```

[Senate Hearing 113-569]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 113-569
 
 THE FEDERAL HOUSING FINANCE AGENCY: BALANCING STABILITY, GROWTH, AND 
                  AFFORDABILITY IN THE MORTGAGE MARKET

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

   EXAMINING THE OPERATIONS AND REGULATORY PRACTICES AT THE FEDERAL 
     HOUSING FINANCE AGENCY AND THEIR IMPACT ON THE MORTGAGE MARKET

                               __________

                           NOVEMBER 19, 2014

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
  
  
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                  

                 Available at: http://www.fdsys.gov/
                               _________                 
                 
                 
                     U.S. GOVERNMENT PUBLISHING OFFICE
  93-421 PDF                WASHINGTON : 2016      
_________________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
      Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
     Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001               
                 
                 
                 
                 
                 

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

              Erin Barry Fuher, Professional Staff Member

              Brian Filipowich, Professional Staff Member

                  Greg Dean, Republican Chief Counsel

            Chad Davis, Republican Professional Staff Member

                    Jared Sawyer, Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
                                  

                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, NOVEMBER 19, 2014

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2

                                WITNESS

Melvin L. Watt, Director, Federal Housing Finance Agency.........     4
    Prepared statement...........................................    25

                                 (iii)

 THE FEDERAL HOUSING FINANCE AGENCY: BALANCING STABILITY, GROWTH, AND 
                  AFFORDABILITY IN THE MORTGAGE MARKET

                              ----------                              

                      WEDNESDAY, NOVEMBER 19, 2014

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:06 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    Welcome back to the Committee, Director Watt. Since this is 
likely my last hearing regarding the GSEs, I would like to urge 
my colleagues to continue our hard work to move past the 
housing crisis. Over the past few years, we and our staffs have 
spent countless hours wrestling with possible solutions and 
pitfalls. Some options are not practical while others are too 
ideological, but we still need to find a solution.
    The Enterprises remain trapped in conservatorship today. 
FHFA continues to perform the dual role of both regulating and 
running the businesses of the largest entities in the mortgage 
market. This is not sustainable, and there is no consensus in 
Congress regarding how to move forward.
    All the while the credit box remains extremely narrow, 
locking out many potential borrowers with good credit, 
including first-time home buyers who are needed to expand and 
sustain our recovery. While I oppose returning to exotic 
products with confusing terms, we need to find a way to bring 
the pendulum back to rational underwriting. Unfortunately, the 
tight credit conditions will remain a challenge while the 
future structure of the mortgage market is uncertain.
    FHFA, under Director Watt's guidance, is taking steps to 
provide more certainty to the market and expand access for 
borrowers. These initiatives include expanding the loan-to-
value requirements from 95 LTV to 97 LTV, updating reps-and-
warrants frameworks, and developing Neighborhood Stabilization 
Initiative pilot programs in Detroit and Chicago.
    I applaud Director Watt and his team at FHFA for taking 
steps to stabilize the Enterprises and the housing market. 
Focusing the Common Securitization Platform on the Enterprises, 
exploring a single security to increase liquidity, and 
developing stronger counterparty oversight are all efforts that 
will help stabilize the market for the future. However, there 
is only so much that can be accomplished while the Enterprises 
are in limbo.
    Everyone agrees that the conservatorship cannot continue 
forever, so I hope my colleagues will keep working toward a 
more certain future for the housing market. However, if 
Congress cannot agree on a smooth, more certain path forward, I 
urge you, Director Watt, to engage the Treasury Department in 
talks to end the conservatorship.
    Before I finish, I want to thank my colleagues on this 
Committee, as well as their staffs and my staff, for all their 
hard work on housing finance reform. I especially want to thank 
Ranking Member Crapo and his staff for their faithful 
partnership.
    With that, I turn to Senator Crapo for his opening 
statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. I 
appreciate those kind words, and I also appreciate the tenor of 
your remarks.
    Today is an important hearing. It is the first time that 
Director Watt has been before this Committee for an oversight 
hearing since he has become the Director of the FHFA, and it is 
also, as you indicated, Mr. Chairman, probably the last housing 
hearing of the Senate Banking Committee that you will be 
chairing.
    Mr. Chairman, I want to take this opportunity right now to 
tell you it has been a pleasure working with you, both in the 
capacities that we have had as the Chairman and the Ranking 
Member during this Congress, but also in the capacities that 
you and I have held as Subcommittee Chairmen and Ranking 
Members over the years. I have truly appreciated our friendship 
and our working relationship.
    I have especially enjoyed working with you and your staff 
in this Congress to develop legislation to address housing 
finance reform, FHFA reform, improving the Terrorism Risk 
Insurance Program, and other important topics. We have had a 
productive collaboration over these years, and I wish you the 
best, and thank you for being a great partner.
    Turning back to the task at hand and the hearing, as 
Director Watt's primary roles are conservator of Fannie Mae and 
Freddie Mac and regulator of the Federal Home Loan Bank System, 
that is where I want to focus today. These are two separate and 
distinct tasks that are incredibly complex and important.
    In his role as conservator, Director Watt is obligated to 
conserve and preserve the assets of Fannie Mae and Freddie Mac 
until Congress acts to reform our housing finance market. I 
wish that we were sitting here today to hear Director Watt 
describe his plan for the implementation of the phase-in to the 
next housing finance system. I suspect Director Watt may wish 
this were the case as much as anyone else. And while we were 
successful in passing a bipartisan path forward out of this 
Committee, the ultimate goal of enacting legislation is not 
going to be achieved in this Congress.
    This being the case, Director Watt's job in preserving the 
assets of these important companies becomes even more 
important. Since taking over as conservator, Director Watt has 
been active. He has announced many actions such as a change of 
the Strategic Plans of Fannie and Freddie's conservatorships, 
which removed the reference to reducing their dominance in the 
market; a shift in the focus of the Common Securitization 
Platform to focus solely on Fannie and Freddie instead of its 
original purpose as a conduit for competition; and expanding 
Fannie and Freddie's business by reducing required borrower 
home equity.
    In addition to these changes, HUD Secretary Castro is now 
making public statements that the FHFA will soon direct Fannie 
and Freddie to start setting aside money for trust funds. Keep 
in mind that if this were to occur, it would happen despite the 
fact that these companies have little to no capital, and thus 
the American taxpayer is completely on the hook for any losses.
    While I have serious concerns with some of these ideas 
individually, perhaps my largest concern is that collectively 
they appear to feed a perception that the old failed status quo 
is slowly beginning to take hold again. Over the course of the 
last 2 years, this Committee held a series of in-depth hearings 
that examined the failures of our broken housing market and 
various approaches to reforming it.
    While there was spirited discussion on the best path 
forward, one of the areas of consensus was that the status quo 
had failed us and that we should not return to that in the 
future. We cannot allow the return of Fannie and Freddie back 
to toxic mortgages with little or no capital. Instead, our path 
forward should be one based on sustainable homeownership, 
facilitated by a strongly capitalized private sector.
    While I understand that some individuals and entities have 
been pressuring Director Watt to institute changes they favor 
via the conservatorship, we all understand that that is not the 
proper role of the conservator. As Director Watt noted during 
his confirmation hearing in addressing this Committee, ``The 
conservator's role is to build a solid bridge from where we now 
are to wherever you, Congress, decide the future housing 
finance system will be.''
    I look forward today to hearing from Director Watt on how 
he plans to prepare that bridge and work through the 
preservation of the assets of these two huge taxpayer 
investments.
    I also look forward to him hopefully dispelling any notion 
that Fannie and Freddie are somehow being reestablished as the 
long-term secondary market solution. In doing so, he should 
focus on how his policies as conservator will address their 
dominance in the market, renounce any demands or outside 
pressures to divert the revenue of Fannie and Freddie to any 
sources other than the taxpayer, and maintain sustainable, safe 
underwriting at these institutions.
    Thank you for joining us today, Director Watt, and thank 
you, Mr. Chairman, again for holding this hearing.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who wish to make a brief 
opening statement?
    [No response.]
    Chairman Johnson. Thank you. I want to remind my colleagues 
that the record will be open for the next 7 days for opening 
statements and any other materials you would like to submit.
    Now I would like to briefly introduce our witness. The 
Honorable Melvin L. Watt is the first Director of the Federal 
Housing Finance Agency. Prior to his confirmation, Director 
Watt served for two decades as the U.S. Representative for 
North Carolina's 12th Congressional District.
    Director Watt, please begin your testimony.

STATEMENT OF MELVIN L. WATT, DIRECTOR, FEDERAL HOUSING FINANCE 
                             AGENCY

    Mr. Watt. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, thank you for inviting me to discuss 
the work we are doing at the Federal Housing Finance Agency. It 
is a privilege to participate in Chairman Johnson's last 
hearing, and all of us at FHFA appreciate his hard work and 
accomplishments on housing issues.
    I also want to share my personal best wishes as you enter 
the new role of full-time grandparent.
    FHFA's statutory mandates require us to ensure the safety 
and soundness of the Federal Home Loan Banks, Fannie Mae, and 
Freddie Mac, and to ensure that they provide liquidity in the 
national housing finance market.
    FHFA works to balance these obligations across all of our 
activities. Because Fannie Mae and Freddie Mac are in 
conservatorship, we are also mandated by statute to preserve 
and conserve their assets.
    In May, FHFA issued a Strategic Plan and scorecard that 
outlined three strategic goals for the conservatorships of 
Fannie Mae and Freddie Mac. Each of these strategic goals is 
fully aligned with FHFA's statutory mandates and fully aligned 
with the commitments I made to this Committee during my 
confirmation hearing.
    The first goal is to maintain the credit availability and 
foreclosure prevention activities supported by the Enterprises 
and to do so in a safe and sound way. We have worked with the 
Enterprises to update and clarify their representation and 
warranty framework, to encourage responsible lending to 
creditworthy borrowers, and to enhance their outreach to small 
and rural lenders. Our objective here has been to normalize the 
availability of credit within the Enterprises' approved credit 
box for borrowers who have the ability to repay a loan.
    The second goal is to reduce taxpayer risk by increasing 
the role of private capital in the mortgage market. FHFA 
required the Enterprises to triple their credit risk transfers 
in 2014, and they have already exceeded this goal by 
substantial margins.
    Our third goal is to build a new securitization 
infrastructure for use by the Enterprises and adaptable for use 
in the future mortgage market, whatever that might be. We have 
defined the governance structure of the Common Securitization 
Platform. The Enterprises recently announced a CEO for their 
joint venture, and we are making much progress toward our 
multiyear goal of developing a single security.
    Our Strategic Plan and Scorecard also have affordable 
rental housing priorities for the Enterprises. The focus is not 
to compete where there is private sector coverage of the 
multifamily market, but to ensure that affordable housing is 
available and that the housing needs of people in rural and 
underserved areas are met, including areas that rely heavily on 
manufactured housing.
    FHFA has also focused on regulating the Federal Home Loan 
Banks, and our efforts include a proposed rule that would 
clarify their membership requirements. We propose this rule 
because FHFA has a responsibility to ensure that the banks 
fulfill their statutory mission to support housing finance in a 
safe and sound manner.
    I want to emphasize that getting feedback from stakeholders 
is a crucial part of our policymaking process. We will strongly 
consider comments made by Members of this Committee and the 
public in determining our final rule on the bank membership 
standards as well as our other proposals, including guarantee 
fees, single security, and enterprise housing goals.
    I thank you, and I look forward to answering your 
questions.
    Chairman Johnson. Excuse me, Director Watt, but we have a 
quorum present, so we will move to Executive Session.
    [Whereupon, at 10:21 a.m., the Committee proceeded to other 
business and resumed at 10:25 a.m.]
    Chairman Johnson. Director Watt, thank you very much for 
your testimony.
    We will now begin asking questions of our witness. Will the 
clerk please put 5 minutes on the clock for each Member?
    Director Watt, first I would like to thank you for 
extending the comment period for the Federal Home Loan Bank 
membership rule. How many home loan bank members would not meet 
the ongoing mortgage participation requirements that have been 
proposed?
    Mr. Watt. Our review indicates preliminarily that less than 
100 would be in that category. There are some that are close to 
the categories that we proposed or the percentages that we 
proposed. And, of course, we are still taking comments on that 
proposed rule and taking those comments into account to 
minimize any adverse consequences. And we will continue to do 
that through the comment period and through our evaluation.
    Overall, there are, I think, approximately 7,500 member 
entities in the Federal Home Loan Bank System, so less than 100 
would be a very small amount that would be adversely or could 
be adversely impacted even if we adopted the rule in its 
current form.
