.. Wm 

Direcror ~ 

FRO~: 

Gcnen

Alfred ~f. l CoPolhrd unsel ~ 

RE: FHFA Aurhority to Suspend Divideods under the Senior Prefeue;l Stock Purchase 

Agrec:mcnr:< "'ith rhc Tte3Sury Depntmeni 

As I ha1·e advised you on severn! prior occasious, J 201 swnuurizing here the Fedcml Housing 

l'inoncc AgcJocy's I~! authoriry to su.<pcod dil'idcnds under the Seruor Pleferred Stoek Purehm 

AgreemeniS (PSPAs) entered into by rhc l'J IrA as consm•ror md the Tn'llsury Oeporm1ent. 

1. Payment of DividCild• undcr rhe PSPAs is a Discretionuy Detcnnination. 

The PSPAs pro1oide chat the 'freasury De~ruuem·s entickmenr to a dividend arises only "11/xN. tJJ 

and if dcxlan:d by the lloard of Dire-ctors, in itl sole discretioo, out of funds legally moihble 

therefore ... " (Senior Preferred Stock Cc.ni6ure § 2(a), 11 amended by the "Third Amendment."} 

[Empbosis adde<l.J The PSPA language foUO\I.~ tntdiriou1l corpomte bw tnd li.nancc p12ctice in 

which dividwds on stock- conlmted to inr,·resr on debr- are not oblig2tions that legally must be 

paid. By !Jiw, poymem of dividends is discretion:~ry with rhc board of direcrors, whkh may consider 

such factors as the futute prospects of the company and the netd to rewn earnings against rhc 

possibility of advetw market dcvcloprnc1ll!; the PSP.-\s reflect this principle. ·Ibis is true of 

prtfcued stock as well as common stock, Wlkss a ponicuhr stock instrurnenr mak<.1 poyment of the 

prtfeued dividend rnandarory. Se<, '.!·• Guttm:onn ,·. Illinois Centntl R. Co., 189 F.2d 927 (2d Ci.r.), 

ttrt. Jt~litJ, 342 U.S.ll67 (1951). 

Board discretion was pan of the Enrc.cprisc prc·nisting ptefeued Srock, now junior to the Treasury 

Oeparonent's senior preferred stock. I ntequeting dividend bugU3gc in the ccrti6C>ws for pod erred 

stock held by the plaintiffs in rhe ••nJ.ird Arucndroertt" litigation, the D.C Circuit Court of Appeals 

Coun found that "cbss p!oinciffs have oo enforcc .. blc right to diV1dends beClluSe the cwificates 

accord the Companies complete discretion to dec.bre or withhold <lividends.n Pc.ny Capiral LLC v. 

Moucbin, 848 F.3d 1072, I I 10 (D.C. Cir. 2017). 

2. Under the Saiel)· tnd Soundness Act, f'llt'A hnlds all powen of the board. 

FHf'A as conservator st>eceeds to a/11/x ri!,h/1 ~tul ~;m of Eurerprise sluttho!ders, officers and 

dioectot$ and hts dte power to opmte an 1\ntcrtr,;,., wirh aU the J>Owets of irs 6hardroldezs, officen 

and directors; 12 CSC 461 7(b)(2)(A)(i) & Ql)(l). [Emphuis added.) Stt Petty C~pitoi,1!4S !'.3d 21 

1987,1989 and Sw~chty v. TttQsury, 68 F.Supp.3d 116 (D.D.C. 2014). FHFNs conservatorship 
66 


26521004.eps

Page 2 of2 

authority in this area mirrors that of the FDIC. Jn 12 USC 1821{d)(2)(A). Thertfore, l'HFA as 

conscwawr has the board's discretionary powers and authority to suspend dividrnds. 

Under its statute, FHF A must consider whether such ~cciou is appropriate for purpose-s of 

safcgua.rding the soundness of the Enterprises and the stability of the American mortg.~ge marker. 

As con~el'\'ator, FHFA is authorized to take such actions as "appropriate to carry on the business of 

the [Entr.rprise to] preserve and conserve [tts] assets and property ... "; 12 USC 4617(h)(2)(D). 

Likewise, as regulator, the FHF:\ Director's "principal duties" include "to ensure that ... each 

regulated entity operates in a safe and sound manner, including maintenance of adequate capital. .. " 

and to foscez "liquid, efficient, competitive, and resilient national housing finance markets ... "; 12 

l:SC 4513(a)(1)(B)(ij&(u). For these reasons, the Dire.ctor acts under his s~arutory duties and 

powers to execcise the discretion the 1>$P;\.s provide the Entezpr:ise boards to suspend dividend 

payments to assure the safe and soWld condition of the Enterprises and the stability of the housing 

finance mar'~ ec. FinaUy, no conCNct provision in the PSPAs runs contrary co or prohibits such 

action by the Director. 
67 


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26521006.eps

Background 

• Fannie M ae and Freddie M ac's (the Enterprises') Non- Performin g Loan (NPL) sales reduce t he number of delinquent loans held in their 

inventories and transfer credit risk to t he private sector. NPLs are generally one year or more delin quent. The Federal Ho u sing Finance 

Agency's (FHFA's) goal is to achieve m o r e favorable outcom es f or borrowers and local communities than the outcom es that would be 

achieved if the Enterprises held the NPLs in their portfolios while also reducin g losses to the Enterprises and, therefore, to t axpay ers. All 

Enterprise NPL sales are subject to requirements p ublished by FHFA. 

• Fannie M ae offers and sells NPLs through a National Pool Offering (NAT) and Freddie M ac offers and sells NPLs through a Standard Pool 

Offering• (SPO• ). These pools are generally large and geographically diverse, alt hough som e pools may be geographically concentrated. 

• Each Enterprise also offers pools struct ured to attract diverse participation by nonprofits, small investors, and minority- and w omen-own

businesses. Fannie M ae refers to these pools as Community Impact Pools (CIPs) and Freddie M ac refers to these pools as Extended Timeli

Pool Offering•s (EXPO• s). CIPs and EXPOs are smaller sized pools and are typically geographically concentrated. The timeline between 

tran saction announcem ent and the bid due dat e is approximately two w eeks lo nger than the typical m arketing period to p ro v ide sm al ler 

i nvestors extra t ime to secure funds to part icipate in the NPL sale. 

Introduction 

• This report prov ides transparency into t he Enterprises' sales of NPLs and borrower outcomes post- sale. The report contains the following 

key information: 

• Quantity and attributes of NPLs sold from August 1, 2014 through December 31, 2016; • Borrower outcomes as of December 31, 2016 on NPLs sold through June 30, 2016, which constituted 63 p ercent of 

the total loans sold by the Enterprises t hrough December 31, 2016;* 

• Borrower outcom es post-sale compared to a benchmark of sim ilarly delinquent Enterprise NPLs that were not sold; 

and 

• Pool level information and outcomes, includi ng t he buyers o f the NPLs. 

• Additional performance dat a o n t he NPLs covered by t h is report as well as performance data on loans sold aft er December 31, 2016 will 

p ro v ided in f u t ure reports. 

@ • The outcomes of 3 Freddie Mac paot u le In August 2014 are not fnduded In this report because the trans.action was exe<:uted before FHFA Issued NPL sales and reporffng requirements. 

Page 2 

26521007.eps

Enhanced NPL Sale Requirements 

Announced MG,<:h 2, 201S 

Bidder qualffiGatlons: Bidders wil l be required to identify their 

servicing partners at the time of qualification and must co1nplete a servicing questionnaire to demonstrate a record of successful 

resolution of loans through alternatives to foreclosure. 

Modification requirements: The new servicer is required to evaluate 

all pre-2009 borrowers (other than those whose foreclosure sale date 

is imminent or whose property is vacant) who apply for assistance for 

the U.S. Department of the Treasury's Making Home Affordable 

programs, including the Home Affordable Modification Program 

{HAMP). • All post-2009 borrowers who apply for assistance must be evaluated for a proprietary modification. Proprietary modifications 

must not include an upfront fee or require prepayment of any amount 

of mortgage debt, and must provide a benefit to the borrower with 

the potential for a sustainable modification. Loss mitigation waterfall requirements: Servicers must apply a 

waterfall of resolution tactics that includes evaluating borrower 

eligibility for a loan modification (HAMP and/or proprietary 

modification), a short sale, and a deed- in· lieu of 

foreclosure. foreclosure n1ust be the last option in the waterfall. The 

watedall may consider net present value to the investor. 

REO sale requirements: Servicers are encouraged to sell properties 

that have gone through foreclosure and entered Real Estate Owned 

(REO) status to individuals who will occupy the property as their 

primary residence or to nonprofits. For the first 20 days after any NPL 

that becomes an REO property is marketed, the property may be sold 

only to buyers who intend to occupy the property as their primary 

residence or to nonprofits. 

Subsequent servlcer Subsequent servicers must assume all the responsibilities of the initial servicer. 

Bidding transparency: To facilitate transparency of the NPL sales 

program and encourage robust participation by all interested 

participants, each Enterprise has developed a process for announcing 

upcoming NPL sale offerings. This includes an NPL webpage on the 

Enterprise's website, email distribution to small, nonprofit and 

minority- and women-owned business (MWOB) investors, and 

proactive outreach to potential bidders. 

Reporting requirements: NPL buyers and servicers are required to report loan resolution results and borrower outcomes to the 

Enterprises for four years after the NPL safe. 

Small pools: The Enterprises w ill offer small, geographically 

concentrated pools of NPls, where feasible, to maximize 

opportunities for nonprofit organizations and MWOBs to purchase 

NPls. The Enterprises will actively market such offerings to 

non profits and MWOBs and provide additional time for buyers to 

complete the transaction .. 

Further Enhancements to NPL Sale Requirements 

Announc:ed Aprlll4. 2016 

High Loan .. to-Value (LTV) loa n modification requirements: For borrowers who apply for assistance and have a mark-to-market LTV ratio above llS percent, servicers will be required to evaluate these 

borrowers for loan modifications (HAMP or proprietary) that include 

principal and/or arrearage forgiveness. 

Proprietary loan modification standards: Proprietary modifications 

must e ither be fixed rate for the term of the modification or limit 

payment increases consistent with HAMP requirements: the initial period of a reduced interest rate must last for at least 5 years and interest rate increases are limited to 1 percent per year. 

No ""walk aways"": If a property securing a loan is vacant, buyers and 

servicers may not abandon the lien and "walk away" from the 

property. Instead, if a foreclosure alternative is not possible, the 

servicer must complete a foreclosure or must sell or donate the loan, 

including to a government or nonprofit entity. 

@) • Loan$ transferred september 1, 2016 onward a re not requ1red to be solicited for HAMP, due to the December 31, 20 16 e-xpiration of HAMP. Page 3 

26521008.eps

Highlights: NPL Sales Through December 2016 

• Through December 31, 2016, the Enterprises sold 72,502 NPls with 

an aggregate unpaid principal balance (UPB) of $14.2 billion. The 

loans i ncluded in the NPL sales had an average delinquency of 3.4 

years and an average current LTV ratio of 97 percen t, not including 

capitalized arrearages. The average delinquency for pools sold ranged 

from 1.4 to 6.2 years. 

• Freddie Mac sold 32,448 loans with an aggregate UPB of $6.6 billion, 

an average delinquency of 3.1 years, and an average LTV of 100 

percent. 

• Fannie Mae sold 40,054 loans with an aggregate UPS of $7.5 billion, 

an average delinquency of 3.6 years, and an average LTV of 94 

percent. 

• New Jersey, New York, and Florida accounted for 48 percent of NPls 

sold. These t hree states also accounted for 47 percent of the 

Enterprises' loans that were 1 year or more delinquent as of 

12/31/2014. 

• Twenty-two percent of the Enterprises' loans that were one or more 

years delinquent at the beginning of 2016 were sold during the y ear, 

up from 9 p ercen t in 2015 and 1 percent in 2014. 

• A n on-profit organization, Community Loan Fund of New Jersey 

(CLFNJ), along w it h its affiliate, New Jersey Community Capital, was 

the winning bidder on 9 of 11 CIP or EXPO pools t hat settled by 

December 31, 2016 and CLFNJ is a service provider for t he tenth and 

eleventh pools. 

@ 

Highlights: Borrower Outcomes 

• The borrower outcomes provided in this report are as of Decem

31, 2016, based on the 45,446 NPLs that settled by June 30, 2016of December 31, 2016, 41 percent of t hese NPLs had been resolve

• NPls where the h ome was occupied by the borrower had t he 

highest rate of foreclosure avoidance outcomes (18.8 percent 

foreclosure avoided versus 10.1 percent for vacant properties). 

• NPls w here the property is vacant had a much higher rate of 

foreclosure, nearly double the foreclosure rate for borrower 

occupied properties (38.5 percent foreclosure versus 16.6 percen

for borrower occupied properties). Foreclosure outcomes for vac

homes typically improve neighborhood stability and reduce blight 

t he homes are sold or rented to new occupants. 

• Compared to a benchmark of similarly delinquent Enterprise NP

that were n ot sold, foreclosures avoided for sold NPLs were highe

t han the benchmark. Thirty-three percen t of NPLs that have been 

with the new servicers the longest (1,737 NPLs for 20 months) 

avoided foreclosure, compared to 23 per cent of t he benchmark 

NPLs. 

