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SUSTAINABLE HOUSING FINANCE: 

AN UPDATE FROM THE DIRECTOR 

OF THE FEDERAL HOUSING 

FINANCE AGENCY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JANUARY 27, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–1 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

ROBERT DOLD, Illinois 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

January 27, 2015 .............................................................................................. 1 

Appendix: 

January 27, 2015 .............................................................................................. 65 

WITNESSES 

TUESDAY, JANUARY 27, 2015 

Watt, Hon. Melvin L., Director, Federal Housing Finance Agency (FHFA) ....... 6 

APPENDIX 

Prepared statements: 

Watt, Hon. Melvin L. ....................................................................................... 66 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Letter from the Credit Union National Association (CUNA), dated January 26, 2015 ................................................................................................... 85 

Default Rate chart submitted by the National Association of Federal 

Credit Unions (NAFCU) ............................................................................... 92 

Letter from NAFCU, dated January 26, 2015 ............................................... 93 

Beatty, Hon. Joyce: 

Letter dated January 2, 2015, from the Ohio Capital Finance Corporation 

(OCFC) to the Federal Housing Finance Agency (FHFA) ......................... 96 

Kildee, Hon. Daniel: 

Written statement of the Homeownership Preservation Foundation 

(HPF) .............................................................................................................. 98 

Moore, Hon. Gwen: 

‘‘Changes in Buyer Composition and the Expansion of Credit During 

the Boom,’’ by Manuel Adelino, Duke; Antoinette Schoar, MIT and 

NBER; and Felipe Severino, Dartmouth, dated January 2015 ................. 102 

Waters, Hon. Maxine: 

Article from the Washington Post entitled, ‘‘A shattered foundation,’’ 

dated January 24, 2015 ................................................................................ 144 

Watt, Hon. Melvin L.: 

Written responses to questions submitted by Representative Barr ............. 158 

Written responses to questions submitted by Representative Fincher ........ 160 

Written responses to questions submitted by Representative Moore .......... 162 

Written responses to questions submitted by Representative Pearce .......... 164 

Written responses to questions submitted by Representative Royce ........... 165 

Written responses to questions submitted by Representative Sherman ..... 167 

Written responses to questions submitted by Representative Sinema ........ 168 

Written responses to questions submitted by Representative Williams ...... 171 

Written responses to questions submitted by Representative Hultgren ..... 173 

(1) 

SUSTAINABLE HOUSING FINANCE: 

AN UPDATE FROM THE DIRECTOR 

OF THE FEDERAL HOUSING 

FINANCE AGENCY 

Tuesday, January 27, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:07 a.m., in room 

2175, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, King, Royce, 

Lucas, Garrett, Neugebauer, McHenry, Pearce, Posey, Fitzpatrick, 

Luetkemeyer, Huizenga, Duffy, Stivers, Fincher, Mulvaney, 

Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Messer, 

Schweikert, Dold, Guinta, Tipton, Williams, Poliquin, Love, Hill; 

Waters, Maloney, Velazquez, Sherman, Hinojosa, Clay, Lynch, 

Scott, Green, Cleaver, Moore, Ellison, Himes, Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema, Beatty, Heck, and Vargas. 

Chairman HENSARLING. The Financial Services Committee will 

come to order. Without objection, the Chair is authorized to declare 

a recess of the committee at any time. 

Today, we meet to hear from the Director of the Federal Housing 

Finance Agency (FHFA). No stranger to this committee, he is our 

former colleague and truly our friend, Mel Watt, whom the Senate 

confirmed to his current position in December of 2013. A special 

welcome to the Director. Most of us know him well. He was the 

Representative of North Carolina’s 12th District for 21 years. And 

I can say from both sides of the aisle, he is one who served on this 

committee with both honor and distinction. 

It was a pleasure to serve with Mel. And I always listened very 

carefully when he spoke. I rarely agreed with anything that he 

said, but he always commanded my respect. And I listened carefully because, again, he was a thoughtful member of this committee. I certainly admire the fact that the Director has chosen to 

continue his career in public service. 

I might remind my friend and colleague that when he was on 

this side of the witness table, he always demanded of the witnesses 

short, concise, and substantive answers. So I have no doubt that 

now that he is on the other side of the witness table, he will continue to demand the exact same from that side of the witness table. 

And once this hearing is over, I can’t wait to ask my last question, which is: Mr. Director, which did you enjoy being more, the 

2 

inquisitor or the inquisitee? Although I suspect I already know the 

answer to that question. 

Now, before we get started with opening statements, I wish to 

yield a brief moment to the ranking member for a special welcome, 

as well. 