    Chairman Johnson. What would be the interaction with and 
impact on the cost to borrowers of the proposed g-fee framework 
and the draft mortgage insurance eligibility requirements?
    Mr. Watt. Well, we are evaluating those. One of the reasons 
we ultimately ended up coordinating the comment period for the 
g-fee input and the mortgage insurance eligibility standards is 
because there is a very, very strong relationship between 
those. We are not trying to adversely affect the availability 
of credit by either one of those things, but we have a 
responsibility to make sure that not only in normal 
circumstances but in distressed circumstances mortgage insurers 
have enough capital to perform the role that they are in the 
system designed to play. And they were not able--some of them 
were not able to perform that role in the distressed situation 
that we went through.
    We are also not trying to control overall the entire 
mortgage insurance industry, but these are counterparties to 
Fannie Mae and Freddie Mac, and all of our counterparties need 
to be strong to make the system work effectively. And if they 
cannot play the role that they are mandated to play or are 
called upon to play or are contractually obligated to play in a 
distressed situation, then the system falls back on Fannie and 
Freddie; and ultimately, as Fannie and Freddie are now in 
conservatorship, it would fall back on the taxpayer.
    So, again, this is one of those areas where we are 
constantly walking a balance between not adversely affecting 
access to credit, but making sure that the players in the 
system are responsible and able to fulfill the responsibilities 
they have in the housing finance system.
    Chairman Johnson. As I mentioned in my opening statement, 
the credit box continues to be extremely narrow. What steps can 
FHFA take administratively to improve access to credit, while 
protecting current and future stability in the mortgage market?
    Mr. Watt. Well, we are trying to normalize expectations of 
the parties who participate in this market. That is really what 
the representation and warranty clarifications have been about, 
because to the extent that there is uncertainty, lenders 
increase the cost of credit as a result of that uncertainty. 
And so as we have tried to smooth out and clarify the 
representation and warranty system and give lenders greater 
certainty, we have asked them to go back and evaluate the 
credit overlays that they have imposed as a result of the 
uncertainty as we move to a more certain system.
    So we have done that. We have tried to make sure that the 
relationships that Fannie and Freddie and the Federal Home Loan 
Banks with small lenders as effective and efficient and cost-
effective as they are with big lenders. So we have tried to 
smooth out that relationship.
    There are a number of steps that we have taken to try to 
bring certainty and clarity to the market because anytime there 
is uncertainty and lack of clarity, lenders tend to increase 
the cost of credit to take that uncertainty into account.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Director Watt, as I noted in my opening statement, I am 
concerned that collectively some of the steps that you have 
taken are creating a perception that a path is being charted 
toward a long-term return to the old failed status quo. And 
this may not necessarily be your intention, and I acknowledge 
that some simply wish for this to happen. They would like to 
see us have a situation permanently in which we have the 
Federal Government in conservatorship of Fannie Mae and Freddie 
Mac. We have the taxpayer permanently on the hook for all of 
the risk in the system, with the Federal Government dominating 
the secondary mortgage markets. And I have a concern that we 
not move in that direction and that we continue to recognize 
the need for reforming this housing market.
    With your position comes a great responsibility to make 
extraordinarily clear that through all of your words and 
actions, it is Congress who will create the next housing 
finance system and that the next housing finance system is not 
the conservatorship of the FHFA.
    For the record, could you do that and make it crystal clear 
to the public that you confirm that the role of conservator, as 
you said in your nomination hearing, is to be the bridge 
builder that you described in your confirmation hearing and 
that it is for Congress to determine the role for a housing 
market in the United States?
    Mr. Watt. I can certainly confirm that, and not only did I 
say it in my nomination hearings, I have said it consistently 
since then. In every speech I have given, we have made it clear 
that conservatorship is not, cannot be, should not be a 
permanent state, and that it is the role of Congress to define 
what the future state is. So I do not think there is any 
uncertainty that is being created as a result of my comments.
    Now, as you say, there are people who potentially have 
different motivations out there, but I do not think there is 
any ambiguity in anything I have said about that.
    Senator Crapo. Well, thank you. I appreciate that. And I 
think it is important for that message to be sent.
    One of the actions that you have taken at the FHFA that has 
concerned me is your recent announced reduction in downpayment 
requirements from 5 percent to 3 percent for loans that are 
flowing through GSEs. Seemingly in recognition that this act is 
going to result in higher risk for both GSEs and ultimately the 
U.S. taxpayer, you have stated that these loans will need to 
carry additional risk mitigants.
    I am troubled that you would reduce borrower home equity 
after the problems we have seen so early, yet I am even more 
concerned that there has been little by way of detail on what 
additional taxpayer protections you are going to require. Could 
you elaborate on that?
    Mr. Watt. I can, certainly, and I appreciate the question. 
The details will be coming out in early December. We announced 
that there will be a plan because we were working on the plan, 
we are working on the details. And some people heard that we 
were just doing this in a willy nilly fashion and did not hear 
the second part of the sentence, which was that there would be 
compensating factors taken into account.
    The reality is that downpayment by itself is not 
necessarily a reliable indicator of whether somebody will pay a 
loan. It is a factor, but the best illustration I can give you 
is that there are--probably 75, 80 percent of the people whose 
mortgages are underwater now are still paying their mortgage. 
They have no equity.
    So downpayment is not the most reliable indicator of 
whether a borrower will repay a loan. If they have good credit, 
if they have housing counseling, if they have ongoing housing 
counseling, post-purchase housing counseling, and know how to 
be responsible homeowners, those can mitigate the perceived 
increased risk that----
    Senator Crapo. But you are going to be establishing a set 
of mitigating----
    Mr. Watt. Absolutely. Absolutely.
    Senator Crapo. Would those include a higher guarantee fee 
to offset the risk of borrower equity?
    Mr. Watt. I do not know--we are working on the g-fee 
proposal, but understand that any loan that the GSEs make that 
requires less than a 20-percent downpayment also requires 
mortgage insurance or some other compensating factor to 
mitigate against the increased risk. So that will be true of 
these loans also.
    So you can be assured that we are not making credit 
available to people that we cannot reasonably predict with a 
high degree of certainty that they will be able and willing to 
pay the mortgage. That is not what we are in the business to 
do.
    Senator Crapo. Well, thank you. My time is up. I will 
probably submit some additional questions to you. One of them 
will be to just follow up to see that we get the details on 
this risk mitigation activity that you are going to----
    Mr. Watt. And we will be happy to come over and brief you 
as soon as those details--but they will be out there pretty 
vigorously in December.
    Senator Crapo. All right. Thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman, and this being 
likely one of the last if not the last hearing, let me begin by 
thanking you and Senator Crapo for your thoughtful, principled, 
and bipartisan leadership. Thank you both, gentlemen, very, 
very much.
    Director Watt, the Housing Trust Fund and the Capital 
Magnet Fund payments out of the GSEs have been suspended, and 
we have an affordable housing crisis. I do not have to tell you 
that.
    In June of this year, I joined 32 of my colleagues writing 
a letter to you asking you to go ahead and begin payments back 
into the funds, which I think would go a long way practically 
to rejuvenate or at least help a bit in the issue of housing.
    Can you update us on that situation, what you intend to do, 
what you can do?
    Mr. Watt. Happy to do so, Senator. I have indicated that 
before the end of this year we will address that issue 
directly. I think not only did we get a letter from you and a 
number of Senators on the side of funding the Housing Trust 
Fund, we also got letters from a number of Senators on the 
opposite side, which illustrates that walking the line between 
safety and soundness and access to credit, that is the space in 
which we operate. So there is not a decision that I make or 
that we make at FHFA where there is not that kind of balancing 
going on. And there is always a constituency on one side or the 
other.
    Now, on the Housing Trust Fund, there are specific 
statutory provisions that indicate when the contributions to 
the Housing Trust Fund can be suspended. Those statutory 
provisions have not changed. They are the same statutory 
provisions. That does not mean that circumstances that 
triggered the termination may not have changed, and that is 
what we are evaluating at this point. And we are doing it 
responsibly. We are going through the process, and when we do 
announce a decision, we will announce it with the details of 
why we announced it on one side or the other. But you can 
expect an announcement of some kind or another on one side or 
the other of that issue before the end of the year.
    Senator Reed. Well, I am confident of your skill and 
agility of balancing all of these things and reaching the right 
side of the chasm, so good luck, but I think a decision sooner 
rather than later.
    I would also point out that within Senator Corker and 
Senator Warner's bill, there was a further indication of 
support for the Housing Trust Fund, so I think the concept is 
something that we agree. And then if you can find a way to fund 
it, it would practically be helpful to thousands and thousands 
of people.
    Let me turn to another issue, and that is, the Neighborhood 
Stabilization Initiative, which you have been very forcefully 
leading. In my State we have a significant number of 
foreclosures. We also have a significant unemployment situation 
still after years and years of recession. And as you look at 
these pilot programs for the NSI, would you be willing to 
factor in unemployment to give States--not just Rhode Island 
but other States--that are suffering not just from housing 
problems but from employment problems?
    Mr. Watt. We will certainly look at it, Senator, but 
unemployment is kind of beyond the control of the space in 
which we operate. And the way we arrive at the target areas in 
which we would do the pilot programs is we actually went to the 
map and identified the places that were basically the hardest 
hit in terms of home valuation declines, the places that had 
the most houses still underwater. And we have tried to craft a 
program, the Neighborhood Stabilization Initiative, to address 
those hardest-hit areas and do it carefully, test some things 
in those areas, and then try to replicate the things that work 
in those areas.
    So we started, obviously, in Detroit, probably the hardest-
hit place in the world. Now, unemployment was a component of 
that, obviously, but it was really--what was driving our 
decision about putting them at the top was the number of loans 
and houses that were underwater there, and that is something we 
can map. We put it up on our Web site. Every community now 
knows the number of distressed houses, the number of loans that 
are substantially behind in payment.
    So those are the factors that are more related to housing 
that we have taken into account to this point. They 
tangentially relate to unemployment, and we recognize that your 
State is among the highest unemployment situations, so we will 
try to figure out--everybody now wants us to bring the 
Neighborhood Stabilization Initiative to their city, their 
county, their State, because it is a very popular thing. It has 
more flexibility in the way we deal with borrowers, and so I 
can understand why people want it. But we still have to do it 
responsibly and with the balance that I have talked about.
    Senator Reed. My time has expired, but I would 
unfortunately note that our housing statistics are just as 
unfortunate as our unemployment statistics. Our serious 
delinquency rate is eighth in the country. So my sense is that 
when Rhode Island applies, you could find----
    Mr. Watt. We will certainly look carefully at it.
    Senator Reed. Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and I, too, want 
to again thank both of you for your leadership. And I look 
forward to what the future holds for you, and I am pretty 
certain I know what the future holds for Crapo, but thank you. 
And to our staffs----
    [Laughter.]
    Senator Corker. To the staffs, I just want to thank all of 
you. I know the election creates uncertainties, and I know some 
of you will stay with us, and some of you will move on. But I 
really appreciate the way the two staffs worked so hard 
together to master housing finance and produce a product that 
had a lot of bipartisan support. So thank you.
    To Jack Reed, my former staffer Michael Bright, who needs 
to get a life, just emailed me to make sure that Jack knew our 
support for the Housing Trust Fund was part of a compromise.
    [Laughter.]
    Senator Corker. That is what you do around here. So, in any 
event----
    Senator Warner. $3 to $5 billion.
    Senator Corker. There you go. That is right.
    So, in any event, Director Watt, thank you for being here, 
and I appreciate the genuine time we have had in our offices to 
talk about FHFA and the two entities that you oversee, along 
with other responsibilities. And I know we talked a lot about 
the Common Securitization Platform, and I know you are moving 
toward creating that.
    One of the concerns that we expressed in our meeting in the 
office was to ensure that as this platform was being created, 
it was something that was useful for any entity, that it was 
not designed as part of some proprietary arrangement where only 
Freddie and Fannie benefited from it. And I think you have 
maybe brought in a CEO to head that up, and I just wondered if 
you could give us assurances as to making sure that this Common 
Securitization Platform is one that will be ubiquitous, meaning 
it can be used by all enterprises that might enter this market 
over time.
    Mr. Watt. That is certainly our intention, Senator Corker. 
At the same time, to have designed a Common Securitization 
Platform for the future state without knowing what that future 
state was going to be would have been an extremely risky and 
costly venture. And so our feeling is that if we can design a 
system that works for the current, it will also work for the 
future. And we know what the current circumstances are.