• Eleven percen t of the permanent modifications provided 

arrearage and/or p rincipal forgiveness. The average forgiveness earned per loan was $35,385, with t he potential to earn an average forgiveness of $73,695 in total. 

Page4 

26521009.eps

Through Decembe r 3 1, 2 016 t he En terp rises sold 7 2,502 l o ans w ith a n aggregat e UPB o f $14.2 billion, a n 

average delinquency of 3 .4 years and an average loan-to-value of 97 percent. 

Combined Non Performing loan 

Sales Activity To Date 

loan Count at 

Settlement 72,502 loans 

Unpaid Principa l 

Balance at Settlement $14,160 million 

Average De linque ncy 3.4 years 

Averag e loan-to- Value Ratio 97 percent 

® 

40,000 

30,000 

20,0 00 

10,000 

0 

Number of 

Enterprise Loans 

O ne Year or More 

Delinquent 

Percent of 

Delinquent 

Loans Sold 

The Enterprises' 

Non-Performing loan Sales 

loan Count At Settlement, by Year 

44,169 

2014 

378,331 

as o f 

12/31/13 

1% 

2015 

278,995 

as o f 

12/ 31/14 

9% • 

2016 

199,619 

as of 

12/31/ 15 

26521010.eps

As of December 31, 2016 Freddie Mac had sold 32,448 loans through 39 national, geographically-diversified 

pools, and 6 smaller, geographically-concentrated NPL pools, w ith an aggregate UPB of $6.6 billion, an average 

delinquency of 3.1 years, and an average loan-to-value of 100 percent. 

Freddie Mac Freddie Mac (continued) 

Average Average 

Loan UPB Oe1in- Average Loan UPB De lin- Average 

Pool Settle Count at (SM) a t quency Loan-·to- Pool Settle Count at (SM) a t quency Loan-to

Sale Name Pool T ype* Date Settle Settle in Years Value Sale Name Pool Type• Date Settle Settle in Years Value 

SPO 2014 (Pilot) 1 SPO 8/28/14 2 , 4 32 533. 1 3.7 114" EXPO 2015113•• 1 EXPO 2/25/16 56 9.6 2.6 100

2 SPO 8/28/14 289 62.9 3 .6 11 4" SPO 2016#1 .. 1 SPO 5/ 12/16 496 100.5 3.4 73

SP0-2015#1'' 1 SPO --3/ 19/15 668 1i2.5 2.3 72" 2 SPO 5112116 1, 216 244.8 3.5 73

SPO 3119115 4 25 93 .6 2.8 10094 3 SPO 511 2116 1,090 258.2 3.7 100:

SPO 3/1611 5 6 4 4 133.3 3 .0 14594 4 SPO 4/28116 1,270 280.0 3.8 15 2:

SPO 2015/ii'-· - - 1 SPO 5114115 3,092 553.4 2.8 8294 5 SPO 4/28/16 638 1 30.4 3.3 144

2 SPO 511511 5 1, 185 212.4 2.9 100% EXPO 2016111'' 1 EXPO S/6/ 16 64 16.1 4. 6 112

3 SPO 511511 5 4 27 104. 1 4.0 82" 2 EXPO S/6116 105 22. 7 3 .9 

SPO 2015113'' 1 SPO l/23115 853 164.0 2.8 10894 SWLO 2016111'" 4 SWLO 8/29116 326 86.6 3.0 99

EXPO 2015#1" 1 EXPO 8/6/15 119 23 .6 3.6 84" SPO 201602 1 SPO 8/24116 358 92.0 5.4 122

SPO 2015114" 1 SPO 9/2Si1 5 1,879 343.1 2.9 95" 2 SPO 8/ 3 1/16 514 156.1 5.3 94

2 SPO 9/24115 272 62 . 1 3.8 8994 3 SPO 8/24116 5 73 119.6 3.9 69

3 SPO 9/24115 484 49.9 3.0 3594 4 SPO 8/24116 260 64.8 4. 3 99:

SPO 2015115" 1 SPO 11/12/15 1,697 378.7 3 .1 8594 5 SPO 8/24116 359 87.8 4.0 151

2 SPO 10/30115 508 114.5 2.9 85" EXPO 2016112 1 EXPO 8/31/16 72 16 .6 5.1 99:

3 SPO 1 1/12/15 933 218.8 3. 7 150" 2 EXPO 8/31116 56 10.8 4.4 113

4 SPO 10/29115 4 38 101.1 3.8 155" SPO 2016#3 1 SPO 12/13/16 175.8 

5 SPO 1 11 12/15 359 36. 7 2. 7 34" 2 SPO 12113116 738 127.2 1.4 709

SPO 201SP6'' 1 SPO 12/11115 878 159.1 1.8 3 SPO 12/6/16 821 168.4 2.1 

2 SPO 1211711 5 309 69.2 2.0 149:14 4 SPO 12/6/16 842 166.9 2.1 ••m 

SPO 2015tt7•• 1 SPO 2119116 1,153 220.3 2.6 72" 

2 SPO 2119116 612 138.4 2.7 99" 

3 SPO 2118116 625 128.4 2.5 146" 

4 SPO 2110116 794 176.2 3.1 102" 

5 SPO 426 80.5 2.5 11 m 

Total Froddlo MOle 32 448 s 6 615 3. 1 100% 

• Pool SPO: Ff'..cldl4- M.c: St•f'ld6rd Po-ol Off•rlf'l&,. UC:PO: F.-.dd .. M.c TIM4-Ifrte Po01 Off•rlnJ, SWLO: WhOI• LO•I'\ Off'• f1"1· @ 

••• In AUffuSI 1016 , Fr.-dd .. M6C sold loans from a truo\1 In whkh F'r.-ddlo Mile owns and fl.\.lant.nt .. s All tnuod from :s;uch trust. 

·• The outcome' of these deah are provided In thh .-.port. 

Page6 

26521011.eps

As of December 31, 2016 Fannie Mae had sold 40,054 loans throu gh 31 nation al, geographically-diversified pools, 

and 5 smalle r, geographically- concentrate d NPL pools, with an aggregate UPS of $7.5 billion, an average d e linque ncy 

of 3 .6 years, a n d an average loan-to-valu e of 94 per cent. 

Fannie Mae 

Loan De lin· Avera.ge 

Pool Se ttle Count at UPB ($M) quenc:y 

Sal e Name Pool Type" o ote se ttle at settle tn Years Vtidue 

FNMA 201 5·NPL1"'• 1 NAT 6119/ 15 606 151.5 5.0 

2 NAT 6/19/15 1,871 481.4 5.0 

FNMA 201 S·NPL2- 1 NAT 9/25/15 627 3.2 1-'13!1\ 

2 NAT 9/26/15 2 ,4 79 484.0 3 .1 71 W, 

FNMA 2015·NPL.2·CIP- 1 CIP 10/26115 38 5. 3 3 . 2 8 1W, FNMA 2015·NPL3"' .. 1 NAT 12/17/15 1,246 272.2 4.1 

2 NAT 121 1?'115 2,703 424. 3 2.7 64!1\ 

3 NAT 12/17115 872 177.4 3.0 

FNMA 2016·NP1,. 1 .... 1 NAT 3/30116 2,308 4 78.6 5.0 90% 

2 NAT 3/29/16 l,022 207. 6 5.0 86% 

NAT 3/30116 785 158.7 5.1 92% NAT J /30116 609 128.4 5. 1 99% 

FNMA. 2016 •NPL 1· 5•CIP""" 1 CIP 4/21116 47 12. 1 6 . 2 FNMA 2016 ·NPL2 , .. NAT 6/28/16 2,912 556.5 3 . 9 94% 

r · NAT 6/28/t6 1,940 370. 2 4.0 91% 

3- NAT 6/28/16 992 192.5 4.1 93% 

4". NAT 6/28/t6 674 123.6 4.0 96% 

l A NAT 7/26/16 13281 246. 8 4. 1 

@ • Pool Typo NAT: F'annto M- National Pool, CtP: F'annMo M- Community lmpacl Poo4. ·-· Tto. outcom•s of tMM <k-•b •(• p roYI<ktd h\ thb ,..port, 

Fannie Mae (continued) 

Average 

loa.n Oeltn· 

Pool Settle count at UPS (SM) quency 

sate Name Pool Type"' Da te settle at settle tn vea.rs 

FNMA 2016·NPL2·CIP 1 CIP 7/25/16 71 17.9 4.4 FNMA 2016-NPL3·1 A NAT 8/24 /{6 1,267 2 12.0 2.9 

B NAT 1,257 209.1 2.9 

c NAT 8124/16 1,269 2 15. 2 2.9 

FNNA2016-NPL3 ·2 A NAT 8/24 /16 1,229 204. 7"--·2 .3 

B NAT 8/24/16 1,259 206. 0 2.3 

c NAT 8/24 /16 1,31 1 2 10 . 5 2.4 

FNMA 20 16 -NPL3-CtP 1 CIP 9/21116 50 1 1. 7 3.4 

F NMA2o•6:NPL4 1 NAT 10125/16 1,825 303.7 3.7 

2 NAT 10/25/16 924 144.2 3.8 

3 NAT 10/25/16 1, 199 177.9 2 .9 

4 NAT 10/27/16 S26 89.8 3.4 

FNMA 2016•NPL4·CIP 1 CIP 11/22/16 77 13.0 4.5 

FNMA 2016·NPL5 1 NAT 12/22/16 1, 246 244.6 3.4 

2 NAT 12/22116 1,274 243. 5 3.4 

3 NAT 12/22/16 1, 406 253.2 3.3 

4 NAT 12/22/ 16 640 1• 4 2.6 3.5 

5 tiAT 12/22116 2 12 40.6 2.9 

Totoa.l Foa.nnio Mille 4 0 ,054 s 7,545 3 . 6 

Av

Lo

v

Page7 

26521012.eps

FHFA Non-Performing Loan Sales Report December 201

New Jersey, New York, and Florida accounted for 48 percent of NPLs sold as of December 31, 2016. These 

three states accounted for 47 percent of the Enterprises' loans that were one year or more delinquent as of 

December 31, 2014. The distribution of NPL sales by state closely mirrors the distribution of the Enterprises' one year or more delinquent loans by state prior to the start of NPL programmatic sales in 2015. 

Geographic Distribution of NPL Sales - Top 10 States* 

New Jersey 

New York 

Florida 

Massachusetts 

Pennsylvania 

Cal ifornia 

Illinois 

Maryland 

Washington 

Oregon 

@ • Se-e pa(lle' for mo..-e lnfOf"JYYat1on. 

llliiiiill 5. 5% 

19.0% 

----· 19.9% 

• Percent of Total NPL Sales to Date 

• Percent of Total Enterprise Book One Year or 

More Delinquent as of 12/31/2014 

Page a 

26521013.eps

The borrowe r outcomes provided in this report are base d on 45,446 NPLs that w e r e sold and settle d by June 30, 20

and reported through Dece mber 31, 2016. In a be nchmark comparison, 33 perce n t of NPLs that h ave b een with th

new servicers the longest (1, 737 NPLs for 20 months) avoided foreclosure, compared to 23 percent of the NPLs tha

w e r e not sold. Fore closures for NPLs sold trended lower than t he benchmark. 

40% 

30% 

20% 

g 

0% 

month 

® 

Foreclosure Avoided Foreclosure Not Resolved 

100% 

NPL Sales 40% 90% 

(Month 20) 80% 

r33% 

30% 70% 

60% 

-'-'FU 24% 50% 20% 

40% 

30% 

10% 20% 

10% 

-

6 12 18 24 

0% 

month 6 12 18 24 

0% 

month 6 12 18 

Weighted Average Loan C haracteristics 

Loan to Value Delinquency (years) 

Benchmark I 93.9% I 2.9 

NPL Sales 97.2% 3.5 

• The 8enchmuk tracks tho performarM:o of the EnterpriSft'IOan$ that wero one yoar or more Ocllnqoont .as ofOeoember- 31, 20 13, o"''r the two suoceecftng tt provide$ an 

historical fa.- the! of the loAns sotd In the HPL n le-s. perform,.nc:e o( the loans sold In the NPL s3IC!:' W'lll differ from the be-nchmark due to, 

among other factors: cHfferences1n loan characte.-lst1a. (for example, ma-rk-to-market toan-to-vatue rauo, eeoeraphl<: kxaUon and deUnquency), dtfferenc:es In the Enterprises • and 

the NPL buyers • ion mltlpt1on prov•ms and KriAdn iJ QUtrttott:h, • nd c h• n &C$ In thtt moc:ro•e<:Onomlc onvtronme n t. 

Chatts e)(Ciude the '"Other-"' categc>ry (Whole Loan Sales, Cha.-ge Offs, and Ae-pur"chase-s). 

f« lnfol'mat1on on tiW! number of loans contl'lbut1na to ead\ month's page 26. 