Ms. WATERS. Thank you very much, Mr. Chairman. I, too, would 

like to welcome Director Mel Watt to this hearing today. I must 

admit, I was somewhat torn when Mr. Watt received this appointment. While I know and always knew that he would do a great job 

at FHFA, I knew I was going to miss him on this committee, and 

not only because he was such a thoughtful, well-prepared member 

of the committee. 

I could count on him as the one person who had read every line 

of a bill. Mel Watt not only had read every line of a bill, he was 

the one who could come up with the question that no one else could 

come up with, because he had spent so much time reading the bill. 

I also appreciate the fact that he served an important role, even 

when Barney Frank was the Chair of this committee. When there 

was a need for tough negotiations, Barney Frank turned to Mel 

Watt and would ask him to work with the opposite side of the aisle 

to work out the differences. And he did that on any number of occasions. Barney Frank could never trust me with that. And I understand why and everybody else understands why. But Mel Watt certainly did serve in that role for all of us. 

So we are so pleased, again, that you are over at FHFA. And despite the fact that I mourn your not being here with us on this 

committee, we know that you are the right person for that position. 

And we are very pleased that you were able to hit the ground 

running because you knew and you know the issues so well. So 

welcome, Mel Watt. We look forward to hearing from you today. 

And don’t worry. If anybody on the opposite side of the aisle tries 

anything with you, I will take them on. Okay? 

Thank you. 

Chairman HENSARLING. The purpose, again, of today’s hearing is 

to take testimony from the Director of the FHFA to learn about the 

conservatorship of the GSEs. I now recognize myself for 3 minutes 

for an opening statement. 

As Yogi Bera once famously said, it is deja vu all over again. 

Memories are clearly short among Washington’s ruling class, because they are repeating the same mistakes that caused the 2008 

financial crisis in the first place. Contrary to the fable told by the 

left, the root cause of the financial crisis was not deregulation, but 

dumb regulation: regulations and statutes that either incented or 

mandated financial institutions to loan money to people to buy 

homes they ultimately could not afford to keep. 

Exhibit one, Fannie Mae and Freddie Mac’s Affordable Housing 

Goals. Seventy percent of all troubled mortgages were backstopped 

by Fannie, Freddie, and other Federal agencies. Contrary to the 

fable of the left, it ultimately wasn’t Wall Street greed that brought 

down the system. 

Of course there is greed on Wall Street. When hasn’t there been? 

But there is also something known as Washington greed: greed for 

power to command and control huge swaths of our economy; greed 

to have Washington allocate credit within our society, as opposed 

3 

to We, the People, in a free and competitive, transparent, and innovative market. 

The mentality of this Washington greed is best summed up by 

Obama architect, Jonathan Gruber, who famously stated, ‘‘The 

American people are too stupid to know the difference.’’ I doubt the 

American people collectively would have been foolish enough to roll 

the dice on taxpayer-backed subprime lending. Clearly, Washington 

was. The dice were rolled, millions lost their homes, the economy 

was brought to its knees, and hardworking taxpayers had to pay 

for the mother of all bailouts. 

Regrettably, Washington appears to be rolling the dice yet again. 

Within the last 12 months, FHFA has announced three different 

policies that are harmful to transitioning us to a sustainable housing finance system that protects both homeowners and taxpayers. 

First, by suspending a previously scheduled increase to fees Fannie 

and Freddie charge for their loan guarantees, FHFA is leveraging 

the taxpayer balance sheet—one that is clearly awash in red ink— 

to lock in a near government monopoly. 

Next, in a race to the bottom with FHA to become the Nation’s 

largest subprime lender, FHFA has announced that it will begin to 

allow the GSEs to buy mortgages with as little as 3 percent down. 

As history repeats itself, historically-prudent underwriting standards are yet again being thrown out the window. The data is overwhelming that there is a direct correlation between delinquencies 

and foreclosures on the one hand and low downpayments on the 

other. 

Finally, and most recently, FHFA has announced it will begin siphoning off taxpayer funds from Fannie and Freddie in order to 

begin filling government housing slush funds. All the while, Fannie 

and Freddie remain ridiculously leveraged and continue to threaten 

hardworking American taxpayers. 

The best affordable housing program is a healthy economy, not 

a doubling down on failed Obama economics and certainly not more 

risky housing schemes from Washington. It is time to grow our 

economy from Main Street up, not from Washington down. It is 

time to get off the boom-bust-bailout cycle. It is time hardworking 

middle-income families have greater economic opportunity to 

achieve financial independence and the opportunity to buy a home 

they can actually afford to keep. 

I now recognize the ranking member for 3 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

Again, let me welcome my friend and our former colleague, Mel 

Watt, back. Director Watt, in the years since you became head of 

the Federal Housing Finance Agency, you have taken important 

steps to ensure that our housing market remains affordable and 

works for everyone. With Fannie Mae and Freddie Mac now having 

paid the government $225 billion—which is $38 billion more than 

the Treasury invested during the crisis—I think it is fair to say 

that our actions to prevent a total collapse of our housing market 

have been a resounding success. 