    At the same time, every one of the modules that we are 
working on has a future component to it also. But understand 
that the taxpayers have at risk now about $5 trillion between 
Fannie and Freddie that, when the Securitization Platform is 
there, will have to be dealt with in some way. And our 
objective is to roll those things into a single security so 
that they will be marketable, right? So----
    Senator Corker. Yes. I do not want to run out of time, and 
I thank you for saying that. I just want you to reassure us, 
though, that what is not happening is a Common Securitization 
Platform that is going to be used as a proprietary product by--
--
    Mr. Watt. I can assure you----
    Senator Corker.----Freddie and Fannie and not something 
that if we ended up moving ahead would not be useful.
    Mr. Watt. I can assure you of that.
    Senator Corker. And just moving on to the single TBA 
market, which, again, I think is a very constructive step, as I 
understand it, you are working with SIFMA to create a single 
product, which, again, would work very much well--it would work 
very well with a product, if you will, that came out of this 
Committee from the standpoint of, again, allowing all types of 
guarantors, if you will, to be able to use this TBA market. Is 
that correct?
    Mr. Watt. We absolutely are working closely with SIFMA. 
They are the most important player in the TBA market, and for 
us to try to do this without close consultation with them I 
think would be irresponsible.
    Senator Corker. So as you look into the future, you are 
dealing with the responsibilities that you have been given. You 
are always really clear, I think, much of it coming from your 
background, that you are going to carry out your operations in 
keeping with the laws that Congress produces.
    What is the biggest risk that you see into the future if 
Congress does not take action on housing finance and deal with 
the current status that we now have? What is the biggest risk 
to us as a Nation, as taxpayers, as people who oversee the 
integrity of Government?
    Mr. Watt. I think over time uncertainty about the future 
will more and more have greater and greater costs to us, and I 
think really bringing certainty to the future of housing 
finance in this country is critically important because, as I 
have indicated in answers to some of the earlier questions, 
uncertainty in this area causes costs to go up, and those costs 
result in costs to borrowers. And that has an impact on the 
economy because it slows down borrowers' willingness to 
participate, and that is true whether it is a home buyer or a 
renter seeking affordable rental housing.
    Senator Corker. Well, listen, thank you for your testimony, 
and, Mr. Chairman, thank you for the extra time.
    Chairman Johnson. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Chairman. Thank you, Director 
Watt, and I appreciate your service. And I am not surprised at 
the type of commitment you have and the way in which you have 
executed your responsibilities from our time in the House 
together, so I am proud of what you are doing.
    I sent a letter with Senators from other affected States 
commending you for your decision to reconsider the guarantee 
fee surcharge your predecessor had attempted to put on 
homeowners and borrowers like in my State of New Jersey, as 
well as others, a surcharge that would have penalized mortgage 
borrowers in States where foreclosures are taking longer, even 
though that might be because of strong consumer protections or 
overloaded courts. And that proposal raised a lot of concerns. 
It would increase costs for new borrowers in States already 
suffering from foreclosure backlogs and would disincentivize 
States from adopting strong consumer protections despite the 
strong need we have seen in recent years for protections from 
foreclosure abuses. And I think there is far more constructive 
and better targeted ways to address the issue on backlogs.
    So I know that this is in the process. Can you give me an 
update on the status of your review?
    Mr. Watt. The comment period on both g-fees and mortgage 
insurance has expired, and we are now in the process of 
evaluating both of those things. They are connected to each 
other in some ways that are not always obvious to the public. 
And we are trying to sort through those connections, and I 
would expect probably in--hopefully in the first quarter of 
next year we will bring greater clarity to that area.
    Senator Menendez. OK. Well, I hope that clarity does not 
come at the cost of consumer protections and does not come at 
the cost--in terms of there are better ways to deal with 
foreclosure backlog, and we would be happy to share our views 
with you in that regard than just tacking on more fees to 
people in which it is challenging.
    Mr. Watt. I should say that from our perspective those 
costs would not be about consumer protections. They are costs 
to longer foreclosure timelines because----
    Senator Menendez. And what I am saying is some of those 
longer foreclosure timelines are because there are strong----
    Mr. Watt. That is right. So we are trying to sort through 
what is related to the consumer and what really exposes us to 
greater risk not as a result of consumers.
    Senator Menendez. Let me move to mortgage principal 
deduction for homeowners who are distressed or underwater. You 
know, in the aftermath of the financial crisis and even through 
our recovery, consumer debt burdens have been one of the 
biggest factors holding back our economy, and high levels of 
mortgage and other debt have caused consumers to defer expenses 
and cut back on other spending, which has led businesses to 
reduce investments and create fewer jobs, which feeds a cycle 
that has slowed our recovery.
    Notwithstanding that, consumers have worked hard to reduce 
their debt, often at a great cost, but there are still more 
than 5 million homes that are still underwater, with underwater 
mortgages, including more than 12 percent in my State of New 
Jersey. And despite the clear economic benefits, as exemplified 
by the fact that the private sector was doing this, your 
predecessor refused to allow mortgage principal reduction by 
the GSEs as a policy response. And while certainly principal 
reduction would have had a greater impact if it had been 
allowed to be done earlier, there are still benefits to be 
gained from allowing it.
    So with the benefits of allowing principal reduction pretty 
clear to me, to taxpayers, homeowners, and the economy, it is 
hard to understand why it was not allowed, especially in cases 
where the modification offers a positive net present value over 
the alternative of a foreclosure.
    So do you intend to revisit your predecessor's policy on 
principal mortgage reduction? And what are your views on that?
    Mr. Watt. We have not taken responsible principal reduction 
off the table as an option. We continue to look at whether 
there are ways to do it responsibly. But even with the private 
ones, it has seldom been done across the board. As I indicated 
in response to an earlier question, 75, 80 percent of the 
people who have been underwater have continued to pay their 
mortgage. And so we are trying to find a way that we can get to 
the net present value, as you indicated, to be at least not a 
loss but a gain. And I think we are getting closer to trying to 
figure out what that connection is, and I would tell you that 
this has perhaps been the most difficult issue that I have 
faced as Director of the Agency.
    Senator Menendez. Two final comments, if I may, Mr. 
Chairman.
    I appreciate how you are coming at it. I also would say 
that, to the extent that this is going to have any value to try 
to keep homeowners, responsible homeowners in their homes, time 
is of the essence here. So I look forward to the calculus and 
what operational costs, if any, you are calculating in that 
regard.
    And, finally, I just want to make a case--I think my 
colleague Senator Reed raised it, but, you know, the Affordable 
Housing Trust Fund, you know, it used to receive funding from 
the GSE revenues as a result of the law. It was temporarily 
suspended. And the reality is that while we now see GSEs once 
again generating positive profits to the point that they have 
paid more to the Treasury than they have received, we do not 
see the allocation going back. And this is going to be 
critical, especially when I think about some of the GSE reform 
that I am hearing about and have looked at, and how do we still 
meet the mandate of opportunity, you know, and a duty to serve. 
The Affordable Trust Fund is clearly an important part of that.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and thank you, 
Director Watt. I want to say that I share a concern that was 
first raised by Senator Crapo about the danger that we slide 
back into some variation of the status quo prior to the 
financial crisis. I am concerned about the current overwhelming 
dominance of the mortgage market by the GSEs.
    I know that FHFA has addressed this as recently as earlier 
this year in both the Conservatorship Strategic Plan and the 
Conservatorship Scorecard. One of the three strategic goals 
that is mentioned in both is to reduce taxpayer risk through 
increasing the role of private capital in the mortgage market, 
quite rightly so in my view.
    In its 2013 annual report, the FSOC said, and I quote:

        Higher guarantee fees are expected to help facilitate increased 
        participation by the private sector in the mortgage markets. 
        The Council recommends that the FHFA continue these efforts in 
        order to help bring more private capital back into mortgage 
        finance.

    Almost immediately upon being sworn into office, you 
suspended the planned g-fee increases, and so I guess my 
question is: Do you disagree with the FSOC's opinion that 
higher g-fees would help to bring private capital into the 
market?
    Mr. Watt. I am not sure I disagree with it, but I cannot 
tell you that I believe that that is the most important factor 
about bringing private capital into the market. We are trying 
to bring capital into the market through risk transfers, 
through providing certainty, and we are looking at setting out 
a transparent and rational basis for setting g-fees, which is 
part of our ongoing process.
    So all of those things have their role in this process, and 
we are trying to look at every single one of them in a 
responsible, deliberative way. But to say that one--you know, 
raising g-fees is going to bring private capital flocking back 
into this space I think is probably a gross exaggeration.
    Senator Toomey. Well, that does seem to be what the FSOC 
says. FSOC has recommended that for exactly that purpose, and 
it seems to me that while there are definitely other steps that 
are important, I agree necessary to bring private capital in, 
if the Government guaranteed piece is systematically 
underpriced, then no matter what else you do, you are not going 
to get private capital to come in in that context. So I think 
the g-fee piece is an important part of that.
    Mr. Watt. I do not think you and I are saying different 
things. I agree with you that it is one factor, and I agree 
with FSOC that it is a factor. But to elevate that above some 
of the other things we are doing and to approach that in a way 
that is different than the way we have approached other things 
I think would be inconsistent. We are looking at the impact 
that the increase in g-fees will have on bringing in private 
capital. We are looking at providing certainty through the 
representation and warranties framework. We are looking at all 
kinds of options that hopefully will bring private capital into 
the process.
    But to say that we should, without a thorough analysis, 
just increase g-fees, without having evaluated it, I think was 
inconsistent with my responsibilities. And so we are getting to 
it. We are going to get there. But----
    Senator Toomey. That is my follow-up question. And I have 
to say I do not believe that the FSOC was suggesting that this 
be the only mechanism and that all other options be ignored. I 
think the FSOC is very well aware of some other steps that need 
to be taken. But in any case, it has been almost a full year 
now since you suspended the increases that were planned by your 
predecessor. So how much longer is it going to take to do this 
analysis? When do you expect to come to a conclusion?
    Mr. Watt. As I indicated in response to an earlier 
question, we expect to provide a framework and the rationale 
for it sometime during the first quarter of this coming year.
    Senator Toomey. First quarter of next year we will have----
    Mr. Watt. 2015.
    Senator Toomey. Yes, OK. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman. And it has been a 
real honor to serve on this Committee with you, and thank you 
for the public service for more or less three decades to the 
people of South Dakota and to our country.
    Mr. Watt, nice to see you, and I echo the words of my 
colleague Senator Menendez that came to the House at the same 
time, and thanks for the work you are doing now at FHFA.
    Let me talk to you about putbacks some. You announced the 
third round of changes negotiated with the mortgage industry to 
further restrict FHFA's ability to put back defaulted loans to 
the lenders that improperly certified they had complied with 
Fannie and Freddie guidelines. These changes are intended to 
give a greater certainty to mortgage lenders, at least in 
theory, that they will in turn facilitate loans to a broader 
range of creditworthy borrowers. But some content that it lets 
irresponsible lenders off the hook, leaving both taxpayers and 
borrowers picking up the tab.
    My question is this: Since the crisis, Fannie and Freddie 
have put back billions in defaulted mortgages that lenders 
tried to pass off as eligible for purchases by GSEs. Under 
these new putback policies, does FHFA still have the tools it 
needs to hold lenders accountable if they do not follow the 
rules?
    Mr. Watt. Yes, we have been very careful about retaining 
authority to put back when there is fraud or misrepresentation. 
But some of these elements were so uncertain about the 
conditions, it was paralyzing the lender community. And that 
was stifling the availability of credit, and it was increasing 
the cost of credit because they were imposing credit overlays 
to take into account that uncertainty.
    So what we have tried to do is move some of the review of 
the loans that Fannie and Freddie guarantee, move more of that 
up to the front end, do not wait until there is a default and 
then put it back. If we know that we are getting good loans and 
we have done our due diligence at the front end, then we have 
got more control over that process.
    But I can assure you that when there is fraud or 
misrepresentation in the process, we will retain the ability to 
put back loans throughout the life of the loan.
    Senator Brown. I hope that means you are vigilant that 
this--the tendency here could be that this gives banks the 
benefit of the doubt that homeowners do not get, but I know 
your values, and I know what you are doing in that job, and I 
know you will be vigilant about that.