Page9 

26521014.eps

NPLs where the home was occupied by the borrower had the highest rate of foreclosure avoidance 

outcomes (18.8 percent foreclosure avoided versus 10.1 percent for vacant p roperties). NPLs where the 

prope rty was vacant had a much higher rate of foreclosure (38.5 percent foreclosure v e r su s 16.6 percent for borrower occupied properties). Foreclosure outcomes for vacant homes typically improve neighborhood 

stability and reduce blight as the homes are sold or rented to new occupants. 

Loan Outcomes by Verified Occupancy Status 

100% 

15.6% 

80% 

60% 

40% 

• Foreclosure Avoide

Foreclosure 

• Other"* 

20% • Not Resolved"'"" 

0% 

Borrower Occupied Non-Borrower Occupied Vacant 

26,552 loans 2,195 loans 9,108 loans 

@ • 17 for mote Information. -Other h den ned as: whote loan repurchases by the Enterpr1ses, and char8I!·Offs . 

... Not Re'-QIYCd 1$ deflno-d u : In Trtal Moctlfk:• don, O.llnqvont: Mc)diflod Post NPI..S.fo, and Dollnqvont: NcY\Cr Modlflod Post NPI..S•to. Page 10 

26521015.eps

Through December 31, 2016, 41 p ercent of the NPLs sold had b een resolv ed. Seventeen percent of NPLs sold 

were reso lved w ithout foreclo su re and 24 p ercent w ere resolved through foreclosure. 

Loa n Outcomes 

Not Resolved Outcomes 

2.7% in Trial Modification 

NPL Sales to 

Date 

2 .5% Delinquent: Modified Post NPL Sale 

53.0% Delinquent: Never Modified Post NPL Sale 

• See- page 18 for more Information. 

Other** 

@ •-• Othor Is dctflnod • = wholo loan ntfl, repurchase-s by U,. EnUtrprlse-s, ._nd 

... 

Foreclosure 

Avoidance 

Outc omes 

2 11 Short Cash Payoff 

1.5% Deed-i n -lieu 

ini F:!.!!'-

2 .7% Self Cure* 

3. 9% Short Sale 

5.8%-. Permanent 

Modification 

Page 11 

26521016.eps

NPLs where the servicer had established contact with the borrower, co-borrower, or trusted advisor 

("Right Party Contact") had a m u ch higher rate of non-fore closure outcomes (20.8 percent v e r su s 9 .2 

pe rcent with no right party contact). In contrast, whe n a servicer w as unable to establish contact, NPLs 

had a highe r rate of foreclosure (36.4 p ercent v e r su s 17.3 p e r cent w ith r ight party contact). 

Loan Outcomes by Right Party Contact 

100% 

20. 8 % 

8 0% 

60% 

• Foreclosure Avoided .. 

40% 

20% 

0% 

Right Party Contact No Right Party Contact 

30,326 loans 15,120 loans 

• Se<e page 20 for more- lnfOf'MaUon. 

•• Ott'4r b doftned as: whololo.n n ol<tS, ropurch•.Ms by thct and . 

Foreclosure 

• Other .... 

• Not Resolved'""" 

@ .-.-. Not Re-solved t.s as: In Tr1at Mo<Hncatton. Modi ne-d Post NPL sate, and Hewor Modi Red Post NPL sate . Pag e 12 

26521017.eps

The least delinquent NPLs sold (less than two years delinquent) had the highest percentage of 

foreclosure avoidance (24.8 percent versus 15.6 percent for 2-5 years delinquent and 9.9 percent for 

loans 5+ years delinquent). 

Loan Outcomes by Length of Delinquency 

100% 

=- 80% 

24.0% 

40% 

20% 

0% 

< 2 Years Delinquent 2-5 Years Delinquent 5+ Years Delinquent 

14,317 loans 1 8, 900 loans 12,229 loans 

® • See 21 for more Information. •• Othe r ts as: whole foan sales, repurchA$(!>S by the Enterpf1ses, A-nd chargc-·ofrs . ...... Mot Resotwd IS deOned as: 1n l'rlal Modincat1on. Delinquent: Modlfted Post HPL Sale. and Delinquent: Never Modi fled Post NPL sate. 

• Foreclosure Avoided" 

Foreclosures 

• Other" .. • Not Resolved",." 

Page 13 

26521018.eps

Ne w York h ad a slower rate of resolution compared to N ew Je rsey , Florida, and t h e average of al l other 

stat es. 

100% 

80% 

60% 

40% 

20% 

0% 

NY 

7, 157 

loans 

• See PatiO 22 for more Information. 

Loan Outcomes by State 

NJ 

9 ,012 

loans 

FL 

6,624 

loans 

All Other States 

22,653 

loans 

® •• Other Is deflned is$: whole lolln sales, by the Enterprise-s, and duarst"-offs. •• Not RlesQived t.s "-flrwtd Q: In Trial Mo<ftflcadon, O.Unqucn t: Modlfl-od POlt HPt.. Salo, and Oellnquon t N•ver Modified PO$t NPL S..lo. 

• Foreclosure Avoided" 

Foreclosures 

• Other"" • Not Resolved'""' 

Page 14 

26521019.eps

Table 1: NPL Sales by State 

····----

NPL 

NPL Sa les Loan Count 

Sales Loan Percent of , 

State UPS (SM) Count Total Loan Count Percentage i 

·

NPL erprlse Loans 1 

Sa les Loan Count More Delinqu

NPL Sa t .. s Loan p,.rc .. nt of as of 1 2/31/20

State UPB ($M ) Count Total n Count Perce

New Jersey 3,015 .4 13,785 37,530 13 .5% Ne'WY"orl< -· i ,75i.i ·.;o,918 T$.1 !>"5:504 ;·9.9% 

Florida··· ... 1,887.2 ·;0, 438 ·;·4.4% 3"8;984 i4.0% 

"MaSSa"C:iiU.etts ••• 622.9 ··2,941 ···4.1% ·s;6o2 ··:i:1"% 

""9>48 ··J.5% 

caufornia · ··3.9% 1·;;496 'iiii'OOis··· ••• 458.6 ··2,557 ···3.5% •• 6;291 "i':l'% 

Maryland ••• 485.3 ··2.336 ···3.2% ·s:186 ··i-:9% 

:::--.ro8.'7·::I.o26 :).8% 1I259 ::Ls..!. 

Oregon 300.3 1,643 2.3% 5,693 2.0% OhiO···· •·· 154.7 ··1,547 ···i.1% ·s:5n "TO% 

Nevad!:: 

Connecticut 274.1 1, 381 1.9% 7,111 2.5% 

;:ex;;s···· •.. 147.3 ··;·,204 ···.; .7% 4;985 "1-:8% 

::: 147.8 :::1.5\1\ ::! .6% 

Ar1zona 89.0 485 0.7% 1,632 

.... 49.4 :

Mlssour1 42.9 414 0.6% 2,114 

't'OUiSiii.ia --·--4-8:7"··- 409 ••• 0.6\1\ -··1 ,531 ·

Alaba';,;;. ... 40.5 •• 401 ... 0.6% .... 1 ,883 .

Olstr1ci' of Cotumbla ... -s3.8 ..... 386 ______ o . 551\ .... 1. 186 .

'O'ida'h'o'ma .... 32.3 ··- 3 52 ••• o . 5% ---1-;;iO-o--···

'Minnesota 58.:> •• 349 o .5% ···; ,437 .

Tennessee .... 36.1 .... 34 3 ... 0.5% .... 1 ,560 .

COiOrid'o ... 44.1 ___ 2_5_1--·--o.J% ··--1,196 .

... 40.2 .. 229 ... 0 .3% .... 855 "

Iowa.... --·-uy·-- 213 ... 0 .3% .. 1,1 22 .

Arka"risas -· 22.o ··- 211 ... o.3% .... 943 -

'UUih.... -- 39.1 ··- 192 ···o.3% .... 121 ·

.... 19.6 ::-- 175 :::0.2% ::-- 768 -

Hawaii 270.9 857 1.2%• 2 ,033 0.7% 

NO'rtii"Carolina -·· 117.5 ··-857 "'"'"1.2.% ! "'"3:918 "'"i:-4'% 

Indian!:: ::: 76.3 :: 809 :::! .1%: J;3S4 _::o.8 % 

Maine 113.4 748 3, 746 1.3% 

Virginia·· •• 137.o ··-744 ·i:n8 ··o:a% 

Wi$COn$fn •• 1oo.3 •••• 74o ·-; ··;:m---··o.7 % 

south ·c-arolina 731 ···; ·i;584 ··oR 

'Ne'W'Me'Xico ••• 104.6 •••• 65o ""3;m---··.;R 

::: 59.6 ::·· 543 ::o.9% 

Delaware 92.5 516 0.7% 1 ,490 0.5% 

RiiOde"isiand 486 _:i;569 

Vermont 27.6 174 0 .2%: 664 

Ka"nSas·· -· 17.4 .... 167 ... o.2%i -·· 7 96 ·

IdahO... .... 22.7 .... 154 ... 0.2%! 

WeSt-V-irginia --- 8.2 ·-- 76 ---

"Ne'br'as.t<a -· 6.4 ··- 62 ••• •••• 34o ··

;;;.m;-.;.·,;;. ... 10.1 .. 57 ... .. .. 379 .

'NOrtt\'oakota .... 2.3 .. 25 93 .'So'Ut'h''oakota -----2-.7---···· 22 ••• .... 47 ·

.... 2.9 ::·· 20 ... :

Alaska 3.3 18 136 'GUain;·PR, VI 3.5 .... 24 ••• 0.0% .... 75 .

TotaC:: .:::14,159. 6 __ ::· 

@ 

Page I S 

26521020.eps

FHFA Non-Performing Loan Sales Report December 201

Table 2: NPL Buyers 

NPL Buyer 

LSF9 Mortgage Holdings, LLC 

MTGLQ Investors, L.P. 

Pretium .Mortgage Credit Partners I Loan Acquisition. LP PRMF Acqufsftfon LLC 

MTGLQ Investors, L.P. and Pretium NIOrtgage Credit Partners I 

GCAT Management Services 201 5 -13 LLC 

Rushmore Loan Management Servtces, LLC 

(Freddie Mac NPL Pflot') 

Carlsbad Funding Mortgage Loan Acquisition, LP 

New Residential Investment Corp. 

MTGLQ Investors, L.P. and New Residential Investment Corp. 

Upland Mortgage Acquisition Company II, LLC 

Bayview Acquisition,. LLC 

21st Mortgage Corporation 

SW Sponsor, LLC 

MFA Financial. Inc. 

OSAT Sponsor ll, LLC Communi ty Loan fund of New Jersey, Inc 

Nomura Corporate Funding Americas_} llC 

New Jersey Community Capftal 

Corona Asset /lllanag:ement XII, LLC Corona Asset Management XVIII . LLC 

Total 

N umber of 

Pools 

Bought 

17 12 

11 

5 

3 3 

4 

2 2 2 2 

5 

4 

81 

• The F'rt:ddle MllC HPL Pilot sale not tndude a provision to disclose the name. 

@) 

Loan Count 

Loan Count UPB ($M) Percent 

at Settlement Oa te at Settlement Date of Total 

16,292 3,197.2 22.5% 

1 1 ,no 2 , 139.1 16.2% 

9,402 1 ,782.7 13.0% 6,594 1 , 246.9 9.1% 

6,133 1 , 173. 5 8.5% 

4,704 869.9 6.5% 

3,375 705.8 4.7% 

2 ,721 596.0 3.8% 

2 ,308 478.6 3.2% 

2, 118 449.6 2.9% 

1,406 253.2 1.9% 

1,335 324 .5 1.8% 

953 202.5 1.3% 794 176.2 1.1% 

606 151.5 0.8% 

526 89.8 0.7% 

4 38 101.1 0.6% 

353 75.9 0.5% 

272 62.1 0.4% 233 48.3 0.3% 

1 19 23.6 0.2% 

50 11.7 0.1 % 

72,502 14,159.8 100.0% 

Page 16 

26521021.eps

Table 3: Loan Outcomes by Verified Occupancy 

Non· of Non· 

Borrower Borr o1N'Cr of Borrower Borro'NICr PercontiiiS

Loilln Occupied Occupi ed Vacant Unknown Pcorcent Occupied Occupi ed Percenta.ac of of Unknow

Category Count Loans Loan s Loans Occupancy of Loan s Loan s Loans Vac.ant Loans Occupanc

Resolved 18,482 9,41 8 715 4,426 3,923 40.7% 35. 5% 32.6% 48.6% 5 1 . 7

Foreclosure Avoided 7 , 715 4 ,998 342 919 1,4 56 17.0% 18. 8" 15.6" 10. 1% 19.2

Self Cure· 1,219 936 82 19 1 82 2 .7% 3.5% 3 .7% 0 . 2% 2.4

Paid in Full 1 ,188 718 so 147 27 3 2. 6% 2 .7% 2 .3% 1 .6% 3 .6

Ac tive Permanent 1'\1\odific;atl on 2 ,617 2,236 114 34 233 5 .8% 8.4% 5.2% 0 . 4% 3 .1

Short Sale 1,792 780 62 3 3 3 61 7 3 .9% 2.9% 2 .8% 3 .7% 8 .1 

Oe ed· in· l ieu 702 21 2 26 344 1 20 1 .5% 0.8% 1.2% 3.8% 1.6

Short. Cash Pay ·Off 197 116 8 42 3 1 0.4% 0.4% 0.4% 0.5% 0.4

Foreclosure 10 ,767 4,420 373 3,507 2,467 23.7% 16.6" 17.0" 38.5" 32. 5

Not Resolved 26,497 16,955 1,449 4,586 3,507 58. 3% 63. 9" 66.0% 50. 4% 46. 2

tn Trial Modification 1 ,238 1 , 0 25 5 9 12 142 2 .7 :11 3 .9% 2.7% 0 .1% 1.9

Delinque nt: Modtf1ed Post HPL Sa l e 1,1 52 891 3 8 35 188 2 .5% 3.4% 1 .7% 2.5De linque nt: Neve r Modified Post NPL Sate 24 ,107 1 5,0 39 1 ,352 4 ,539 3,177 53 .0:11 5 6.6% 61.6% 49.8% 41.9

Other 467 179 31 96 161 1.0" 0 . 7" 1.4" 1. 1" 2.1

Whole loa n Sal es 35 0 0 0 3 5 0.1% 0.0% 0 .0% 0 .0:11 0 . 5

Repurc hase by Enterprise 164 59 2 8 95 0.4:11 0 . 2% 0.1 :11 0 .1% 1.3

Charge .. off 268 12 0 29 88 31 0.6% 0 . 5% 1.3% 1.0% 0.4

T otal 45,446 26, 552 2 , 195 9 ,108 7 ,591 1 00.0:11 100.0% 100.0:11 100.0 :11 100. 0 

• Includes Sl non·d@linqvent loan$ included ln the f-;:annie pilot sale. 