    Speaking of potential fraudulent activity that you 
mentioned a second ago, the New York Times recently this week 
highlighted Fannie and Freddie's use of debt collectors to 
pursue families who lose their homes to foreclosure for any 
debt that was not covered by the value of their home as it was 
underwater. Homeowners just starting to get back on their feet 
for a year or 2 years, or even longer, can find themselves with 
tens of thousands of dollars of new debt depending on their 
State's laws for collecting these deficiency judgments. Your 
agency has a duty to protect taxpayers, but demanding payment 
from borrowers who have already documented they cannot repay 
seems both expensive for FHFA who must pay the collectors and 
obviously harmful to the borrowers who cannot escape debt on a 
home they do not even now own.
    How do you ensure that deficiency judgment cases are only 
brought when borrowers can truly repay?
    Mr. Watt. Well, we are in the middle of a thorough review 
of Fannie and Freddie's practices and policies related to 
deficiency judgments. There may be as a result of that analysis 
an indication that we were spending more on that process than 
we were getting out of it and that there needed to be different 
criteria, but we have not reached that conclusion yet. But we 
are evaluating it carefully, and we are doing it, as we do with 
every other decision, based on actual information and research 
and documentation that we have access to.
    It is a more recent evaluation. It is not something that I 
started in January or May. We became aware of the problem or 
the concern that was being raised actually before the article 
came out recently. And----
    Senator Brown. So what does that mean you are doing to make 
sure that third-party collectors are following State and 
Federal law in these situations?
    Mr. Watt. Well, we always expect our counterparties to 
follow State and Federal law. I mean, that is part of the 
contract, and we are enforcing that contract. So we are always 
doing that. That is a given.
    But I am talking about a deeper analysis of whether and to 
what extent there is value in pursuing a deficiency judgment in 
various kinds of cases.
    We have already eliminated borrowers age 65 or older, 
active military borrowers, bankrupt borrowers, borrowers 
pursuing short sales, deeds in lieu of foreclosure, and we are 
looking at the value of what is left. Are we really doing 
more--getting more benefit or doing more harm out of pursuing 
deficiency judgments in the States that allow it? I mean, a lot 
of States do not allow it in the first place.
    Senator Brown. Thank you.
    Thanks, Mr. Chairman.
    Chairman Johnson. Senator Warner.
    Senator Warner. Well, thank you, Mr. Chairman. Let me add 
my voice to other colleagues thanking you for your service and 
also thanking Ranking Member Crapo for your great work on 
housing finance reform.
    I would remind my colleagues that those who have raised the 
Housing Trust Fund, if the bipartisan reform that we advanced 
had moved forward for the Housing Trust Fund, that would have 
generated $3 to $5 billion a year. That would have been 
extraordinarily valuable on a project and a program that we all 
advocate but has zero money in it at this point.
    Director Watt, thank you for your service. I have got a 
number of questions. I would like to make one quick comment, 
though, on the front end. As somebody who believes we do need 
housing finance reform--and Senator Warren and I recently wrote 
you a letter on a series of points, and I am going to raise a 
couple of them. One of the things I just want to put--hopefully 
you will be able to get back to me. Fannie Mae is in the 
process of entering into a long-term lease on what appears to 
be very expensive real estate. We have tried to press for some 
level of cost-benefit analysis. We have not gotten it. It is 
kind of a little bit of they are acting as a private entity, 
yet they are under your control, no GAO review. I really 
question the entities' move. They seem to be acting as if they 
assume the status quo is going to be 30 years going forward, 
and I think that is at best an uncertain assumption and one 
that I am not sure the taxpayer is getting full value on. So I 
hope you will look into that and can get back to me.
    Mr. Watt. We are regularly in consultation with them, and 
actually, our expectation is that it will provide much, much 
greater flexibility for them to----
    Senator Warner. We have gotten nothing. They say they are 
in NDAs----
    Mr. Watt. I thought we had provided a number of things to 
your staff, but if not, I will certainly follow up.
    Senator Warner. Yes, I am very unsatisfied with what we 
have got.
    Mr. Watt. OK.
    Senator Warner. And, again, I will ask you to be fairly 
brief because I have got at least three or four areas I would 
like to touch on.
    We are concerned about access to credit. You know, in 
effect, we have become--FICO scores have become the de facto 
standard, particularly first-time home buyers, in these 
challenging times, particularly when you are looking at folks 
with student loans and others, becomes a real hurdle.
    Have you thought at all about looking at standards other 
than FICO and how we might bring a little more competition into 
this space?
    Mr. Watt. We are thinking of it on an ongoing basis, not 
only whether it would be advantageous to have competition in 
the credit score area, but whether Fannie and Freddie through 
their own processes could evaluate creditworthiness, and they 
do, using things other than credit scores. So it is a part of 
our regular process, and it is a daily part, it is an hourly 
part of our regular process, because if you cannot accurately 
evaluate the ability of a borrower or a prospective borrower to 
repay, we have real trouble.
    Senator Warner. I would love to get an update on that.
    The other is--and I think a number of us have probably 
dealt with this, and this is kind of the first-look program. 
How do we make sure owner-occupied individuals that may be in 
challenging financial straits really are going to get a fair 
shake? It is tough for them to go against sometimes these 
outside purchasers that will come in and buy up areas and the 
owner-occupied individual--in terms of a bit more flexibility 
to keep that owner-occupied--that owner in that home on ability 
to dig their way out. We have enormous problems with this in 
Prince William County, one of our suburban communities. That 
was one of the hardest-hit areas with the financial crisis. I 
hope you will take a look at that as well.
    Mr. Watt. We are, on an ongoing basis, and I got the letter 
that you and Senator Warren sent yesterday afternoon, and we 
will respond to it and be available to meet with you on each 
one of these specific issues.
    Senator Warner. That would be great. Let me move to another 
area. This is kind of the other end of the spectrum, and that 
is around mortgage insurance rules. Obviously a lot of us 
raised concerns that when the financial crisis happened, a lot 
of the mortgage insurers were not there. And we do have to get 
the capital standards right, and I applaud you on moving 
forward in that area.
    But one of the areas that I think bears some consideration 
is the PMIERs, you know, in terms of considering within the 
mortgage insurance industry premiums that are paid and that are 
in the process of being paid, at least applying those within 
the capital standards. That is a revenue stream that I believe 
ought to be counted. Do you want to make--I know my time has 
run out, but could you make a comment on that?
    Mr. Watt. It is something that we are looking at very 
carefully because a number of people have said that our 
proposed rule does not take it into account and that it should 
take it into account.
    It is a difficult issue because in defining capital and 
having the capital to survive in a stress situation, income 
generally is not considered capital. I mean, it would be like 
the GSEs having capital, but then allowing the g-fee income 
that they get to produce income be considered as part of the 
capital, right?
    So there are arguments on both sides of this issue, and it 
is a very complicated issue, and interestingly enough, I have 
people internally who have different perspectives on it, which 
is why I think we will get to the best possible result because 
we----
    Senator Warner. And I appreciate that, and my time has 
expired. And we do need to make sure that in the event of 
another crisis, the mortgage insurers have some backing. But I 
do think this is an area, at least on my review, that merits 
some further scrutiny.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. And, again, thank 
you for your service. It has been a real privilege to serve 
with you and with Ranking Member Crapo.
    Thank you for being here, Chairman Watt. I want to return 
to an issue that Senator Menendez raised, and that is, as you 
know, 5 million families lost their homes during the financial 
crisis, and millions more are still struggling. According to 
the latest data from Core Logic, a leading housing market 
research firm, another 5.3 million homeowners remain underwater 
on their homes, and people are continuing to lose their homes 
every day in foreclosure.
    Now, we talk a little bit about the law here. One of your 
duties under the law is to preserve and conserve the assets of 
Fannie and Freddie. But another duty given equal importance by 
Congress--and I am reading from the law here--is to implement a 
plan that seeks to maximize assistance for homeowners and take 
advantage of available programs to minimize foreclosures.
    Congress explicitly included reduction of loan principal as 
an option for your agency to pursue. Principal reduction is 
often a win-win that both helps Fannie and Freddie and helps a 
family. A 2013 CBO study, for example, found that even a modest 
principal reduction plan for Fannie and Freddie mortgages could 
help 1.2 million underwater homeowners, prevent 43,000 
defaults, and save Fannie and Freddie about $2.8 billion.
    The Treasury Department has found that principal reductions 
could save Fannie and Freddie nearly $4 billion and help half a 
million homeowners stay in their home.
    It has been 6 years since Congress created FHFA, and in all 
that time, your agency has never, not once, permitted a family 
to reduce its principal mortgage through Fannie or Freddie.
    I have asked about this repeatedly, and you have said you 
would look into allowing Fannie and Freddie to engage in 
principal reduction. You said it again today. You have been in 
office for nearly a year now, and you have not helped a single 
family, not even one, by agreeing to a principal reduction. So 
I want to know why this has not been a priority for you. The 
data are there.
    Mr. Watt. It is probably an overstatement, Senator Warren, 
to say it has not been a priority. It has been a priority. It 
is just a very difficult issue, and the reason it is difficult 
is because we are looking for exactly what you said, which is a 
win-win situation. We----
    Senator Warren. Well, forgive me, though----
    Mr. Watt. So we have to do this in a way that is 
responsible; otherwise, we just--reduced principal for 
everybody across the board is not what anybody, I think, is 
advocating for. So then we have to decide, OK, what is a 
responsible----
    Senator Warren. Chairman Watt, you have had a year to do 
that. You have known for 5 years before that what the problem 
was. We have two studies coming out showing that Fannie and 
Freddie could make money by doing this, one from the Treasury 
Department and one from the CBO. I am not even talking about 
all the private studies on this.
    In the meantime during this year, you have done the reps 
and warranties policy, you have done the buyback policy, you 
have done private mortgage insurance rules. You have done a 
whole list of really tough technical things, and I applaud you 
for doing that. But people have lost their homes in the last 
year, and every day that you delay more families lose their 
homes. There are 5.4 million families out there underwater.
    So I want to know: When are you going to have an answer on 
this one?
    Mr. Watt. We are going to have the answer soon. It will not 
be as long as it has been, let me put it that way. You know----
    Senator Warren. How many more people have to lose their 
homes before we get there----
    Mr. Watt. I cannot take responsibility for what decisions 
were made in the first 5 years. I can take responsibility----
    Senator Warren. No, but you----
    Mr. Watt.----for what decisions are made in the last year. 
And it is not a year yet, but I think we are getting closer 
to--and we are doing some things that really may not call 
themselves principal reduction, but we are giving a lot more 
flexibility through the Neighborhood Stabilization Initiative.
    Senator Warren. But they are not principal reductions, so 
let us just be----
    Mr. Watt. They are. They are principal reduction. If we 
facilitate the transfer of loans to other entities that do 
principal reduction and allow them to do principal reduction, 
that is principal reduction. It is not across-the-board 
principal reduction.
    Senator Warren. Indeed, how many families has it affected?
    Mr. Watt. It has affected a number of families.
    Senator Warren. We have got 5.4 million families 
outstanding with underwater loans, and we have got two 
principal studies now showing what would happen if Fannie and 
Freddie were to engage in principal reduction.
    I just want to add one more point before I quit here 
because I want to follow up on Senator Brown's concerns about 
pursuing people for deficiency judgments when they cannot pay. 
And you have said this is something you are looking at, and, 
again, I am glad to hear that. But there has already been a 
study on this.
    According to an FHFA Inspector General's report from 
October of 2012, in 2011 Fannie and Freddie pursued about 
35,000 borrowers who collectively had an unpaid balance of $2.1 
billion. Do you know how much they recovered? Do you know?
    Mr. Watt. I know what the Inspector General says, but I 
think you are not looking at the bottom line of what the 
Inspector General said. The Inspector General says we should be 
pursuing more of these rather than less of them, and----
    Senator Warren. Well, what he says is that----
    Mr. Watt. And that is the dilemma we are in. We are trying 
to figure out which ones make sense and which ones do not make 
sense, and that is the evaluation that we are doing.
    Senator Warren. Well, let us just look at his numbers. His 
numbers are, out of that 2.1 billion, you managed to collect 
$4.7 million. That is less than one-quarter of 1 percent of the 
amount you went after families and hammered on them for, and 
that is before you account for the expenses of the collection. 
This is not a program that is producing money for Fannie and 
Freddie, but it is certainly imposing a lot of pain on families 
that have already lost their homes, families that have already 
been caught in bad mortgages, caught with robo-signing. This 
looks like a program to me that you do not need to spend 
another year on. It is a program that needs to be severely cut 
back.
    Thank you, Mr. Chairman. Sorry for going over.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and thank you for 
your service as Chairman of this Banking Committee. It has been 
a pleasure to serve on it, and I wish you well in the next 
chapter of your life.
    Director Watt, the FICO score system that is used by Fannie 
and Freddie now uses the 2004 classic model, and it weighs 
medical debt in a way that does not accurately reflect the role 
of medical debt on risk because it is kind of a special 
category because it often takes folks a lot of time to figure 
out what they actually owe in our complicated medical system.
    FICO has recognized this in their modeling, so they have 
produced FICO 8 and 9, which more fairly treat consumers in 
this regard.
    Why do the seller/servicer guidelines still require the 
2004 model that does not take into account this improvement in 
analyzing medical debt?
    Mr. Watt. Because the costs of changing from one FICO model 
to another FICO model or from FICO to an alternative credit 
scoring model are heavy, and the systems that have to be 
adjusted are complicated.
    So what we are trying to do now is get through an analysis 
of not only FICO 8 and 9, but an alternative credit scoring 
model and try to come up with a system that is a better system 
and then adjust the operational things that it would take to--
--
    Senator Merkley. Let me cut you off there because I only 
have a little bit of time, but I encourage you to put pedal to 
the metal in that regard.
    Mr. Watt. We have pedal to the metal. We are at it, I 
guarantee you.
    Senator Merkley. I am not quite persuaded of that, but 
thank you for pursuing it, because a lot of people would be 
more fairly treated with an appropriate credit model.
    I wanted to turn to force-placed insurance. There have been 
reports from NPR and from AP recently, but these issues go back 
a long way. It is something I have been pointing out for a long 
time, kickbacks that go to mortgage servicers to place 
insurance at many times the market rate, actually often drive 
people into foreclosure. And, of course, that has an impact on 
your agency.
    I understand that in June you all did issue a requirement 
that these kickbacks end, whether they are direct financial or 
in discounted services, and I applaud you for that.
    Can you comment a little bit about these recent articles 
that seem to indicate this still is a big and challenging issue 
and how you are taking it on?
    Mr. Watt. Well, force-placed insurance in and of itself is 
a big and challenging issue, and we have taken some of the 
abuses out of it by issuing guidelines. But I do not think I 
could represent to you that we have taken every concern that we 
have about how it is done out of the process, and we are 
continuing to work on methods of trying to improve the way we 
handle force-placed insurance.
    By definition, if somebody is in default or if somebody has 
already moved out of the house, they have put insurers into a 
different situation. And there is really no good, effective 
market out there yet that takes that into account. So we are 
looking at it aggressively and trying to continue to improve 
it, but it is a tough area.
    Senator Merkley. So both Fannie and Freddie at various 
points have looked at directly contracting for replacement 
insurance so that it would be at the market rate, which is 
fundamentally fair to the homeowner, that would eliminate the 
middlemen and the kickbacks. And are you willing to 
aggressively pursue a model which would be fundamentally fair 
to homeowners?
    Mr. Watt. Well, I am willing to pursue a model that is 
fundamentally fair to homeowners, but I am not sure that you 
would want Fannie and Freddie to be in the insurance business 
themselves.
    Senator Merkley. No. They would be contracting. That is 
what----
    Mr. Watt. And when you say fair market value then, the 
risks associated with vacant properties are higher than the 
risks associated with occupied properties.
    Senator Merkley. These are not vacant properties. These are 
often----
    Mr. Watt. But you have got to make those differentials, is 
the point.
    Senator Merkley. Are we providing a list of excuses here or 
are we going to get----
    Mr. Watt. No, I am not--I am just explaining the reality of 
the difficulty of the problem that we are facing, Senator. I am 
not providing excuses. These are difficult issues, and we try 
to deal with them and give them the kind of consideration 
that----
    Senator Merkley. OK. Well, I would like you to keep dealing 
with it. I am not satisfied yet that homeowners have gotten a 
fair shake when we have been through this time and time again 
for a long period of time, and homeowners are still being 
saddled with insurance that is two to three times on average by 
various studies, in some cases four to ten times market rate. 
That is predatory practices. You are in a position to help stop 
it, and I am asking you to do so.
    Mr. Watt. I think you and I have exactly the same 
objective.
    Senator Merkley. Thank you.
    Mr. Watt. And we are moving in the direction that you would 
like us to.
    Senator Merkley. Thank you very much.
    Mr. Watt. Probably not at the pace you want us to do it.
    Chairman Johnson. Senator Heller.
    Senator Heller. Thank you, Mr. Chairman, and if I may, 
thank you for your leadership on this Committee, your time 
spent. I do appreciate it, as I know most Members of this 
Committee do.
    I want to thank also the Ranking Member. In fact, Director 
Watt, I would like to continue with some of the questioning 
that he had beginning earlier, but thank you very much for 
being here, for taking time, and being here available to answer 
some of our questions.
    As you are probably well aware, there are quite a few 
Members here on this Committee that are pretty passionate about 
housing finance reform. I am included in that group. I think 
most have recognized that the current models of Fannie Mae and 
Freddie Mac cannot remain, and we must reduce the risk that 
currently the American taxpayers face.
    Just recently, I heard from HUD Secretary Castro when he 
was calling for housing finance reform, but I have not heard 
anything on this subject from you. In fact, when we had the 
Committee vote on the Johnson-Crapo housing bill, we did not 
hear any word from you. So I guess my question for you today 
is: Given your position, and, of course, the importance of this 
issue, are you going to continue your hands-off approach when 
it comes to housing finance reform? Or will you start engaging 
with Congress and work with us to end this current Fannie and 
Freddie model?
    Mr. Watt. I am going to continue to say that it is--that 
our role at FHFA is in the here and the now--and that is what 
the statute gives us. It is Congress' role to tell us what the 
future of GSE reform is, and we have cooperated fully in terms 
of being a resource to the committees on all proposals, both 
the House and the Senate. But if the Committee is expecting me 
to have a position on what the future of housing GSE reform 
should be, they will be sorely disappointed.
    Senator Heller. OK.
    Mr. Watt. I will not be--and, you know, when I left 
Congress, I know this is counterintuitive, but I left that role 
behind. And if I get embroiled in what is good and what is bad 
in the future of GSE reform, it is going to make it more 
difficult to do the job in the present of housing----
    Senator Heller. So what you are saying is do not ask for 
your opinion?
    Mr. Watt. Beg your pardon?
    Senator Heller. Do not ask for your opinion on GSE reform? 
Is that what you are saying?
    Mr. Watt. Well, I mean, I expressed my opinion before I 
became the Director, but I do not have an independent opinion 
now because anytime I express an opinion now, people take it as 
the FHFA opinion. And so----
    Senator Heller. Let me ask you for your opinion.
    [Laughter.]
    Senator Heller. Do you support eliminating Fannie and 
Freddie under its current--as they are today?
    Mr. Watt. I do not have an opinion on whether there is a 
Fannie and Freddie. I think there are roles that somebody will 
have to play in the process. And----
    Senator Heller. So there is no, yes or----
    Mr. Watt. And you have got $5 trillion of outstanding 
obligations now that somebody has to deal with, and that is in 
the current of housing finance. That is not in the future. So 
somebody has got to deal with that, and whether it is Fannie or 
Freddie or somebody else, I mean, that is, I think, a decision 
that Congress has to make, not FHFA.
    Senator Heller. All right. Let me switch topics here for 
just a minute. That has to do with the Mortgage Debt Relief 
Act. Director Watt, I do not think any State has felt the 
impact of falling home values more than the State of Nevada. 
Congress passed the Mortgage Debt Relief Act to ensure those 
who owed more on their mortgages than they do on their homes 
are now worth would not be hit with additional income taxes. I 
am not going to ask your opinion on the IRS or----
    Mr. Watt. Thank you.
    Senator Heller.----being taxed on income taxes, but I think 
it is unfortunate. No one gets hit more than low-income and 
middle-income families, and I just think it is unfair, and I 
think most would concur that it is unfair that individuals have 
to pay taxes on income that they have never received.
    So I guess, quickly, do you have any picture in your mind 
of what the consequences would be if we did not extend the 
Mortgage Debt Relief Act retroactively for this year or extend 
it into next year?
    Mr. Watt. It would certainly have severe consequences for a 
number of decisions, but, again, that is a decision that 
Congress has to make. I cannot make it. And what I have 
realized is that sometimes expressing my opinion on things that 
I cannot influence have more negative impacts than they have 
positive impacts. So----
    Senator Heller. Well, we look to you from time to time, 
Director Watt. We do look to you for----
    Mr. Watt. Well, I appreciate everybody looking to me, but 
it is just----
    [Laughter.]
    Mr. Watt. You know, I am in a difficult position, and I do 
not want to have a negative outcome as a result of something 
that I say. So I think I try to stay in my lane doing the 
things that FHFA has either perceived or real control over and 
trying to do those well and effectively.
    Senator Heller. Director, thank you for being here today.
    Mr. Watt. Thank you.
    Senator Heller. Mr. Chairman, thank you.
    Chairman Johnson. I would like to thank Director Watt for 
his testimony and for his ongoing service to our country.
    This hearing is adjourned.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.]
    [Prepared statement supplied for the record follows:]
                  PREPARED STATEMENT OF MELVIN L. WATT
                Director, Federal Housing Finance Agency
                           November 19, 2014
     Chairman Johnson, Ranking Member Crapo and Members of the 
Committee, I am pleased to testify today about the activities of the 
Federal Housing Finance Agency (FHFA).
    FHFA was established by the Housing and Economic Recovery Act of 
2008 (HERA) and is responsible for the effective supervision, 
regulation, and housing mission oversight of the Federal National 
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage 
Corporation (Freddie Mac), and the Federal Home Loan Bank System, which 
includes 12 Federal Home Loan Banks (FHLBanks) and the Office of 
Finance. The agency's mission is to ensure that these regulated 
entities operate in a safe and sound manner so that they serve as a 
reliable source of liquidity and funding for housing finance and 
community investment. Since 2008, FHFA has also served as conservator 
of Fannie Mae and Freddie Mac (together, the Enterprises).
    In my statement today, I will provide a brief overview of FHFA's 
statutory responsibilities, an update on the Enterprises' financial 
condition and FHFA's supervisory and conservatorship activities related 
to the Enterprises, and an update on the FHLBanks' financial condition 
and FHFA's regulatory activities related to the FHLBanks.
FHFA's Statutory Responsibilities
    I. FHFA's Regulatory Oversight of the Federal Home Loan Banks, 
        Fannie Mae and Freddie Mac
    As part of the agency's statutory authority in overseeing the 
Federal Home Loan Bank System (FHLBank System) and the Enterprises, the 
Federal Housing Enterprises Financial Safety and Soundness Act (the 
Safety and Soundness Act), as amended by HERA, requires FHFA to fulfill 
the following duties:

        ``(A) to oversee the prudential operations of each regulated 
        entity; and
        ``(B) to ensure that----

      (i)  each regulated entity operates in a safe and sound manner, 
        including maintenance of adequate capital and internal 
        controls;

      (ii)  the operations and activities of each regulated entity 
        foster liquid, efficient, competitive, and resilient national 
        housing finance markets (including activities relating to 
        mortgages on housing for low- and moderate-income families 
        involving a reasonable economic return that may be less than 
        the return earned on other activities);

      (iii)  each regulated entity complies with this chapter and the 
        rules, regulations, guidelines, and orders issued under this 
        chapter and the authorizing statutes;

      (iv)  each regulated entity carries out its statutory mission 
        only through activities that are authorized under and 
        consistent with this chapter and the authorizing statutes; and

      (v)  the activities of each regulated entity and the manner in 
        which such regulated entity is operated are consistent with the 
        public interest.''

12 U.S.C.  4513(a)(1).
    II. FHFA's Role as Conservator of Fannie Mae and Freddie Mac
    As part of HERA, Congress granted the Director of FHFA the 
discretionary authority to appoint FHFA as conservator or receiver of 
Fannie Mae, Freddie Mac, or any of the Federal Home Loan Banks, upon 
determining that specified criteria had been met. On September 6, 2008, 
FHFA exercised this authority and placed Fannie Mae and Freddie Mac 
into conservatorships. Since they were placed into conservatorships, 
Fannie Mae and Freddie Mac together have received $187.5 billion in 
taxpayer support under the Senior Preferred Stock Purchase Agreements 
(PSPAs) executed with the U.S. Department of the Treasury. FHFA 
continues to oversee these conservatorships.
    FHFA's authority as both conservator and regulator of the 
Enterprises is based upon statutory mandates enacted by Congress, which 
include the following conservatorship authorities granted by HERA:

        ``(D) . . . take such action as may be----

      (iii)  necessary to put the regulated entity in a sound and 
        solvent condition; and

      (iii)  appropriate to carry on the business of the regulated 
        entity and preserve and conserve the assets and property of the 
        regulated entity.