(§) 

Page 17 

26521022.eps

Table 4: Loan Outcomes Summary 

Category 

Resolved 

F orec losu re Avoided 

Sel f Cure• 

Pafd In Full 

Active Permanent Modification 

Short Sate 

Deed-In-lieu 

Short Cash Pay-Off 

Foreclosu re 

Not Resolved 

in Trial Modification 

Delinquent: Modified Post NPL Sale 

Delinquent: Never Modified Post NPL Sale 

Other 

Whole loan Sales 

Repurchase by Enterprise 

Charge-off 

T otal 

Total Count Total Percent Total Percent 

of Loans Sold of Loans Sold of Resolved 

18,482 40. 7!16 100.0!16 

7,715 17.0!16 41.7!16 

1,219 2.7!1> 6.6!1; 1,188 2.6% 6.4!1> 

2,617 5.8!1; 14.2!1> 

1,792 3.9!1> 9.7!1; 

702 1.5% 3.8% 

197 0.4% 1.1!1> 

10,767 23. 7!16 58. 3!16 

26,497 58. 3!16 

1,238 2 .7% 1,152 2.5% 

24,107 53-0% 

467 1.0!16 

35 0.1 % 

164 0.4% 

268 0 .6% 

45,446 100.0!16 

• Includes 51 non-de linquent loans Included in t he Fannie Mae pilot sale. 

@ Page 18 

26521023.eps

Table 5: Loan Outcomes b y Loan to Value 

Percent Percent Percent Percen

Loan LTV LTV >90 LTV >110 L.TV > Percent LTV LTV >90 LTV >110 LTV> 

Category Count <;;:90 to <;:1 10 to <;1 30 130 of Loans <;;:90 to <=110 to <;;:130 130 

Resolved 18,482 8,761 3,938 2,547 3,236 40.7% 38.7% 41 . 3% 43.0% 43.9

Foreclosure Avoided 7,715 4 ,061 1,449 980 1,225 1 7.0% 18.0% 15.2% 16.5% 16.6

Self Cure• 1, 219 705 167 110 237 2 .7% 3.1% 1.8% 1.9% 3 .2

Paid in Full 1 ., 188 1 , 105 57 14 12 2.6% 4.9% 0.6% 0.2% 0.2

Active Permanent Modification 2,6 17 1 ,436 518 342 321 5 .8% (). 3% 5.4% 5.8% 4.4

Short Sale 1,792 532 482 350 428 3 .9 % 2.4% 5.1% 5.9% 5.8

De·ed-in-lieu 702 200 184 144 174 1.5% 0.9% 1.9% 2.4% 2.4

Short Cash Pay·Off 197 83 41 20 53 0.4% 0.4% 0.4% 0.3% 0.7

Foreclosure 10,767 4,700 2,489 1,567 2,01 1 23.7% 20.8% 26.1% 26.4% 27.3

Not Resolved 26,497 13,676 5,531 3,31 7 3,973 58.3% 60.5% 58.0% 55.9% 54.0

in Trtal Modification 1 ,238 629 254 173 182 2 .7% 2.8% 2 .7 % 2 .9% 2.5

Del1nquent: Modified Post NPl Sale 1 ' 152 615 220 158 159 2 . 5% 2.7% 2 .3% 2.7% 2.2

Delinquent: Never .Modified Post NPL Sale 24, 107 12,432 5, 057 2 , 986 3 , 632 53.0% 55. 0% 53.1 % 50.4% 49.3

Other 467 186 61 65 155 1.0% 0.8% 0.6% 1.1% 2.1

Whole Loan Sales 35 24 () 3 2 0.1 % 0.1% 0 . 1% 0.1% 0.0

Repurchase by Enterprise 164 83 24 24 33 0.4% 0.4% 0.3% 0.4% 0.4

Charge-off 268 79 31 38 120 0 .6% 0.3% 0.3% 0 .6% 1.6

Total 45,446 22, 623 9 ,530 5, 929 7 ,3 64 100.0% 100.0% 100.0% 100.0% 100.0

• lndudes 51 non-delinquent loans included in the Fannie Mae pilot sale . 

@ 

Page 19 

26521024.eps

Ta ble 6 : loa n Outcomes by Right Party Contact 

Loan Count Percent of Loans Sold 

No Right No Ris ht 

Right Party Party Right Party Party 

Category Conta ct Contact Totals Cont act Cont act Totals 

Resolved 1 1,578 6,904 18,482 38.2% 45.7% 40. 7% 

Foreclosur e Avoided 6 ,317 1, 39 8 7,715 20 .8% 9 . 2% 17.0% 

Self Cure• 1,053 166 1,219 3.5% 1 . 1% 2.7% 

Paid in Full 842 346 1,188 2 .8% 2.3% 2.6% 

Active Per'manentModifia.t.ton 2,439 178 2,617 8 .0% 1.2% 5 .8 % 

Short Sa le 1,216 576 1,792 4 .0% 3.8% 3.9% 

Deed·in-lfeu 602 100 702 2.0% 0.7% 1.5% 

Short Cash Pay·Off 165 32 197 0.5% 0.2% 0.4% 

Foreclosul"e 5,261 5,506 10,767 1 7.3% 36.4% 23.7% 

Not Reso tved 18,543 7,954 26,497 6 1.1% 52. 6% 58.3% 

1n Tna l Modtf1catton 1, 125 113 1,238 3.7% 0 .7% 2 .7 % 

Delinquent: Modtrled Post N Pl Sale 1,068 84 1 , 1 52 3.5% 0.6% 2.5% 

Delinquent: Never Modified Post NPl Sale 16,350 7 ,757 24, 107 53.9% 51 .3% 53.0% 

Oth&r 205 262 4 67 0.7% 1. 7% 1.0% 

Whole Loan Sales 25 10 35 0.1% 0.1% 0.1 % 

Repurchase by Enterprise 40 124 164 0.1% 0.8% 0.4% 

Charge·off 140 128 268 0.5% 0.8% 0.6% 

Tot al 30,326 15,120 45,446 100% 100% 100% 

• Includes 51 non-delinquent loans Included In the Fannie Mae pilot sale. 

@) Page 20 

26521025.eps

Table 7: loan Out.comes by Delinquency at. Settlement. Loans of < 2 Loans 2-3 Loans 3-4 Loans 4·5 Loans S-6 Loans 6+ 

Years Years Years Years Years Years 

Cateaory Loan Count Delinque nt Delinquent Delinquent Delinquent Delinquent Delinquent 

Resolved 18,482 6,977 3,117 2,538 2,037 1,876 1,937 

Foreclosure Avo,ded 7,715 3,548 1,276 950 728 646 567 

Se1f Cure• 1,219 811 140 91 59 58 60 

Paid In Full 1,188 632 241 150 78 57 30 

Active Permoi!lnent Modif\cation 2_,617 116 450 348 273 250 180 

Short Sate 1,792 629 296 237 223 192 215 

Deed-in-lieu 702 299 117 96 72 66 52 

Short Cash Pay-Off 197 61 32 28 23 23 30 

Fore ctosure 10,767 3,429 1,841 1_,588 1,309 1,230 1 ,370 

Not Resolvod 26,497 7,218 3,793 3,849 3,381 3,423 4,833 

1n Trlat Mod1flcaUon 1,238 455 229 183 127 131 113 

OeUnquent: Modlfted Post NPL Sate 1,152 541 187 142 128 79 75 OeUnquent: Never Modified Post NPL Sate 24,107 6,222 3,377 3,524 3, 126 3,213 4,645 

Other 467 122 82 52 51 57 103 

Whote Loan Sates 35 24 8 1 1 1 

Repurchase by Enterprise 164 30 21 14 21 25 53 

Charge-off 268 68 53 38 29 31 49 

Total•• 45,446 14,317 6,992 6,439 5,469 5,356 6,873 

Pereent•ae Percentaae Percentaae Percentaae Percentase Perc:entaae 

Perc:ent of of < 2 Years of 2•3 Years of 3•4 Years of 4 •5 Years of 5 •6 Years of 6+ Years 

Category loans Delinquent Delinquent Delinquent Delinquent Delinquent Delinquent 

Resolved 40.7% 48.7% 44.6% 39.4% 37.2% 35.0% 28.2% 

Foreclosure Avoided 17.0% 24.8% 18.2% 14.8% 13.3% 12.1% 8 .2% 

Self Cure· 2.7% 5. 7% 2.0% 1.4% 1.1% 1.1% 0.9% 

Paid In Full 2.6% 4.4% 3.4% 2.311. 1.4% 1.111. 0.4% 

AcUve Permanent Modification 5.8% 7.8!1 6.4% 5.4% 5.0% 4. 7% 2 .6% 

Shol"t Sale 3 .911. 4.4% 4.2% 3.7% 4.1 11. 3.611. 3.111. 

Oeed· in·lleu 1.5% 2.1% 1. 7% 1.5% 1.3% 1 .2% 0 .8% 

Short Cash Pay·Off 0.4% 0.4% 0. 5% 0.4% 0.41(, 0.4% 0.411. 

Foreclosure 23.7% 24.0% 26.3% 24.7% 23.9% 23.0% 19.9% 

Not Resolved 58.3% 50.4% 54.2% 59.8% 61 .8 % 63.9% 70. 3% 

1n Trtal Modtfkatlon 2. 7X 3.2% 3.3% 2.8% 2.3% 2.4% 1.6% 

Modifie-d Post NPL Sale 2.5% 3.8% 2. 7% 2.2% 2.3% 1.5% 1. 1% Never Modlfted Post NPL Sate 53.0% 43.5% 48.3% 54. 7% 57.2% 60.0% 67.6% 

Other 1.0% 0.9% 1 . 2% 0 .8% 0.9% 1 . 1% 1 .5% 

W hole Loan Sates 0.1 % 0.2!(, 0.1% 0 .0% 0 .0% 0 .0% 0.0% 

Repurchase by Enterprise 0.4% 0.2% 0.3% 0.2% 0.4% 0 .5% 0.8% 

Charge·off 0.6% 0 .5% 0.8% 0.6% 0.5% 0.6% 0.7% 

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

@ • Includes 51 non·delinquent loans Included In the Fannie Mae pilot sale. Page 21 

26521026.eps

Table 8: Loan Outcomes by State 

All All 

L..oan Other Percent Other 

Category Count FL NJ NY States of Loans FL NJ NY States 

Resolved 18,482 3 ,262 3,291 1,990 9,939 40. 7" 49.2" 36.5" 27.8" 43. 9" 

Foreclosure Avo;ded 7, 715 1,131 1,0 84 1,050 4,450 17.0" 1 7.1" 12 .0" 14. 7" 19.6" 

Self Cur'e" 1 ,219 230 1 14 103 772 2.7SI> 3.5!11 1.3!11 1.4% 3.4!11 

Paid in Full 1 , 188 142 79 133 834 2.6!11 2.1% 0.9!11 1.9!11 3.7% 

Active Permanent fv\Odification 2,617 369 386 467 1,395 5.8!11 5.6% 4.3% (). 5% (). 2!11 

Short Sale 1 ,792 307 329 24 3 9 13 3.9% 4.6% 3.7% 3.4!1) 4 .0 !11 

702 60 129 85 428 1.5% 0.9% 1.4% 1.2SI'. 1.9S!. 