12 U.S.C.  4617(b)(2)(D).
    Carrying on the business of the Enterprises in conservatorships 
also incorporates the above-referenced responsibilities that are 
enumerated in 12 U.S.C.  4513(a)(1). Additionally, under the Emergency 
Economic Stabilization Act of 2008 (EESA), FHFA has a statutory 
responsibility in its capacity as conservator to ``implement a plan 
that seeks to maximize assistance for homeowners and use its authority 
to encourage the servicers of the underlying mortgages, and considering 
net present value to the taxpayer, to take advantage of . . . available 
programs to minimize foreclosures.'' 12 U.S.C.  5220(b)(1).
    FHFA, acting as conservator and regulator, must follow the mandates 
assigned to it by statute and the missions assigned to the Enterprises 
by their charters until such time as Congress revises those mandates 
and missions.
FHFA's Actions as Regulator and Conservator of Fannie Mae and Freddie 
        Mac
    As regulator and conservator of Fannie Mae and Freddie Mac, FHFA 
has taken actions during 2014 to ensure their safety and soundness, to 
ensure that they provide liquidity to the housing finance market, and 
to preserve and conserve the assets of both Enterprises. The following 
sections provide information about the financial performance and 
condition of both Enterprises, FHFA's supervisory oversight of Fannie 
Mae and Freddie Mac, FHFA's work toward the objectives identified in 
the 2014 Strategic Plan for the Conservatorships of Fannie Mae and 
Freddie Mac, and other activities concerning the Enterprises that FHFA 
has undertaken in 2014.
    I. Financial Performance and Condition of Fannie Mae and Freddie 
        Mac
    Since the establishment of the conservatorships in 2008, the 
financial performance of the Enterprises has improved significantly. 
They have gone from having to draw funds from Treasury under the PSPAs 
to no longer requiring such draws. Some of the improvement in 
performance relates to one-time or transitory items, such as the 
reversal of each Enterprise's deferred tax asset valuation allowance, 
legal settlements, and the release of loss reserves associated with 
rising house prices. But, part of the improvement is also attributable 
to other factors, including strengthened underwriting practices and 
increased guarantee fees.
    While conservatorship of the Enterprises has helped stabilize their 
financial condition and the mortgage market, significant challenges 
remain. Serious delinquencies have declined but remain historically 
high compared to pre-crisis levels, and counterparty exposure remains a 
concern. While the risks from the Enterprises' mortgage-related 
investment portfolios are declining as their volume shrinks, revenues 
from these portfolios are also shrinking. And both Enterprises continue 
to work on maintaining the effectiveness and efficiency of their 
operational and information technology infrastructures.

    Following are highlights of the financial performance of the 
Enterprises:
Fannie Mae
    Net income for the third quarter of 2014 totaled $3.9 
        billion. For the first 9 months of 2014, Fannie Mae reported 
        earnings of $12.9 billion compared to net income of $77.5 
        billion for the first 9 months of 2013, which reflected one-
        time or transitory items.

    Fannie Mae has not required a Treasury draw since the 
        fourth quarter of 2011. The cumulative amount of draws received 
        from the Treasury to date under Fannie Mae's PSPA is $116.1 
        billion. Through September 30, 2014, Fannie Mae has paid $130.5 
        billion in cash dividends to Treasury on the company's senior 
        preferred stock. Under the PSPA, the payment of dividends 
        cannot be used to offset prior Treasury draws. This provision 
        has remained unchanged since the PSPA was established.

    The credit quality of new single-family acquisitions was 
        strong through the third quarter of 2014, with a weighted 
        average FICO score of 743 and a weighted average loan-to-value 
        (LTV) ratio of 77 percent.

    The serious delinquency rate was 1.96 percent for Fannie 
        Mae's total single-family book of business as of September 30, 
        2014. As of this date, the serious delinquency rate for loans 
        acquired between 2005 and 2008 was 8.27 percent compared to 
        0.34 percent for loans acquired since 2009. The serious 
        delinquency rate for loans acquired prior to 2005 was 3.27 
        percent as of September 30, 2014.

    Fannie Mae continues to reduce its retained portfolio in 
        accordance with the PSPA. As of September 30, 2014, Fannie 
        Mae's retained portfolio balance was $438.1 billion, which 
        represents a decline of $52.6 billion since the beginning of 
        the year, when the balance was $490.7 billion. As of September 
        30, 2014, Fannie Mae's retained portfolio is 27 percent agency 
        securities, 7 percent nonagency securities, 6 percent 
        multifamily loans, and 60 percent single-family loans.
Freddie Mac
    Net income for the third quarter of 2014 totaled $2.1 
        billion. For the first 9 months of 2014, Freddie Mac reported 
        earnings of $7.5 billion, compared to net income of $40.1 
        billion for the first 9 months of 2013, which reflected one-
        time or transitory items.

    Freddie Mac has not required a Treasury draw since the 
        first quarter of 2012. The cumulative amount of draws received 
        from the Treasury to date under Freddie Mac's PSPA is $71.3 
        billion. Through September 30, 2014 Freddie Mac has paid $88.2 
        billion in cash dividends to Treasury on the company's senior 
        preferred stock. Under the PSPA, the payment of dividends 
        cannot be used to offset prior Treasury draws. This provision 
        has remained unchanged since the PSPA was established.

    The credit quality of new single-family acquisitions 
        remained high through the third quarter of 2014, with a 
        weighted average FICO score of 744 and a weighted average loan-
        to-value (LTV) ratio of 77 percent.

    The serious delinquency rate was 1.96 percent for Freddie 
        Mac's single-family book of business as of September 30, 2014. 
        As of this date, the serious delinquency rate for loans 
        originated between 2005 and 2008 was 7.66 percent compared to 
        0.23 percent for loans originated since 2009. The serious 
        delinquency rate for loans originated prior to 2005 was 3.12 
        percent as of September 30, 2014.

    Freddie Mac continues to reduce its retained portfolio in 
        accordance with the PSPA. As of September 30, 2014, Freddie 
        Mac's retained portfolio balance was $413.6 billion, which 
        represents a decline of $47.4 billion since the beginning of 
        the year, when the balance was $461.0 billion. As of September 
        30, 2014, Freddie Mac's retained portfolio is 43 percent agency 
        securities, 17 percent nonagency securities, 12 percent 
        multifamily loans, and 28 percent single-family loans.
    II. FHFA's Supervisory Activities
    FHFA's supervision function evaluates the safety and soundness of 
Enterprise operations. Safety and soundness is a priority in the 
achievement of FHFA objectives, execution of Enterprise strategic 
initiatives, and in all business and control functions. FHFA takes a 
risk-based approach to supervision, which prioritizes examination 
activities based on the risk a given practice poses to a regulated 
entity's safe and sound operation or its compliance with applicable 
laws and regulations. FHFA conducts onsite examinations at the 
regulated entities, ongoing risk analysis, and offsite review and 
surveillance. FHFA communicates supervisory standards to the regulated 
entities, establishes expectations for strong risk management, 
identifies risks, and requires remediation of identified deficiencies.
    In 2014, FHFA has issued supervisory guidance to the Enterprises on 
topics related to mortgage servicing transfers, cyber risk management, 
operational risk management, and liquidity risk management. This 
guidance articulates FHFA's supervisory expectations related to those 
matters and informs examination activities.
    Counterparty risks are the focus of several FHFA documents 
providing supervisory guidance to the Enterprises. For example, in June 
of this year, FHFA issued Advisory Bulletin 2014-06, Mortgage Servicing 
Transfers. This bulletin articulated FHFA's supervisory expectations 
for the Enterprises with regard to transfers of servicing of mortgage 
loans that they hold or guarantee. Pursuant to contracts with their 
counterparties, the Enterprises must approve the transfer of servicing 
operations or servicing rights. FHFA has focused on Enterprise approval 
processes for these transactions, due in large part to the significant 
recent transfers of mortgage servicing operations from federally 
regulated banks to nonbank entities that are generally subject to less 
regulation and are more concentrated in their operations. Heightened 
risks associated with these market developments were identified in the 
2014 Annual Report of the Financial Stability Oversight Council.
    The Mortgage Servicing Transfers bulletin outlines the standards to 
be applied by the Enterprises in a risk-based approach to analysis of 
financial, operational, and legal and compliance risk factors. 
Specifically, the bulletin states that the Enterprises should only 
approve these types of transfers when they are consistent with sound 
business practices, aligned with each Enterprise's board-approved risk 
appetite, and in compliance with regulatory and conservator 
requirements. Transfers should also be subject to risk-based monitoring 
by the Enterprises to monitor the execution of the transfers so that 
all servicing transfers occur in a timely manner and in accordance with 
approved terms, servicing guide requirements, and applicable mortgage 
servicing transfer-related laws and regulations.
    Information security is another risk area of importance to the 
Enterprises and is addressed in Advisory Bulletin 2014-05, Cyber Risk 
Management Guidance, issued in May. This bulletin describes the 
characteristics of a cyber risk management program that the FHFA 
believes will enable the regulated entities to successfully perform 
their responsibilities and protect their environments. Assessment of 
system vulnerabilities, effective monitoring of cyber risks, and 
oversight of third parties that have access to Enterprise data are 
among the key expectations of FHFA.
    Standards set by FHFA are also reflected in guidance to examiners 
provided in FHFA's Examination Manual, which was publicly released in 
late 2013. The manual includes 26 modules that cover various operations 
of the Enterprises and present background on a range of credit, market, 
and operational risks. The manual is a valuable tool for implementing 
FHFA's risk-based approach to supervision of the Enterprises and is 
available on FHFA's Web site.
    FHFA maintains a team of examiners onsite at each Enterprise, and 
the examiners receive support from offsite analysts and subject matter 
experts. Examination teams perform targeted examinations of specific 
Enterprise operations and conduct ongoing monitoring of risk control 
functions and business lines. The examination work is performed in 
accordance with plans prepared at year-end for the following year for 
each Enterprise, taking into account factors such as analysis of 
existing risks, changes in business operations and strategic 
initiatives, and mortgage market developments. Where deficiencies are 
identified, examiners communicate recommendations and expectations for 
remedial action. Examiner risk assessments are updated during the year 
to ensure that emerging risks and Enterprise business changes receive 
appropriate examination coverage.
    Findings from targeted examinations and ongoing monitoring 
conducted through the course of the year are relied upon by examiners 
in assigning ratings to each Enterprise under the ratings system 
adopted by FHFA in 2013. The system, known as CAMELSO, includes 
separate ratings for Capital, Asset quality, Management, Earnings, 
Liquidity, Sensitivity to market risk, and Operations. The examination 
findings are also incorporated into annual Reports of Examination, 
which capture FHFA's view of the safety and soundness of each 
Enterprise's operations. Information from the Reports of Examination is 
included in FHFA's annual Report to Congress.
    III. FHFA's 2014 Strategic Plan for the Conservatorships of Fannie 
        Mae and Freddie Mac and 2014 Initiatives
    In May of this year, FHFA issued the 2014 Strategic Plan for the 
Conservatorships of Fannie Mae and Freddie Mac (2014 Conservatorship 
Strategic Plan), which outlines FHFA's conservatorship objectives for 
the Enterprises. At the same time, FHFA issued the 2014 Conservatorship 
Scorecard, which details activities and expectations for the 
Enterprises during 2014. Both the 2014 Conservatorship Strategic Plan 
and the 2014 Conservatorship Scorecard are centered around three 
strategic goals:

    Maintain, in a safe and sound manner, foreclosure 
        prevention activities and credit availability for new and 
        refinanced mortgages to foster liquid, efficient, competitive 
        and resilient national housing finance markets.

    Reduce taxpayer risk through increasing the role of private 
        capital in the mortgage market.

    Build a new single-family securitization infrastructure for 
        use by the Enterprises and adaptable for use by other 
        participants in the secondary market in the future.

    FHFA has worked to further these strategic goals during 2014, and 
highlights of these activities are detailed below.
    A. Maintain, in a safe and sound manner, foreclosure prevention 
        activities and credit availability for new and refinanced 
        mortgages to foster liquid, efficient, competitive and 
        resilient national housing finance markets.
    Our first strategic goal, MAINTAIN, requires Fannie Mae and Freddie 
Mac to carry out and strengthen, where possible, three aspects of their 
core business operations. First, we expect them to take actions that 
improve liquidity in the present single-family housing finance market. 