Short Cash Pay -Off 197 23 47 19 108 0 .4% 0.3% 0.5% 0.3!1) 0.5% 

Foreclosu res 10,767 2,131 2,207 940 5,489 23. 7" 32.2" 24.5" 13.1" 2 4 .2" 

Not Resolved 26,497 3,284 5,657 5,108 12,448 58. 3" 49.6" 62.8" 71.4" 55.0" 

1n trial Modif ication 1,238 91 222 254 671 2.7% 1.41'6 2 . 5116 3 .5% 3.0!11 

Delinqu ent: Modified Post NPL Sale 1 , 152 126 136 172 7 18 2.5% 1.9% 1.5!1) 2.4!1) 3 .2S!. 

Delinquent: Never f.Aodi fied Post NPL Sale 24, 107 3,067 5 , 299 4,682 11 , 059 53.0% 46.3% 58.8% 65.4% 48.8!11 

Other 467 78 6 4 59 266 1.0" 1.2" 0 . 7% 0.8" 1.2" 

Whole Loan Sales 35 8 2 1 24 0.1% 0.1 % 0.0% 0 .0% 0 .1 % 

Repurchase by Enterprise 164 44 13 32 75 0.4% 0.7% 0.1!1) 0.4!1) 0.3% 

Charge-off 268 26 49 26 167 0 .6% 0.4% 0.5!1) 0.4% 0.7% 

Total 45,446 6,624 9,012 7,157 22,653 100" 100" 100" 100" 100" 

• Includes Sl non-delinquent loans Included In the F8t\nle pilot sale. 

@ 

Page 22 

26521027.eps

Table 9: Permanent Loan Modifications Changes In Monthly Payment 

@) 

Payment Decrease 

Decreased by 50% or N'Cre Decreased by 40!11 to Less Than 50!11 Decreased by 30% to Less Than 

by to Less Tha n 30% 

Decreased by 1 0% to Less Than 

by Less Than 10% 

Payment Increase or Unchanged 

Increase 

Unchanged 

Unknown 

Total 

Ever to Date 

Permanent 

Modtfkations• 

2,680 

287 

307 

462 

523 545 556 

1,395 

774 

621 

5 

4,080 

Percent of Total 

Permanent 

Modifications 

66!11 

7 % 

8 % 

11% 

13% 13% 14% 

34% 

19% 15% 

0 % 

100% 

• Ever-to-date permanent modific-ations Include .actlw permanent modlflcauons as well as modified 

loans that subsequently re-defaulted, paid off. liquidated or were sold throuch a whole loan sale. 

Some mod tflcatlons by the new servlcers were on loans that had been previously modified that 

subsequently re-defaulted (see p.ae.es 2S..33). The previous modlf,catlons had already reduced the 

payment I rom the or·lalnalloan terms. constrei nln& the new servtcer ' s ability to offer p.avment 

redueUons on the new m<>difleatlon . In addition. some modlf'icatlons wer'e on adjunabfe ..,.ate 

mortcace.s that the new ser vleer to fb:ed-rate loans. also constrain Inc the ability to reduce 

Paee 23 

26521028.eps

Table 10: Permanent loan Modifications Arrearage and/or Prindpal Forgi veness• 

@ 

Arrearage and/or Principal Forgiveness 

Permanent Mod, No Forgiveness 

Total 

Ever to Date 

Permanent 

Modifica tions• • 

458 

3, 622 

4, 08 0 

Ave rage Forgive n e ss 

Percentaa e of Ever- Ear ned Amount Per 

to .. o a te Permanent loan (Eve r -to-Date 

Modifications Modifications)••• 

11% 

89% 

10 0% 

$35,385 

Averaae 

Forgivene ss T otal 

Amount Per Lo an 

(Ever -to-Da te 

Modiflcations) 

$73, 6 95 

• Includes loans sold before FHFA enacted further enhancements to the NPL sales requlrments. which ad ded the requirement to evaluate borrowers whose 

mark-to-market LTV ratios are above 115 percent for arrearage and or principal forgi veness. 

• • Ever-to-date permanent modifications include active permanent modifications as well as modified loans that redefaulted, paid off, liquidated or were sold 

in a whole loan sale. 

• •• Some modlficaHons require forgiveness to be earned over a period of ttme contingent on the borrower making timely payments. The 'Average 

Fo raivencs.s Ear"ncd Amoun1 Per Loan• column reflects the :.mount of foreiveness borrow ers hrwc earned to <hHe. The 'Averaeo Foreivcncss Total Amount Per t.oan' column renects the tot:>l omovnt that could be roraiven i f the borrower m3kes all of their payments timely. 

Page 2.4 

26521029.eps

Table 11: Disposition of Property Acquired through Foreclosure or Deed in Lieu 

Property of 

Pr'operty Disposition Count Total 

Third Party Sa le 1, 168 11% 

Property Sales by Buyer 3 , 003 28% 

Owner Occupant 1 ,447 13% 

Non· Profit 0 0 % 

Investor 1, 195 11% 

Unknown 361 3% 

Not Sold 6 , 596 61 % 

Held for Rental 87 1% In R.EO 6 , 509 60% 

Tot al 10,767 100% 

@ Pag e 2 5 

26521030.eps

The borrower outcomes provided in this report are based on 45,446 NPLs settled by June 30, 201.6 and reported throug h December 31., 201.6. These NPLs have been with a new servicer between 4 and 20 months. The outcomes 

reported on the graphs represent averages for all the NPLs that have been serviced up to a given point in 

time. For example, the first three months of performance is based on the full 45,446 NPLs because all the NPLs 

have been with a new servicer for at least four months. The last three months of performance are based on 1., 737 

NPLs, that have been with the new servicer for at least 1.8 months. For charts showing outcome information, see 

page 9. 

NPL Sales Loan Count by Month Since Transfer 

month 1 2 3 4 5 6 7 8 

loan count! 45,4461 45,4461 45,4461 45,4461 38.9301 38,9261 35,9591 32,6051 

month 9 10 11 12 13 14 15 16 

loan count! 26,4051 25,6151 25,6 11 1 20,4821 19,5671 12,5251 9 ,8891 9 ,7721 

month 17 18 19 20 

loan count! 8,918 1 1,737J 1,7371 1,7371 

@ 

Page 26 

26521031.eps

FHFA Non-Performing Loan Sales Report December 201

Factors to consider in evaluating loan outcomes by pool: 

The borrower outcomes for loans sold In each NPL pool are influenced by several factors, Including the characteristics of the loans in 

the pool. Some of these factors are described below to provide additional context about the pool-level borrower outcomes described 

on the following pages: 

Mont h s Since Tran sf er 

• The more time th at has elapsed since transfer to a new 

servicer, t he more likely t hat the new servicer is f urther along in 

resolving the loans. 

A v erage Years Delin quen c y 

• The longer a borrower has not been making payments, the 

more unlikely it is that the borrower will respond to a 

solicitation by a new servicer t o modify t he loan or pursue an 

alternative resolution. 

Verified Borrower Occupancy 

• Loans on properties w here the borrower is still occupying t he 

residence are more likely to be modified t han those where the 

borrower has abandoned or vacated the p roperty. 

Prev iously Modif ie d 

• Loans that have been previously modif ied are m ore likely to 

avoid foreclosure through a short sale o r deed-in-lieu and less 

likely to result in a successf u l subsequent modificat ion. 

@ 

In Foreclosure Proceedings 

• For loans w here the foreclosure process has started, it is more 

likely t hat if there is still an option to avoid foreclosure, it will be 

w ith a short sale or deed-in-lieu. Loans that are in late stage 

foreclosur e proceedings are more likely to result in a foreclosure 

outcome. 

Geography of Loans 

• The t imeline t o resolut ion varies by state. Loans in states with 

longer foreclosure timelines w ill take lon ger to be resolved. 

Right Party Contact 

• Loans for which the servicer has been able to make Right Party Con tact are more likely to result i n a non-foreclosure resolution. 

Page 27 

26521032.eps

FHFA Non-Performing Loan Sales Report December 2016 

Table 12: Pool Characteristics and Outcomes as of 12/31/2016 

Frodd1e M•c Fr•ddkt M•c; Freddie Mac Fre ddio Mac Frodd• Mac; Freddie M•c 

SPO 2015Nt SPO 2015#1 SPO 2015N 1 SPO 2015N"2 SPO 2015#2 SPO 2015W2 FNMA FHMA 20

Poolt Pool 2 Pooll Pool 1 Pool2 Poo13 HPL1·2 HPL1 ·

Pretium Protium 

BayVIew GCAT '""'"a&ement GCAT_Mllnaaement GCAT_MilnApmcnt PRMF Aequ1S1tSon Buyer Credit Partners I Credit Partners I $W$pon$0r

Loan Acquisition. loan AcquiSition, Acq.tfsftion, LLC LLC 

1.1' LP 

Charaete st es 

Months Since Transfer 20 20 20 17 17 17 17 18 LOan Count at 068 425 044 3,092 185 4 27 1,811 606 Average Years OeUnquency 2.3 2.8 3 .0 2.8 2.8 4 .0 5.0 5.0 

Average Loan-to-Value 72% 100% 145% 82% 136% 142% 

%Verified Borrower Occupancy 75% 74% 71% 04% 61% 43% 35% 

" Prev1ousty Modified 15.1% 26.4% 34.6% 21 . 7% 23.5% 15.0% 26.0% 

% In Foreclosure 60.6% 66.4% 72.7% 90.3% 90.7% 97.6% 42.0% 

Geography 

FL 19% 26% 39% 15% 41% 39% 

NJ 8% 8% 11% 24% 24% 1"' 18% 

NY 8% 8% "' 13% 13% 100% 11% 13% CA 7% 6% 6% 4% 3% 0% 5% 3% % All Other States 5 7% 52% 3 7% 49% 45% 0% 26% 27% 

% Judicial Forectosure States 60% 6 7% 74% 68>1. 72% 100% 76% 78% 

Outcomes 

Re-solved 64.2% 04.5% 73.6% 56.4% 61.3% 44.3% 52.3% 50.2% 

Foreclosure Avoided 30.1% 25.4% 41 .8% 21.8% 20.1% 20.4% 19.8% 

Setf Cur'e · 3. 1% 2.8% 1. 7% 3.2% 2.4% 0.9% 8.8% 6.8% 

Paid in Full 10.6% 1.9% 0.5% 5.5% 3.8% 3.0% 0.1% 0.0% 

Active Permanent Nlodlflcatlon 8.5% 21.1% 7.0% 7.5% 9.1% 4.4% 5.8% 

Short Sate 4 .2% 7. 1% 8.1% 4.0% 5.1% 5. 2% 5. 9% 6 .3% 

Deed-in-lieu 5 .2% 9 .5% 1.6% 2 .6% 1.9% 1.2% 1 .0% 

Short Cash Pay-Off 0 .1% 0.9% 0.5% 0.0% 

Foreclosure 34.1% 39.1% 31 .8% 34.6% 39.9% 24.1% 3 1.9% 30.4% 

Not Resolved 35.2% 34.8% 26.2% 42. 3% 37. 7% 46.2% 46.4% 

In Tr1al Modification 0 .9% 1.2% 4. 3% 3.6% 5.1% 9. 1% 0.1% 3.6% 

Delinquent: Modified Post NPL Sate 2.8% 6.1% 2. 3% 1."' 1.4% 1.2% Delinquent: Never Modtfled Post N PL Sate 3 1.3% 30.8% 15.8% 36.4% 30.9% 44.5% 45.2% 41. 6% 

Other Outcomes 0 .6% o. "' 0.2% 1.3% 0.7% 1.5% 3.5% 

Whote Loan Sa.les 0 .0% 0 .0% 0.0% 0.0% 0 .1% 0 .0% 

Repurchase by Entf!rptt$f! 0.6% 0."' 0.0% 0.5% 0.1% 0.7% 3.1% 

Charge-Off 0.0% 0.0% 0.2% 0.8% 0.9% 0.0 % 0.4" 0.3% 

T otal 100.0% 100.0% 100.0% 100.0% 

• lndudt-S 51 non·dt-llnquftnt k>ans included In the Fannie M ae pilot sale. 

@ Yhe performance o f the loans $Old In the NPL will varv due to, among ot her factors' mork-to·market loan·to·value ratio, geographic location, 

occupancy status, and the length of delinquency. 