Second, we believe they should continue to improve servicing standards 
and foreclosure prevention actions. Third, we think they have a 
critical, ongoing role in the multifamily sector, particularly for 
affordable multifamily properties. Our objective here has been to 
normalize the availability of credit within the Enterprises' approved 
credit box for borrowers who have the ability to repay a loan, to 
refine servicing and loss mitigation opportunities to address borrowers 
still in need of assistance, and to support financing for affordable 
multifamily housing.
Representation and Warranty Framework
    FHFA is continuing the process of updating and clarifying the 
Representation and Warranty Framework (Framework) for the Enterprises. 
This Framework provides Fannie Mae and Freddie Mac with remedies--
including requiring a lender to repurchase a loan--when they discover 
that a loan purchase does not meet their underwriting guidelines.
    Over the last several years, FHFA has worked to refine the 
Framework and to have the Enterprises place increased attention and 
resources on upfront quality control reviews. These quality control 
improvements enhance the Enterprises' risk management processes to 
identify and correct problems with the loans they purchase. This 
progress builds on a foundation of work to improve the Enterprises' 
ability to detect potential loan defects, including work to improve 
their data standards. More recently, both Enterprises are developing 
tools to provide upfront feedback to lenders on appraisals even before 
they purchase a loan, which addresses a problem identified in a large 
number of repurchase demands in recent years. In addition, any fraud or 
significant noncompliance that the Enterprises discover across their 
mortgage purchases can always trigger a repurchase.
    In addition to these efforts, FHFA has also worked to bring 
increased clarity to the Framework to encourage lenders to reduce their 
credit overlays and lend throughout the Enterprises' full credit boxes. 
We believe that the changes to the Framework will reduce lender 
uncertainty about when the Enterprises will require repurchase of a 
loan and, as a result, pave the way for lenders to lift some of their 
current credit overlays and reduce the cost of credit to borrowers.
    FHFA launched its efforts to update the Representation and Warranty 
Framework in 2012, and the first improvements went into effect for 
loans sold or delivered on or after January 1, 2013. These improvements 
relieved lenders of representation and warranties obligations related 
to the underwriting of the borrower, the property or the project for 
loans that had clean payment histories for 36 months. In May of this 
year, FHFA and the Enterprises announced additional refinements that 
addressed revisions to the payment history requirement, written 
notification of relief to lenders, and treatment for mortgage insurance 
rescissions.
    More recently FHFA announced an agreement in principle on how to 
clarify and define the life-of-loan exclusions applicable to the 
Framework. The current life-of-loan exclusions are open-ended and make 
it difficult for a lender to predict when, or if, Fannie Mae or Freddie 
Mac will apply one of them. The refinements will provide all parties 
with additional clarification about when these exemptions apply. 
Additionally, these revisions maintain and support the safe and sound 
operations of the Enterprises and are consistent with our broader 
efforts to place more emphasis on upfront quality control reviews and 
other upfront risk management practices.
Providing Targeted Access to Credit Opportunities for Creditworthy 
        Borrowers
    Part of the Enterprises' mission is promoting access to mortgage 
credit for creditworthy borrowers across all market segments. We know 
that in today's market, there are creditworthy borrowers who have the 
income to afford monthly mortgage payments but do not have the money to 
make a large down payment and pay closing costs. As a result, Fannie 
Mae and Freddie Mac will shortly announce purchase guidelines that 
allow for 3 to 5 percent down payments, which will improve 
opportunities for access to credit for some of these borrowers.
    To appropriately manage the Enterprises' risk, the guidelines for 
these loans will be targeted in their scope and will include standards 
that support safety and soundness. We know that the size of a down 
payment--by itself--is not the most reliable indicator of whether a 
borrower will repay a loan. As a result, the guidelines will require 
that borrowers have ``compensating factors'' and risk mitigants--such 
as housing counseling, stronger credit histories, or lower debt-to-
income ratios--in order to make the mortgage eligible for purchase by 
Fannie Mae or Freddie Mac. This approach builds on the Enterprises' 
experience using compensating factors and risk mitigants. It also meets 
the objective to develop guidelines that look at and assess a 
borrower's full financial picture and ability to repay, not just 
whether they have enough money for a big down payment. Additionally, 
like other loans with down payments below 20 percent, these loans will 
require credit enhancement, such as private mortgage insurance.
Working with Small Lenders, Rural Lenders and Housing Finance Agencies
    During 2014, the Enterprises have continued to conduct outreach to 
small lenders, rural lenders and Housing Finance Agencies to strengthen 
their understanding of how the Enterprises might be able to better 
serve these institutions. These initiatives are important ones, because 
we know that community-based lenders and Housing Finance Agencies have 
a vital role in serving rural and underserved markets across the 
country. We also know that many community-based lenders could not be 
active in the housing market without access to a liquid secondary 
housing finance market. In recent years, the share of Enterprise 
acquisitions that are originated by smaller lenders has increased, and 
the cash window continues to be an important form of secondary market 
access for smaller and rural lenders. Additionally, the guarantee fees 
charged are by policy no longer based on volume delivered, and, as a 
result, ongoing guarantee fees for all lenders have converged.
Foreclosure Prevention
    Since entering conservatorship, the Enterprises have continued to 
focus on loss mitigation and borrower assistance activities. As of 
August 31, 2014, the Enterprises had conducted more than 3.3 million 
foreclosure prevention actions since the start of the conservatorships 
in September 2008. However, there are still areas of the country where 
the housing market recovery has lagged and groups of borrowers continue 
to need assistance.
    During 2014, FHFA has worked to improve the Enterprises' 
foreclosure prevention efforts through targeted outreach. Examples of 
these efforts include the Neighborhood Stabilization Initiative under 
which the Enterprises are partnering with the National Community 
Stabilization Trust to develop pre-foreclosure strategies that include 
deeper loan modifications and timely and informed decisions about the 
best treatment of individual properties. FHFA has selected Detroit and 
Chicago for this pilot program. FHFA has also conducted targeted 
outreach activities to increase consumer awareness of the Home 
Affordable Refinance Program (HARP) as many borrowers could benefit 
from this program but may not fully understand that they qualify. 
Finally, the Enterprises developed Streamlined Modification programs to 
address documentation challenges associated with traditional 
modifications, including for deeply delinquent loans.
    Moving forward, FHFA will continue to review loss mitigation 
options to help families stay in their homes, stabilize communities, 
and meet our conservatorship obligations.
Multifamily
    For individuals and families who rent rather than buy, continuing 
to support affordable rental housing is also an ongoing priority for 
FHFA and the Enterprises. Under FHFA's 2014 Conservatorship Strategic 
Plan and the 2014 Conservatorship Scorecard, FHFA did not require a 
reduction in the Enterprises' multifamily production levels. Fannie Mae 
and Freddie Mac have historically played a key role in providing 
financing to the multifamily housing finance market throughout all 
market cycles and their multifamily portfolios have demonstrated 
excellent performance even through the recent financial crisis.
    In addition, FHFA has continued to emphasize the Enterprises' 
important role in the affordable rental housing market, and FHFA 
provided the Enterprises with additional capacity to provide financing 
for affordable multifamily properties beyond the multifamily volume cap 
established in the 2014 Conservatorship Scorecard. In establishing this 
policy, the focus is not for the Enterprises to compete where there is 
private sector coverage of the multifamily market, but to ensure that 
affordable housing is available and that the housing needs of people in 
rural and other underserved areas are met, including areas that rely 
heavily on manufactured housing. On multifamily purchases, we are also 
requiring the companies to continue sharing risk with the private 
sector, which Freddie Mac does through a capital markets structure and 
Fannie Mae does through a risk sharing model. Both approaches transfer 
significant risk to the private market.
    B. Reduce taxpayer risk through increasing the role of private 
        capital in the mortgage market.
    FHFA's second strategic goal, REDUCE, is focused on ways to bring 
additional private capital into the system in order to reduce taxpayer 
risk. We have reformulated this goal so that it no longer involves 
specific steps to contract the Enterprises' market presence, which 
would risk having an adverse impact on liquidity. Instead, the REDUCE 
goal focuses on ways to scale back Fannie Mae and Freddie Mac's overall 
risk exposure. This approach allows us to meet our mandates of 
upholding safety and soundness and ensuring broad liquidity in the 
housing finance market.
Private Mortgage Insurer Eligibility Requirements
    FHFA has continued to advance efforts to strengthen Fannie Mae and 
Freddie Mac's counterparty requirements for private mortgage insurers. 
When a borrower makes a down payment of less than 20 percent, these 
mortgages are required by statute to have a credit enhancement, 
including private capital standing behind the loan, in order to qualify 
for purchase by Fannie Mae or Freddie Mac. Private mortgage insurance 
has always played an important role in meeting this requirement and it 
is critical to make sure that claims can be covered in both good times 
and in bad times. To this end, FHFA released a Request for Input on 
draft Private Mortgage Insurer Eligibility Requirements. Our objective 
is to have the Enterprises strengthen their risk management by 
enhancing the financial, business and operational requirements in place 
for their private mortgage insurer counterparties thereby enhancing 
long-term claims paying ability.
    FHFA is in the process of reviewing and considering the input we 
received as part of our comprehensive evaluation of this issue. 
Consistent with our statutory mandates, our assessments and policy 
decisions will take into account both safety and soundness 
considerations and possible impacts on access to credit and housing 
finance market liquidity.
Credit Risk Transfers and Retained Portfolio Reductions
    FHFA and the Enterprises remain focused on increasing the amount of 
credit risk transferred from the Enterprises. FHFA increased the 2014 
Scorecard target to achieve a meaningful credit risk transfer of $90 
billion in unpaid principal balance, up from $30 billion in 2013. In 
addition, FHFA encouraged the Enterprises to test multiple types of 
credit risk transfer structures, which include securities-based 
transactions and insurance transactions. As of November 1, 2014, Fannie 
Mae has transferred the credit risk associated with $183 billion in 
unpaid principal balance of single-family mortgages, and Freddie Mac 
has transferred credit risk associated with $169 billion in unpaid 
principal balance of single-family mortgages. In each transaction, the 
Enterprises retained a small first-loss position in the underlying 
loans, sold a significant portion of the risk beyond the initial loss 
and then retained the catastrophic risk in the event losses exceeded 
the private capital support. As a result, private capital is absorbing 
significant credit risk on much of Fannie Mae and Freddie Mac's new 
purchases, thereby substantially reducing risk to taxpayers from these 
purchases.
    In addition, both Enterprises continue to reduce the size of their 
retained mortgage portfolios consistent with the terms of the PSPAs, 
which require them to reduce their portfolios to no more than $250 
billion each by 2018. Fannie Mae and Freddie Mac have developed plans 
to meet this target even under adverse market conditions. As their 
portfolios continue to decline, they are transferring interest rate 
risk, securities credit risk and liquidity risk from these portfolios 
to the private sector.
    C. Build a new single-family securitization infrastructure for use 
        by the Enterprises and adaptable for use by other participants 
        in the secondary market in the future.
    FHFA's final strategic goal is to BUILD a new infrastructure for 
the Enterprises' securitization functions. This includes ongoing work 
to develop the Common Securitization Platform (CSP) infrastructure and 
to improve the liquidity of Enterprise securities. We have clarified 
that FHFA's top objective for the CSP is to make sure that it works for 
the benefit of Fannie Mae and Freddie Mac. We are also requiring that 
the CSP leverage the systems, software and standards used in the 
private sector wherever possible. This will ensure that the CSP will be 
adaptable for use by other secondary market actors--including private-
label securities issuers--in the future. In addition, FHFA has also 
worked with the Enterprises to leverage the CSP in order to develop a 
Single Security, which we believe will improve liquidity in the housing 
finance markets.
Common Securitization Platform
    Important progress has been made in 2014 concerning the multiyear 
process of developing the CSP. This includes the announcement of a 
Chief Executive Officer for Common Securitization Solutions (CSS)--the 
joint venture owned by Fannie Mae and Freddie Mac--which is the 
corporate entity that we expect ultimately to house and operate the 
CSP. Additionally, this also includes finalizing the governance 
structure and operating agreements between Fannie Mae and Freddie Mac 
concerning the CSS.