Page 23 

26521033.eps

FHFA Non-Performing Loan Sales Report December 2016 

Table 12: Pool Characteristics and Outcomes as of 12/31/2016 

Frodd1e M•c: Fr•ddkt Mac: Freddie Mac Fre ddio Mac Frodd• Mac 

SPO 2015#3 EXPO 2015#1 SPO 2015#4 SPO 2015#4 SPO 2015N. FHMA '2015· FNMA FHMA 20

Pool1 Pool1 Pool1 Pool 2 Pool3 N PL2·1 NPL2·2 NPL2-C

Coron.- A$Ht Prctivm Nort·pgc New Jerw

Buyer LSF9HOrtpg:e Crectit Partners 1 MTGLQ InvestOrs, LSf9 MOrtaaae l SF'9 NIOrtQbae Commun

HoldinSS, LLC LLC Loan "" naLLC enc.as, L.P LLC Holdings, llC Capt ta

Charaete st es 

Months Since Transfer 16 15 14 14 14 14 14 13 LOan Count at 853 119 1,879 2n 484 627 2, 479 38 

Average Years OeUnquency 2.8 3.6 2 .9 3.8 3 .0 3 .2 3. 1 3.2 Average Loan-to-Value 108% 84% 95% 89% 35% 148% 71% 81% 

%Verified Borrower Occupancy 68% 79% 66% 91% 57% 3 7% 49% 61 % 

" Prev1ousty Modified 27.4% 18.5% 28.0% 25.4% 13.2% 38.0% 27.0% 24.0% 

% In Foreclosure 77.8% 95.001. 96.6% 99.3% 96. 5% 77.0% 71.0% 84.001

Geography 

FL 15% 100% 11% 0 % 8% 15% 8% 100% 

NJ 9% 0% 14% 0% 12% 3 1% 24% 0% 

NY 0% 0% 15% 100% 29% 14% 20% 0% 

CA "" 001. 2% 0 % 4% 1% 2% 0% %All Other States 69% 0% 5 7% 0% 47% 39% 4 7% 0% 

% Judicial Forectosure Stat es 4 7% 100% 68% 100% 73% 83% 77% 100% 

Outcomes 

Re-solved 64.5% 58. 0% 50.6% 22.8% 42.6% 58.5% 48.6% 65.8% 

Foreclosure Avoided 28.0% 21 .8% 19.2% 14.3% 25.4% 17. 7% 18.8% 15.8% 

Setf Cur'e · 4. 0% 5 .9% 0 .6% 0.4% 2.3% 1.0% 2. 0% 5.3% 

Pa id in Full 2.3% 5.9% 2.0% 0. 7% 10.3" 0.0" 2. 7% 2.6ll. 

Active Permanent Nlodlflcatlon 9.5% 3.4% 10.4% 10. 7% 11.6% 5. 7% 7.8% 2 .6% 

Short Sate 10.8% 6 . 7% 2.9% 1.5% 1.2% 9.1% 5.b% 5 .3% 

Deed-in-lieu 1.4% 0 .0% 3.2% 0.0% 0 .0% 1.9% 0 .8% 0 .0% 

Short Cash Pay-Off 0 .0% 0.00:> 0.0% 1.1% 0.00:> 0.0" 0. 00:> 0.00:> 

Foreclosure 3b.5% 36. 1% 31.5% 8.5% 17.1% 40.8% 29. 7% 50.0% 

Not Resolved 34.5% 42. 0% 48. 7% 77.2% 57.4% 40.5% 49.5% 34. 2% 

In Tr1al Modification 2.3% 0.0% 1.4% 0. 7% 8.1% 0.3% 1. 1% 0.0% 

Delinquent: Modified Post NPL Sate 2. 7% 1. 7% 8.6% 2. 9% 0 .0% 2.2% 2.6% 0 .0% Delinquent : Never Modtfled Post NPL Sate 29.4% 40. 3% 38.6% 73.5% 49.4% 38.0% 45.8% 34.2% 

Other Outcomes 1.1% 0.0% 0.7% 0.0% 0.0% 1.0% 1.9% 0.0% 

Whote Loan Sa.les 0.0% 0 .0% 0 .0% 0. 0% 0 .0% 0. 5% 1.2% 0 .0" 

Repurchase by Entf!rpttse 0 .5" 0.0% 0.4% 0.0% 0.0% 0.2" 0. 7% 0.0% 

Charge-Off O.b% 0.0% 0.3% 0.0% 0.0% 0.3% 0. 0% 0.0% 

Total 100.001. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 

• lndudes 51 klans Included In t he Fannie M ae pilot sale . 

@ Yhe performance of the loans $Old In the will varv due to, among ot her factors' mork-to-market loan·to·value ratio, geographic location, 

occupancy status, and the length of delinquency. 

Page 29 

26521034.eps

FHFA Non-Performing Loan Sales Report December 2016 

Table 12: Pool Characteristics and Outcomes as of 12/31/2016 

Froddfe Fr•ddkt M•c Freddie Mac Fre ddio Mac Frodd• Mac Freddie M•c Froddto Mac 

SPO 2015N5 SPO 2015#5 SPO 2015#5 SPO 2015#5 SPO 2015#5 SPO 201511'6 SPO 2.015# 6 FHMA 20

Poolt Pool 2 Pooll Pool 4 Pools Pool t Pool2 NPL3·

Protium Pro tium lf'Qft&Ap 

Buyer LSF9HOrtpg:e Credit Partners I LSF'9M::Irtpte LSF9 MOI'"lfi,Aif! Cre:dlt PattnefS I Sa >"'few Hew ReSid

Hotdinss. LLC loan AcquiSition, Holdi"n$1, LLC LLC Holdings, LlC loan Acqubition. LLC lnvestm ecnt 

LP LP 

Charaete st es 

Months Since Transfer 13 13 13 13 13 12 11 11 

LOan Count at 1,097 508 933 438 359 878 309 1,24 6 

Average Years OeUnquency 3 . 1 2.9 3.7 3.8 2. 7 1.8 2.0 4.1 Average Loan-to-Value 85% 85% 150% 155% 34% 79% 149% 102% 

%Verified Borrower Occupancy 72% 83% 6 7% 69% 80% 70% 62% 25% 

" Prev1ousty Modified 29.6% 30.3% 32.7% 35.8% 20.9% 26.5% 44.0% 29.0% 

% In Foreclosure 83.3% 81. 7% 83.9% 86.1% 76.6% 83.1% 88.0% 55.0% 

Geography 

FL 10% 9% 19% 23% 95(, 155(, 19% 26% 

NJ 16% 15% 24!11; 24% 18% 9% 13% 8% 

NY 19% 16% 16% 15% 13% 9% 11% 11% 

CA 7% 7% 4% 55(, 10% 8% 8% 8% 

% All Other States 4 95(, 52!11> 3 75(, 335(, 50% 60% 49% 46% 

% Judicial Forectosure States 64% 60% 74% 75% 60% 5 7% 63% 66% 

Outcomes 

Re-solved 41.5% 4 5.3% 46.0% 38. , , 33. 7% 55.0% 5 1. 1% 34.3% 

Foreclosure Avoided 17.5% 15. 9% 18.8% 11.2% 22.0% 27. 7% 31.4% 18.2% 

Setf Cur'e · 1. 7% 3.9% 1.5% 0.2% 4.2% 6.6% 3.2% 1.8% 

Paid in Full 1.5% 4.5% 0.2% 0.7% 12.5% 5.8% 1.3% 2.6% 

Active Permanent Nlodlflcatlon 8.2% 2.6% 8.8% 5.0% 4.2% 6.0% 11.0% 6.5% 

Short Sate 5. 1% 2.8% 7.5% 3.95(, 1.1% 5 .6% 8. 7% 4.65(, 

Deed-in-lieu 0.9% 2 .2% 0.8% 1. 4% 0 .0% 3.6% 6 .8% 2 . 7% 

Short Cash Pay-Off 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0. 3% 0.0% 

Foreclosure 24.0% 29.3% 27.2% 26.95(, 11. 7% 27.3% 19.7% 16. " ' 

Not Resolved 58.3% 54. 7% 53.8% 56.6% 66.3% 44.9% 48.2% 63.2% 

In Tr1al Modification 2.8% 1.2% 2.5% 2.1% 2.2% 1.3% 7.4% 2.8% 

Delinquent: Modified Post NPL Sate 3 .9% 1.8% 2.9% 2.7% 3 .3% 3 .2% 4. 9% 8.8% Delinquent: Never Modtfled Post N PL Sate 5 1.6% 51.8% 48.4% 51 .8% 60. 7% 40.4% 35.9% 51.5% 

Other Outcomes 0 . 1% 0.0% 0.2% 5.3% 0.0% 0.1 % 0.6% 2.5% 

Whote Loan Sa.les 0.0% 0 .0% 0 .0% 0.0% 0 .0% 0.0% 0 .0% 0 .0% 

Repurchase by Entf!rptt$f! 0. 1% 0.0% 0.0% O.OiiO 0.0% 0.0% 0.3% 1.6% 

Charge-Off 0. 1% 0.0% 0.2% 5.3% 0.0% 0.1% 0. 3% 0.9% 

T otal 100.0% 100.0% 100. 0% 100.0% 100.0% 100.0% 100.0% 100.0% 

• lndudes Sl non-delinquent loans included in the Fann ie M ae pilot sale. 

@ Yhe performance o f the loans $Old In the N PL will varv due to, among o t her factors' mork-to·market loan·to·value ratio, geographic location, 

occupancy status, and the length of delinquency. 

Page 30 

26521035.eps

FHFA Non-Performing Loan Sales Report December 2016 

Table 12: Pool Characteristics and Outcomes as of 12/31/2016 

Froddio Mac Fr• ddio Mac Frodd• Mac Freddie Mac Froddto Mac Froddfo 

FNMA FHMA 2015• SPO 2015#7 SPO 201567 SPO 2015#7 SPO 2015'1'7 SPO 2.015# 7 EXPO 201

HPL3·2 HPLJ-3 Pool4 Pool 3 Pool1 Pool 2 Pool5 Pool 1 

RuVImorc l.oi!ln Pr•tium ANJ>rtp.ac Pretium lf'Qft&Ap Prc:tivm Mort;psc Commvnity 

MTGLQ Hew ReSklent1at 21 St 1-NJ naa,e Cred1t Part.ners I Cre:dlt Partners t credit Partners 1 Buyer l.P. Investment Corp. Corporation Management lolln Aoqu1slri0n, loan Acqubition. Loan Ac(f.lisition, Fund of H

Servkes. LLC LP LP LP Jersey, I

Charaete st es 

Months Since Transfer 11 11 9 8 8 8 8 8 LOan Count at 2,703 872 794 625 153 612 426 5o 

Average Years OeUnquency 2. 7 3.0 3 .1 2.5 2.5 2 .7 2.5 2.6 Average Loan·to·Vatue 64>" 138>" 102>" 146>" 72>" 99" %Verified Borrower Occupancy 71>" 21>" 61" 63" 59>" 77>" 

" Prev1ousty Modified 24.4" 40 . 21ll 30.2>" 40.4" 44.6" 

% In Foreclosure 54.0% 94.7% 95.5% 94.4% 95.6% 93.9" 100.0>

Geography 

FL 9>" 14" "' 8>" 6>" 100% NJ 8>" 12% 34" 16" 16>" 23>" 0% 

NY 34" 19>" 13>" 0>" 

CA 6% 3% 0% 3" 5% 3% 1>" % All Other States 68>" 66" 53>" 51% 0>" 

% Judicial Forectosure States 55>" 64% 86" 71 % 70% 75% 73>" 100>" 

Outcomes 

Re-solved 46.3>" 37.5" 43.2" 46.6>" 50.7>" 44.6" 

Foreclosure Avoided 29. 1% 23.6" 25.6" 19.2>" 17.0% 19.4% 14.6>" 14.3% 

Setf Cur"e · 7.6% 3 .4>" 3.4>" 3.2>" 2.21ll 1.6" 

Paid in Full 7.4% 0.5>" 1.6>" 0.2>" 5.2% 0.3% 1.21ll 

Active Permanent Nlodlflcatlon 9.4>" 6.3>" 13 .6>" 4. 7" 4.2% 0.0>" 

Short Sate 1.6% 8 . 1>" 6.2% 10.6>" 8 . 7" 4 . "' 10. 7" 

Deed-in-lieu 0.6% 5.3>" 0 .8>" 2. 6>" 1.6% 4 . 1" 3 .5" 3.6>" 

Short Cash Pay-Off 2.6" 0.0>" 0.0>" 0.0% 

Foreclosure 17.2>" 17.6>" 36.8>" 29.6>" 29.6" 36.2>" 30.4>

Not Resolved 52.6% 62.2% 56.5>" 53.4>" 48.8>" 55.4>

In Tr-1al Modification 6.5>" 4.4>" 3.2>" 2.4% 1.6" 2.3% 

Delinquent: Modified Post NPL Sate 7.8>" 2.3>" 1. 3>" 2 .3% 1.6" 2. 1>" 3.6>" Delinquent: Never Modtfled Post NPL Sate 47.8>" 49.9>" 39.5" 44.4% 51.8" 

Other Outcomes 1.1>" 0.3>" 0.3>" 0.0>" 0.0" 0.5" 

Whote Loan Sa.les 0.0% 0 .0>" 0 .0>" 0. 0>" 0.0" 0 .0% 0 .0>" 

Repur-chase by Enterptt$e 0.3>" 0.1% 0.0>" 0.0>" 0.2" 0.0" 

Charge-Off 0. 3>" 0.1 % 0.0>" 0.0 % 0.2>" 0.0>" 

Total 100.0>" 100.0% 100.0>" 100.0>

" lndudes Sl non·dellnqvent soans included in ch• M ae pilot sale. 

@ Yhe performance o f the loans $Old In the NPL will varv due to, among ot her factors' mork.ro-market loan-to·value ratio, geographic location, 

occupancy status, and the length of delinquency. 

Page 3 1 

26521036.eps

FHFA Non-Performing Loan Sales Report December 2016 

Table 12: Pool Characteristics and Outcomes as of 12/31/2016 

Freddfe M•c Freddto M ac Froddfo 

FNMA 2016• FHMA 20t6-- F NMA 2016· FHMA .2016· FNMA 2016• SPO 2016,1 SPO 2.016.fl EXPO 201

HPL1·2 HPL1·1 HPL1·3 HPL1-4 NPL1 ·5 CIP Pool 4 Pool5 Pool 1 

Pretium d F ncf New Je rwy RuV.more l.o41n Rwhmore l,.o.a_n Commvnity 

Buyer credit 1 vi.O.a';• MTGLQ lnwstors, MTGLQirwestOrs, Community Man411&ement Fund of N

Loan Acq.,lsit1on, V L. P. L.P. capitat Services, LLC Servk:es, LLC Jersey, I

Charaete st es 

Months Since Transfer 8 8 8 8 7 7 7 6 LOan Count at 1, 022 2,308 785 609 47 1,270 638 64 

Average Years OeUnquency 5.0 5.0 5.1 5.1 6.2 3.8 3.3 4.6 Average Loan·to·Vatue 86% 90% 92% 99!G 141% 152% 144% 112% 

%Verified Borrower Occupancy 70% 64% 24% 4 7% 60% 69!G 74% 78% 

" Prev1ousty Modified 2 1. 0% 2 1.0% 21.0% 23.0% 21.0% 36.1 % 43.6% 31.3% 

% In Foreclosure 54.0% 55.0% 58.0% 57.011. 49.0% 95.2% 94.8% 100.0% 

Geography 

FL 21% 17% 12% 15% 100% 13% 11% 100% 

NJ 24% 26% 29% 29% 0% 30% 22% 0% 

NY 19% 17% 19% 17% 0% 12% 12% 0% 

CA 2% 2% 1% 1% 0% 2% 2% 0% 

% All Other States 34% 38% 38% 3 7% 0% 43% 53% 0% 

% Judicial Forectosure States 83% 83% 84% 82% 100% 74% 74% 100% 

Outcomes 

Re-solved 28.7% 24.2% 14.6% 22.8% 12.8% 32.5% 33.7% 15.6% 

Foreclosure Avoided 10.6% 7. 7% 7.0% 8.2% 2.1% 8 .6% 8.5% 10.9% 

Setf Cur'e· 1. 7% 1.2% 0 .6% 0.8% 2.1% 1.7% 0. 9% 0.0% 

Paid in Full 2. 0% 1.4% 1.1% 1.5% 0.0% 0.0% 0. 0% 0.0% 

Active Permanent Nlodlflcatlon 3.0% 2.6% 2.3% 2.5% 0.0% 1.3% 2.2% 3.1% 

Short Sate 2.9!G 1.8% 0 .0% 1. 1% 0.0% 4. 2% 3 .1% 7.8% 

Oeed·in-tieu 1.0% 0. 7% 0.0% 0. 5% 0 .0% 1. 3% 2 .2% 0 .0% 

Short Cash Pay-Off 0.0% 0.0% 2.9% 1.8% 0.0% 0.0% 0. 0% 0.0% 

Foreclosure 18.1% 16.6% 7.6% 14.6% 10.6% 23. 9% 25.2% 4.7% 

Not Resolved 69.6% 74. 7% 85.1% 75.4% 87.2% 67.2% 65.7% 84.4% 

In Tr1al Modification 2. 0% 1.3% 1.4% 2.3% 0.0% 2.8% 3.9% 0.0% 

Delinquent: Modified Post NPL Sate 0.5% 1.0% 0.8% 0. 8% 2.1% 0.6% 0 .9% 3 .1% Delinquent: Never Modtfled Post NPL Sate 67.1% 72.4% 82.9% 72.2% 85.1% 63.8% 60.8% 81.3% 

Other Outcomes 1.8% 1.0% 0.3% 1.8% 0.0% 0.2% 0.6% 0.0% 

Whote Loan Sa.les 0.0% 0 .0% 0 .0% 0.0% 0 .0% 0.0% 0. 0% 0 .0% 

Repurchase by Entf!rptt$f! 1.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0. 0% 0.0% 

Charge-Off 0.0% 1.0% 0.3% 1.8% 0.0% 0.2% O.b% 0.0% 

Total 100.0% 100.0% 100. 0% 100.0% 100.0% 100.0% 100.0% 100.0% 

" lndudes Sl non·dellnqvent soans include d in ch• Mae pilot sale. 

@ Yhe performance of the loans $Old In the NPL w ill varv due to. among other factors' mork.ro-market loan·to-value ratio. geographic location. 

occupancy status, and the length of delinquency. 

Page 32 

26521037.eps

FHFA Non-Performing Loan Sales Report December 2016 

Table 12: Pool Characteristics and Outcomes as of 12/31/2016 

Frodd1e M•c Freddkt M•c Froddio Mac Froddio Mac 

EXPO 2016#1 SPO 2016# 1 SPO 2016Nt SPO 2016#1 FNMA 2016• FNMA 2016· FNMA 20U•• FHMA 2.0

Pool2 Pool1 Pool2 Pool 3 HPL2·1 NPL2·2 NPL2·3 N PL2·4 

MTGLQ lnwsters, MTGLQ Investors. 

Community Loan LSF'9 Mc>rt,gag,e LSF9 Mortaaae LSF'9Hortaaee L.P. and Pretium MTGLQ Investors, Ml'GLQ lnw.

Buyer Fund of New LLC Holdins:;, U.C Holdin-gs,U.C Mortpa,e Credit Pal'tnei'S I Loan L.P. t..P. Jel'sey, Inc: Partners 1 Loa.n 

Acquisition, LP .4C:quisttion1 LP 

arac:tc st cs 

Months Since Transfer 6 6 6 6 5 5 5 5 

Loan Count at Settlement 105 496 1,216 1,090 2,912 1,940 992 674 

Average Years Oet1nquency 3.9 3.4 3.5 3.7 3.9 4.0 4.1 4.0 

Avetage 107% 73% 73% 100% 94% 91% 93% % % 

% Ver1fled Borrower Occupancy 72% 25% 2 7% 26% 61" 62% 65% 61 % % Pre"'ously Modified 34.3% 25.4% 22.8% 34.1 % 29.0% 28.0% 30.0% 27.0% 

% In Foreclosure 97.1% 93.3% 91 .2!1\ 94.2% 8 1.0% 79.0% 81.0% 81.()% 

Geography 

FL 100% 7% 6% 6% "" 9% 10% 12% NJ 0% 14% 12.% 20% 30% 34% 30% 30% NY 0% 14% 15% 17% 15% 14% 17% 16% 

CA 0% 3% 5% 3% 2% 2% 2% 2% 

Atl Other States 0% 62% 61 % 53" 42% 41% 41% 

%. Judldat Foreclosure States 100% 64% 59% 69% 81% 80% 82% 83% 

Outcomes 

Resolved 34.3% 25.4% 26.9% 29.0% 19.8% 19.5% 19.8% 22.4% 

Foreclosure Avoided 11.4% 12.1% 13.0% 9. 7% 5.9% 6.8% 5. 7% 6.5% 

Set.f Cur'e• 1.0% 3.4% 2.9% 1.2% 1.1% 1.2% 0. 9% 1.9% 

Paid in Full 0.0% 1.2% 2.0% 0. 7% 1.8% 1.8% 2 .0% 1.0% 

Active Modification 2.9% 4.6% 5.3% 3.0% 1.0% 1.4% 0.6% 1.2% 

Short Sale 7.6% 2.6% 2.3% 3. 7% 1.0% 0. 7% 0. 7% 0 .6% 

0 .0% 0.2% 0 .6% 1.1% 0.4% 0.4% 0.2% 0.1% 

Short Cash 0.0% 0.0% 0.0% 0.0% 0.6% 1.3% 1.3% 1.6% 

Foreclosure 22.9% 13.3% 13.9% 19.3% 13.9% 12.8% 14.0% 15.9% 

Not Resolved 65. 7% 74. 2% 72.9% 70.6% 78. 7% 79.0% 77.5% 75.5% 

In Tdal Modification 0.0% 4.2% 4.3% 4. 5% 2 .8% 2.4% 4. 0% 3 .0% 

Delinquent: rYIOdlfled Post NPl Sale 1.0% 4.0% 2.1 % 1.8% 0.5% 0.6% 0 .4% 0.3% Delinquent: Never Modified Post NPL Sale 64.8% 65. 9% 66.4% 64.3% 75.4% 76.0% 73.1 % 72.3% 

Other Outcomes 0.0% 0.4% 0.2% 0.4% 1.4% 1.5% 2. 7% 2.1% 

Whole loan Sales 0 .0% 0 .0% 0 .0% 0.0% 0.0% 0.0% 0 .0% 0 .0% 

by 0 .0% 0.4" 0.2% 0.4% 0.2% 0.3% 0. 1% 0.1% 

Charge·Off 0. 0% 0 .0% 0 .0% 0.0% 1.2% 1.2% 2.6% 1.9% 

Total 100.0% 100.0% 100.0% 100.0% 100.0 %. 100.0% 100.0% 100. 0 % @ • Includes 51 non·delinquent loans included in the Fannie Mae pilot sale. 

ihe performance of the loans SQid in the NPL s-ale will varv due to, other factors: mark·to·mark(!t loan-to-value ratlo, geogr.l:'tphlc location. 

occupancy status, and the length of delinQuency, 

Page 33 

26521038.eps

Glossar y 

Term 

ArYcaragcs 

Ch<'lrgeoff Community Impact Pool Offering 

(CIP) 

Deed-In-lieu Extended Timeline Pool Offering• 

(EXPO• ) 

Foreclosure 

Held for Rent al 

Judicial Stat es 

l oan to Value 

Natfonal Offeri ng 

Loan (NPL) 

NPL Sales Requirements 

Paid in Full 

Permanent Modlfic.atlon 

Real Estate Owned (REO) 

Self Cure Settlement D ate Shon. c.ash Pay·Off 

Short Sale 

Sto)ndard Pool Offering• (SPO• ) 

Third Party Sale 

Unpatd Princip.:tl B:::tl.:mcc (UPB) 

Whole Loan Sale 

@ 

Def i nition P.ost d ue l>mounts on delinquent loons. Arrcarogcs i nclude property to Interest .• homeowners lnsun:mcc. and any fees p.o ld by the 

serviccr to protect tho lienholde-r's lien. 

of collection efforts on a mortgage when the debt Is d eemed to be uneolloctablc. A char'gc off docs not c.anccl the note o r r-elea

the lien on the property. 

Sm .<lllcr, e:cogr-;:,phlc.;)Hy-conccntrated, high occupancy pools m a rketed by Ft:tnnlc Mac to c n cour;:,ge p;:,rtlclpt:tt ion by sm all Investors Includ

nonptofits and m inority and women -owned business (MWOB) buyers. Buyers h:.ve two e xtra weeks compared to buyers of national poo

secure funds to participate in the auctions. 

The borrower volunt arily transfers the ownershi p of the property to the lien-holder to avoid a foreclosure proceeding. 

Smaller, geographi cally concen trate d, pools marketed by Freddie Mac to encourage parti cipation by small i nvestors Including nonproflt s a

MWOSS. Buyers have two e><tro> weeks compared to buyers of noltlono>l pools to secure funds to participate In the ;:,ucttons. 

A legal p r ocedure i n which a lienholder takes possession of a mortgaged property as a result of the borrower n ot making con tractual 

paym en ts. 

Property own ed and h eld f or rent al by a lienholder after completio n of a f oreclosure or deed-in -lieu. 

StMes where Judlefal action Is required to complete a foreclosu re. 

The ratio of the loan amount of the first mor tgage to the property value based on the 6roker's Price Opinion (BPO). A 6PO Is a p roperty v

estim ate provided by a third party su ch as a sales agent. A BPO is b ased on an external review o nly and does n ot reflect the con d ition of t

int erior of a property. The 6PO LTV d oes not include capitalized arrearages. 

typ iQllly geographically diverse pools offered by Fannie Mae. 

For purposes of the Enterprises' Loan sales. N on-Performing Loans arc defined as loans ha:.ve been delinquent for mo

th an one 

Prog-ram req u irements established by the Ho u sing Finance Agency for the Enterpr-Ises' NPL sates. 

Borrower p ays the entlre am ount due, thereby releasing the lien. 

The terms o t a mortgage loan are c h anged in order to c h ange the borrower's payment. 

Property owned by a lien-holder 3fter comp letion of a foreclosure or deed-In-lieu. 

A deUnquent borrower rein st ates the loan without assisumce from the lien - h o lder. 

The date on wh ich the N PL sates transaction closes and the Guyer acquires the N PLs. The lienholder releases the lien in exchange for a cash payment fr om the borrower of less than the outstandin g debt. 

A d elinquent borrow er sells a property for less than the outst anding d ebt and the l ienholder agrees to release the lien . 

Large, typiC<llly gcogrophlcally diverse pools offered by Freddie Mac. 

A third party entity purchases the property at the for eclosure sale/auction abov e the init ial bid set forth by the lien holder. 