    In addition, FHFA and the Enterprises have also made considerable 
progress on the design-and-build phase of the CSP. Each Enterprise has 
designated staff to work on the project at the CSS location and during 
2014 this team has been developing the technology and infrastructure of 
the CSP platform. This includes work to incorporate the Single Security 
into the development of the CSP. Furthermore, Fannie Mae and Freddie 
Mac have reorganized their staffs with business operations and 
information technology experts to develop the systems and processes 
needed to integrate with the CSP. As this work continues, Fannie Mae 
and Freddie Mac staff will engage in continuous testing and will 
develop operating policies and procedures to ensure a smooth transition 
to the CSP. FHFA, Fannie Mae, and Freddie Mac are committed to 
achieving a seamless CSP launch, and the actions taken so far are 
moving us in the right direction toward this multiyear goal.
Single Security
    FHFA's top priority in pursuing the Single Security is to deepen 
and strengthen liquidity in the housing finance markets. In today's 
market, the mortgage-backed securities issued by Fannie Mae and Freddie 
Mac trade in separate ``to-be-announced'' (TBA) markets. The forward-
trading that takes place in TBA securities allows borrowers to lock-in 
a mortgage rate. The TBA market also adds efficiencies to the process, 
which reduces transaction costs and results in lower mortgage rates for 
borrowers. In today's TBA market, there is a price disparity between 
Fannie Mae and Freddie Mac securities largely due to greater trading 
volumes of Fannie Mae securities. This price disparity imposes an 
additional cost on Freddie Mac to remain competitive. We believe a 
Single Security can further strengthen market liquidity by reducing the 
trading disparities between Fannie Mae and Freddie Mac securities.
    We have asked for public input on FHFA's proposed Single Security 
structure, and this Request for Input is the first step in a multiyear 
process. The deadline for feedback was October 13, 2014, and FHFA is 
working with the Enterprises to process the feedback we received and 
will move forward in a deliberative and transparent manner.
    IV. Additional Initiatives Impacting Fannie Mae and Freddie Mac
    In addition to the activities outlined above, FHFA continues to 
work on a number of other initiatives that impact Fannie Mae and 
Freddie Mac, several of which are highlighted below.
Guarantee Fees
    One of the first decisions I made as Director of FHFA was to 
suspend increases in guarantee fees that had been announced by FHFA in 
December of 2013. Given the impact of these fees on the Enterprises, 
the housing finance markets, and on borrowers, I believed that it was 
critical to evaluate this issue and to get feedback from stakeholders. 
After additional work at FHFA, we issued a Request for Input that 
provides further details on how the Enterprises set these fees. The 
request also posed a number of questions to prompt substantive feedback 
about how guarantee fee levels affect various aspects of the mortgage 
market.
    FHFA is in the process of reviewing and considering the input we 
have received as part of our comprehensive evaluation of this issue. 
Consistent with our statutory mandates, our assessments and policy 
decisions will take into account both safety and soundness and possible 
impacts on access to credit and housing finance market liquidity.
Fannie Mae and Freddie Mac Housing Goals
    On August 29, 2014, FHFA issued a proposed rule to set the 
Enterprises' housing goals for 2015 through 2017 for both single-family 
and multifamily housing. While HERA changed the structure of the 
Enterprises' housing goals, the goals remained a component of the 
mission requirements of the Enterprises. This proposed rule raises 
questions for public comment about how best to set Fannie Mae and 
Freddie Mac's housing goals to encourage responsible lending that is 
done in a safe and sound manner, while serving the single-family and 
rental housing needs of lower-income families as outlined in HERA. FHFA 
is in the process of evaluating the comments submitted to the agency.
FHFA's Actions as Regulator of the Federal Home Loan Banks
    The FHLBanks continue to play an important role in housing finance 
by providing a reliable funding source and other services to member 
institutions, including smaller institutions that would otherwise have 
limited access to these services. In addition, the FHLBanks have 
specific statutory requirements related to affordable housing, and, as 
a result, the FHLBanks annually contribute funds toward the development 
of affordable housing.
    I. Financial Performance and Condition of the Federal Home Loan 
        Banks
    The financial performance and condition of the FHLBank System 
remains strong. Led by growth in advances, the aggregate balance sheet 
of the FHLBanks has increased over the past 2 years, but remains 
considerably smaller than in peak years. Advances totaled $545 billion 
as the end of the third quarter of 2014, up from $499 billion at year-
end 2013, but down 50 percent from a peak of $1.01 trillion in the 
third quarter of 2008. The overall decline in advance volume from the 
peak is a result of increased market liquidity from deposits and 
sluggish economic growth.
    Following are highlights of the financial performance of the 
FHLBanks:

    The FHLBanks, in aggregate, reported net income of $1.7 
        billion for the first three quarters of 2014 after earning $2.5 
        billion in all of 2013. All twelve Banks were profitable during 
        these quarters.

    The FHLBanks saw substantial asset growth during the first 
        9 months of 2014 driven by advances to members. As of the end 
        of the third quarter of 2014, aggregate FHLBank assets totaled 
        $883 billion and $545 billion in advances--up from $835 billion 
        and $499 billion at the end of 2013. Advances constituted 62 
        percent of assets at the FHLBanks in aggregate at the end of 
        the third quarter of 2014, up from 60 percent at the end of 
        2013.

    Retained earnings have grown significantly in recent years 
        and totaled $13.0 billion, or 1.5 percent of assets, as of the 
        third quarter 2014.

    Also at the end of the third quarter of 2014, the Banks had 
        an aggregate regulatory capital ratio of 5.6 percent--
        comfortably above the minimum of 4.0 percent.

    All FHLBanks had net asset values (equity values) in excess 
        of the par value of their members' stock holdings. The market 
        value of the FHLBanks is 142 percent of the par value of 
        capital stock, the highest ratio since FHFA started tracking 
        this metric in 2002.
    II. FHFA's Supervisory and Regulatory Activities
    FHFA conducts annual safety and soundness and affordable housing 
policy examinations of all 12 FHLBanks and the Office of Finance based 
on well-defined supervisory strategies. Similar to the approach 
described concerning supervision of the Enterprises, FHFA uses a risk-
based approach to conducting supervisory examinations of the FHLBanks, 
which prioritizes examination activities based on the risks given 
practices pose to a regulated entity's safe and sound operations or its 
compliance with applicable laws and regulations. Additionally, FHFA's 
FHLBank supervision also utilizes the CAMELSO ratings system and 
incorporates these ratings into each FHLBanks' Report of Examination. 
Information from the Reports of Examination is included in FHFA's 
annual Report to Congress.
    Over the last few years, FHFA's supervisory work has included 
assessments of: FHLBank mortgage purchase programs which have been 
expanding, the substantial increase in advances to a few very large 
member institutions, the FHLBanks' changing capital composition in 
light of their increasing retained earnings and reduced activity stock 
requirements, and their management of unsecured credit. We are also 
currently conducting reviews of FHLBank enterprise risk management 
structures and approaches to vendor management.
    FHFA also provides the FHLBanks with supervisory guidance, in the 
form of Advisory Bulletins that outline the agency's regulatory 
expectations. In 2014, FHFA issued Advisory Bulletin 2014-02, 
Operational Risk Management, and Advisory Bulletin 2014-05, Cyber Risk 
Management, that applied to the FHLBanks. Other Advisory Bulletins 
applicable to the FHLBanks have covered such areas as model risk 
management, collateral valuation and management, and the classification 
of risky assets.
    FHFA's supervision of the FHLBanks' expanding mortgage programs 
involves oversight of the significant operational issues required by 
two new products--Membership Partner Finance (MPF) Direct and MPF 
Government MBS--that the FHLBank of Chicago is likely to begin offering 
in late 2014 or early 2015. Under MPF Direct, participating members 
would sell nonconforming and conforming, single-family, fixed-rate 
mortgage loans to the Chicago Bank, which would concurrently sell the 
loans to a third-party private investor that would accumulate the loans 
for securitization. The Chicago Bank expects, at least initially, that 
loans sold will be ``jumbo conforming'' loans--capped at $729,750 for 
single unit loans in the contiguous United States.
    Under the MPF Government MBS program, the Chicago Bank would 
purchase government guaranteed or insured loans, accumulate the loans 
on its balance sheet as held for sale, and eventually pool the loans in 
securities guaranteed by the Government National Mortgage Association 
(Ginnie Mae). The Chicago FHLBank would then sell the securities to 
other Federal Home Loan Banks, members approved to participate in the 
mortgage programs, and external investors. Initially, this product will 
be available only to participating members in the Chicago FHLBank's 
District.
    The mission focus of the FHLBank System is an important component 
of FHFA's regulatory activities. FHFA has undertaken three recent 
efforts to oversee the housing finance mission of the FHLBanks. First, 
in early September, FHFA released a proposed rulemaking involving 
membership requirements for the FHLBanks. Congress established the 
FHLBank System in 1932 as a government sponsored enterprise with a 
focus on housing finance. Over time, Congress has expanded the 
membership base, expanded the types of assets that are eligible 
collateral for advances, and made other incremental changes to the 
System. However, over eighty years later, the FHLBanks are still 
grounded in supporting housing finance.
    Under the current membership rule, institutions may gain access to 
the benefits of FHLBank membership by meeting a one-time test showing a 
minimal amount of housing finance assets at the time of application. 
FHFA has proposed eliminating this one-time test and, instead, 
requiring that FHLBank members maintain a minimal amount of housing 
finance assets on an ongoing basis. In addition, FHFA has proposed 
defining insurance company in such a way that captive insurers would no 
longer be eligible for FHLBank membership. Captive insurance companies 
only provide benefits for their parent company, which may not be 
eligible for FHLBank membership. While captive insurers may in some 
cases be involved in housing finance, their access to the FHLBank 
System raises a number of policy questions that we discuss in the 
proposed rule.
    Given the importance of the issues surrounding the membership rule, 
FHFA extended the initial 60-day comment period for another 60 days, 
until January 12, 2015. As I have consistently emphasized since 
becoming Director of FHFA, getting input and feedback from stakeholders 
is a crucial part of FHFA's policymaking process, and we will strongly 
consider comments made by members of this Committee as well as the 
public in determining our final rule.
    Second, FHFA has continued a dialogue with the FHLBanks on core 
mission assets. This also relates to the fundamental issue of how the 
FHLBanks use the benefits of their status to support their housing 
finance mission. In partnership with the FHLBanks, I believe we are 
making progress in developing a framework for the fundamental 
characteristics of what a FHLBank's balance sheet should look like in 
order to demonstrate a satisfactory mission commitment.
    Finally, among our current regulatory initiatives is a review of 
FHFA's Affordable Housing Policy (AHP) regulation. The AHP program 
provides funding for both single-family and rental affordable housing--
including housing affordable to very low-income individuals and 
families. In 2013, the FHLBanks allocated $297 million to their AHP 
programs for the purchase, construction, or rehabilitation of over 
37,800 housing units. FHFA is committed to working with the FHLBanks to 
make this program more efficient.
    Another area of ongoing regulatory work involves the merger of the 
FHLBanks of Des Moines and Seattle. There has been considerable change 
in our Nation's financial system, in the membership base of the 
FHLBanks, and in market conditions across the various FHLBank districts 
since the FHLBank System was established in 1932. As a result, the 
FHLBanks have seen changes in advance demand and membership 
composition, which in turn has affected the fundamental franchise 
values of some of the FHLBanks.
    As a result of these changes, the Boards of the FHLBanks of Des 
Moines and Seattle have determined that a combined entity would better 
serve the needs of their members. The Boards of both Banks voted to 
approve this merger on September 25, 2014. There remain additional 
steps in order to complete this merger, including approval by FHFA upon 
reviewing the Banks' formal merger application and ratification by the 
members of both FHLBanks. FHFA has and will continue to work with the 
Banks throughout this process, and we will review and evaluate the 
merger application to ensure that the proposed transaction will be 
accomplished in a safe and sound manner and will result in a 
financially strong FHLBank that supports the interests of all its 
members.
Conclusion
    None of these activities or initiatives would be possible without 
the dedication of the staff at the Federal Housing Finance Agency. 
Since beginning my time at FHFA in January, it has been a pleasure 
getting to know the very qualified staff at FHFA and working with them 
toward our common priorities, and I want to thank them for their 
service. In addition, I also want to recognize the hard work of the 
staff at Fannie Mae, Freddie Mac and the FHLBanks, who continue to 
provide important contributions to the housing finance system.
    In the coming year, FHFA will continue to work to achieve the 
agency's statutory mandates to ensure the safe and sound operations of 
the regulated entities and to ensure that they provide liquidity in the 
national housing finance market. In addition, FHFA will continue to 
advance its Office of Minority and Women Inclusion responsibilities, 
which include furthering diversity in management, employment and 
business activities at FHFA, as well as at our regulated entities.
    Thank you again for having me here this morning, and I look forward 
to answering your questions.
```