The loan's actual pr-lnc1pal bc)tancc owed to the Enterprise. The unJ)<)id principal balance docs not include any arrearagM. Th e sale of loan s by the Initial NPL Buyer to another Investor, nonprofit, etc. 

Page 34 
101 


26521039.eps

-'-

NAFCU 

3138 10th S!reet Nor1h 

Atfng10t1, VA22201·2149 

700.~W2.2234I800.3364&« 

t 103.522.06$4 

du1t0nalco.otg I n~fcu.org 

Carrie R. Hunt 

EliecutMl VICe President of Go...emment Affairs 

and General Coonsel 

National Association of Federally-Insured Credit Unions 

May 10,2017 

The Honorable Mike Crapo 

Chainnan 

Committee on Banking. Housing. 

And Urban Affairs 

United Slates Senate 

Washington, D.C. 20510 

The Honorable Sherrod Brown 

Ranking Member 

Committee on Banking. Housing. 

and Urban Affairs 

United States Senate 

Washington, D.C. 20510 

Re: Credit Unions and the Federal Housing Finance Agency 

Ow Olairman Crapo and Ranking Member Brown: 

On behalf of lhe National Association of Federally-Insured Credit Unions, lhc only trade association 

that exclusively represents the federal interests of our nation's federally-insured credit unions, I write 

with~ to tomorrow's bearing. "The Status of the Housing Fmance S)'Stelll After Nine Years of 

Conservatorship.• NAFCU members appreciate the work of Director Wall and the Federal Housing 

Finance Agency (FHFA) in helping stabilize the nation's mortgage market by overseeing Fannie Mae, 

Freddie Mac, and the Federal Home Loan Bank System (FHLB). 

As you know, the future of housing finance is of great importance to our nation's credit unions. 

NAFCU would like to reiterate to the oommiUee the impor1ance of retaining a housing finance system 

that provides credit unions with unrestricted access to the secondary mor1gage market and offeiS them 

a fair price for their loans based on quality. This source of liquidity is critical in enabling credit unions 

to serve the mor1gage needs of their over 107 million membeiS across the oountry. 

In addition 10 a healthy and viable secondary mortgage market lhat provides necessary access for 

oommunity-based financial service providers like credit unions, Congress, in any refonn effort, must 

put into place safeguards that will prevent discrimination based on the type of institution, an 

institution's asset size, or any geopolitical issues. To ensure this type of discrimination does not lake 

place, NAFCU believes there needs to be a heavy focus on fair pricing lhat reflects loan quality as 

opposed 10 standards almost exclusively based on loan volume. loan quality and underwriting 

standards are the best way to ensure a healthy and efficient secondary market and a strong housing 

eoonomy. As has been widely recognized by Congress and various other stakeholders, credit unions 

did not oontribute to the financial crisis and pride themselves on solid underwriting that creates higb· 

quality loans. 

NAFCU and our member credit unions weloome the opportunity to work with the oommittee as you 

pUISUe a oomprebensive overhaul of the nation's housing finance system. As the oommittee prepares to 

hear from the FHFA, we would like to share a few thoughts on some of the agency's recent initiatives. 

The FHFA 's work on the Common Securitization Plalfonn and Single Security as well as experiments 

with various credit risk transfer transactions are a step in the right direction and should be preserved in 

any new housing finance system. Nonetheles~, NAFCU has some ooncerns regarding the logistics of 

fully implementing these programs and cautions the FHFA against rushing this process. Hasty 

NAFCU I YOU' Direct Coonecoon 10 Fedetal ~. EdtJcation & Ccrrcliiance 
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implementation may harm credit unions' access to the secondary mortgage market- a consequence that 

must be avoided. 

CSP and Single Security: 

The JlllfiA's efforts to create a Single Security have the potential to reduce compliance burdens for 

credit unions that transact business with the GSEs, allow greater acoessibility to the to-be-announced 

market, and create an efficient and resilient national housing market. NAFCU and its member credit 

unions are, however, hesitant to fully endorse this project because of the risk that the consolidation of 

securitization programs will make it prohibitively expensive for credit unions to sell their loans to 

Fannie and Freddie. NAFCU urges the AiPA to provide safeguards for existing GSB secnrities held by 

credit unions so they do not lose their marketability after the introduction of a single security. The 

FHFA should strive to create full fungibility between legacy and new securities and, if the market 

demonstrates a distinct preference for the new single security, allow credit unions to excbange legacy 

secnrities for new ones. 

Credit Risk Transfer: 

NAFCU and its member credit unions support the AiFA's efforts to reduce overall risk at Farmic Mac 

and Freddie Mac, but are concerned that limiting front-end credit risk transactions to only those that 

m "economically sensible" bas the potential to force credit unions out of the mortgage market 

CUrrently, only large financial institutions have the necessary capital to participate in sudl transactions. 

If the AiFA would like to truly create a level playing field, other avenues should be explored. 

&tablishing a level playing field for alllende~ must include consideration of the unique structure and 

constra.ints of credit unions so they m not disadvantaged against larger lenders. Credit unions must be 

able to participate through the use of an aggregator or special purpose vehicle, sudl as the Federal 

Home Loan Banks (FHLBs). Alternatively, NAFCU believes that the time has come for the FHFA to 

consider permitting the FHLBs to begin securitizing and selling mortgage loans in addition to Fannie 

and Freddie. This would not only provide credit unions wilb greater access to lbe secondary mortgage 

market, but also reduce mortgage rate.~ for borrowers and lower systemic risk in the secondary 

mortgage market. 

Chattel loans/duty to serve: 

The AiFA's December 2016 Duty to Serve final rule includes the NAFCU-backed provision that 

credits shall be extended for loans made on manufactured housing units titled as personal property, or 

chattel. NAFCU and our members believe that including chattel loans extended to finance 

manufactured housing units squarely meets the statutory intent of the Housil1g and Economic Recovery 

Act of 2008 (HERA) to "facilitate a secondary market for mortgagees on housing for very low, low·, 

and moderate-income families." However, NAFCU recognizes that the chattel loans market is unique 

and complex and there is limited data about chattel lending. The A-IF A should allow the GS& more 

time to fully evaluate the chattel loans market before fully launching a pilot program as part of their 

three-year Underserved Markets Plans. 
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Again, thank you for bQlding this important hearing. We look forward to continuing to work with 

you on the issue of housing finance refonn. If my coUeagues or I can be of assistance to you, or 

if you have any questions regarding th.is issue, please feel free to contact me or NAFCU's Vice 

PrtSident of Legislative Affairs, Brad Thaler, at (703) 842-2204. 

/;M-- Carrie Hunt 

Executive Vice President of Government Affairs & General Counsel 

cc: Members of the Senate Banking Committee 
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it\ Credit Union ll National 

cuNA' Association 

May 11,2017 

l11e Honorable Mike Crapo 

Chainnan 

Committee on Banking, Housing and 

Urban Aflairs 

United States Senate 

Washington, DC 20510 

Jim Nussle President & CEO 

Phorw: 201·~674S 

Jnuss.t.etcurw.coop 

Dear Chaim1an Crapo and Ranking Member Bro\\11: 

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The Honorable Sherrod Bro,~n 

Ranking Member 

Conunilteeon Banking, Housing and 

Urban Atlairs 

United States Senate 

Washington, DC 20510 

On behalf of Ameriea'scredit unions, thank you for holding this hearing entitled the Status of the Housing 

Finance System aller Nine Ye.ars of Conservatorship. The Credit Union National Association (CUNA) 

represents Ameriea'scredit unions and their 110 million members. 

As member-0\\1Jed, not for pro[it financial cooperatives, many credit unions offer mortgages to satisfy 

member demand, and credit unions represent an increasingly signitlcant source of mortgage credit 

nationally. In 2016, more than two-thirds of credit unions were active in the first mortgage arena, 

collectively originating over Sl43 billion worth of tl1ese loans- an amount equal to 7.5 percent of the total 

market. By comparison, in 1996 only 43 percent of credit unions were aclive and they originated a total of 

less than $20 billion in first mortgages. Moreover, credit unions are increasingly active participants in the 

secondary market. Whereas in 1996 01 y about 16 percent of mortgage lending credit unions sold loans 

into the secondary market, by 2016, nearly 30 percent of mortgage lending credit unions sold $56 billion 

into the secondary market, or 40 percent of total first mortgages originated by credit unions. 

Credit unions that elect to sell mortgages into the secondary market do so for a variety of reasons, but 

predominantly it is a tool to help them manage long tcm1 interest mtc risk. Particularly today, with long 

term interest rates at or near historic lows, aecess to a highly liquid secondary market \\ith relatively low 

tmnsaction costs is '1tal for the health of credit union mortgage lending. Credit unions therefore have a 

deep interest in the stn1ctureofthe housing finance system going forward, and CUNA supports the 

creation of an efficient, effective, and fair secondary market "ith equal access lor lenders of all sizes, 

which adheres to the follo\\ing principles: 

Neutral Third Par tv 

l11ere must be a neutral third party in the secondary market, with its sole role as a conduit to the secondary 

market. l11is entity must be independent of any linn that has any other role or business relationship in the 

mortgage origination and securitization process, to ensure that no market participant or class of 

participants enjoys an unfair advantage in the system. 
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Eg ual Access 

The secondary market must be open to lenders of all sizes on ru1 equitable basis. CUNA understands !hal 

the \tsers (lenders, borrowers, etc.) of a secondary marl<et will be required to pay for d1e use of such 

markd through fees, appropriate risk premiUllls and other means. However, guarantee fees or other 

fees/premiums should not have any relationship to lender rolume. Additionally, CUNA cautions strongly 

against regimes that require lenders to retain significant amo1mts of risk beyond that represented by 

actuarially appropriate gltaWJtee fees, as these risk retention arrangcn1ents may have a disproportionately 

negative impact on small lenders !hal are less able to manage such risk, and could therefore result in less 

consumer choice. 

Strong Oversight and SuJK•rvision 

The entities providing secondary market services must be subject to appropriate regulatory ru1d 

supervisory oversight to ensure safety and soundne~ by ensuring accountability, effective corporate 

govemauce ru1d preventing future fraud; dtey should also be subjected to strong capital requirements and 

have flexibility to operate well and develop new programs in response to marketplace demands. 

Any new system must ensure mortgage loans will continue to be made to qttalified borrowers even in 

troubled economic times. \Vithotn dte backstop of an explicit federally insured or guarameed component 

of any revised system, CUNA is concemed that private capital could quickly dry up during difficull 

economic times, as it did during the financial crisis, effectively hailing mortgage lending alloge~Jer. 

Financial Education 

Credit unions have a noble history of offering a wide variety of financial counseling and otlJer educational 

services to their members. Any new bousing finance system should emphasize consumer education and 

counseling a~ a means to ensure that borrowers receive appropriate mortgage loans. 

Predictable and Affordable Pavments 

Any new system must include consumer access to a variety products that provide for predictable, 

affordable mortgage payments to qualified borrowers. T raditionaUy tltis bas been d1rough fixed-rate. 

mortgages (such as the 30-year fixed rate mortgage), but other products that may be more appropriately 

tailored to a borrower's specific circumstances, such as certain standardized adjustable rate mortgages, 

should also be available. 

Loan Limits 

Our nation's housing market is diverse, with wide variation geographically and between rural and urban 

communities. Any new housing finance system should apply reasonable confonning loan limits !hat 

adequately take into consideration loca.l real estate prices in higher cost areas. 
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Affordable Housing 

The important role of government support for affordable housing (defined as housing for lower income 

borrowers but not necessarily high risk borrowers, historically provided through FHA programs) should 

be a function separate from the responsibilities of the secondary market entities. The requirements for a 

program to stimulate the supply of credit to lower income borrowers are not the same as those for the 

more general mortgage market. We believe that a connection between these two goals could be 

accomplished by either appropriately pricing guarantee fees to minimize the chance of taxpayer expense, 

and/or adding a small supplement to guarantee fees, the proceeds of which could be used by some other 

federal agency in a more targeted fashion in furtherance of affordable housing goa.ls. 

Mortgage Servicing 

In order to ensure a completely integrated mortgage experience for member-borrowers, credit unions 

should continue to be afforded the opportunity to retain or sell the right to service their members' 

mortgages, at the sole discretion of the credit union, regardless of whether that member's loan is held in 

portfolio or sold into the secondary market. To lose control over this servicing relationship would be 

detrimental not only to a large majority of credit union member-borrowers, but could also result in fewer 

mortgage choices available to credit unions and their members, with higher interest rates and fees alike. 

Moreover, to the extent national mortgage servicing standards are developed, such servicing standards 

should be applied uniformly and not result in the imposition of any additional or new regulatory burdens 

upon credit unions. 

Reasonable and Orderly Transition 

Whatever the outcome of the debate over the housing finance system in this country, the transition from 

the current system to any potential new housing finance system must be reasonable and orderly, in order 

to prevent significant disruption to the housing market which would harm homeowners, potential 

homebuyers, the credit unions who serve them, aod the nation's housing market as a whole. 

Once again, on behalf of America's credit unions and their 110 million members, tl1ank you for holding 

this important hearing, and for your consideration of credit unions' principles for any potential refom1 of 

our nation's housing finance system. 

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