If we close the GSEs without putting in place a viable alternative, as my Republican colleagues would do, we would likely reenter a recession. In fact, I think it is in our economy’s best interest that the PATH Act lost what little momentum it may have ever 

4 

had. And, Director Watt, your actions demonstrate that you are fulfilling your statutory mandate to preserve a liquid, competitive, 

and national housing market. 

Similarly, the FHFA has finally abided by another statutory 

mandate to fund the Affordable Housing Trust Fund. This one action will help improve, especially in districts like mine, the availability and affordability of rental housing. There are 7.1 million 

American households for whom safe and decent housing is neither 

affordable nor available, a situation made worse due to Republican 

attacks on public housing and voucher programs. 

But by complying with your statutory obligation to allocate a tiny 

percentage of Fannie Mae and Freddie Mac’s profits to these funds, 

we have the chance to improve the lives of millions of American 

children, families, people with disabilities, and the elderly. 

I also applaud your efforts to expand the availability of homeownership for all Americans, including Americans who are qualified borrowers but are not fortunate enough to come from wealthy 

families. When FHFA lowered the downpayment requirements, it 

appropriately balanced safeguards to protect the taxpayer with expanded credits for eligible borrowers. 

Moving forward, I encourage FHFA to think outside the box 

when it comes to credit scores to ensure that all creditworthy borrowers have a chance at the American dream. 

So I thank you, Director Watt. And again, we welcome your testimony today. I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, the chairman of our Capital Markets and Government Sponsored Enterprises (GSEs) Subcommittee, Mr. Garrett, 

for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman, for convening this very 

important hearing today. And thank you, Director Watt, also, for 

being here and for your testimony, as well. 

I would like to begin today’s hearing by commending Chairman 

Hensarling for your work and your steadfast commitment to reforming our Nation’s broken housing finance system. Our housing 

finance system and, more specifically the GSEs, were at the heart 

and center of the recent financial crisis. I realize the odds are long 

and the political issues to overcome are immense. I do believe that 

reforming this broken marketplace must remain a priority of this 

committee in the 114th Congress. 

So I am heartened at the level of substantive engagement by 

Members on both sides of the aisle with a number of specific legislative proposals introduced by the chairman, the ranking member, 

and Mr. Delaney, as well. These proposals and the bipartisan bills 

provide a foundation for which to continue negotiations with Congress and hopefully reach bipartisan consensus on a reform package. 

Now, Director Watt, you have been quoted as saying that you believe that GSE reform should be left up to Congress, and the FHFA 

should not interfere. While I appreciate the appropriate deference 

you pay to the body where you once served, it is important to understand that no matter your intent, any decisions that you make 

as Director will impact upon reform efforts, either positively or negatively. There is no way for you to avoid them. 

5 

So given that, I would hope that your decisions, then, would err 

on the side of helping to facilitate reform, and not acting as an impediment to it. So lowering downpayments, preventing risk-based 

guaranteed pricing, and the funding of the Housing Trust Fund, 

those things will make it harder to reform these entities and quite 

possibly lead us down the path of another multibillion dollar taxpayer bailout. 

These decisions bring to mind the old saying, ‘‘Those who don’t 

learn from history are doomed to repeat it.’’ So subpar underwriting standards, taxpayer-subsidized pricing, encouraging people 

to buy homes that they simply can’t afford, well, they were the 

main causes of the last crisis. 

So I would ask the Director, please, don’t let these decisions lead 

to the next one. 

With that, I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, the ranking member of our Capital Markets and 

GSEs Subcommittee, Mrs. Maloney, for 2 minutes. 

Mrs. MALONEY. I thank the chairman and ranking member for 

calling this important hearing. And it is a pleasure to welcome our 

former colleague and good friend, Mel Watt. You are missed on this 

committee. 

Director Watt has been on the job for 386 days. And he has proven to be a thoughtful, deliberative, and conscientious leader of this 

tremendously important agency. He has focused on maintaining the 

liquidity of the mortgage markets and on increasing access to credit for creditworthy borrowers. For example, his first act as Director 

of FHFA was to delay a planned increase in Fannie and Freddie’s 

guarantee fees, which would have raised g-fees even more in States 

with stronger consumer protections, such as the one I represent. 

There was never a sound basis for penalizing States that have 

strong consumer protections in foreclosure. And I applaud Director 

Watt for this decision. States that have strong consumer protections should be rewarded, not penalized. In addition, he halted the 

arbitrary 10 percent cuts to Fannie and Freddie’s multifamily businesses, and created an exception for small and affordable multifamily housing. This is hugely important for my district, where 

multifamily housing is our single family business. 

He has also allowed Fannie and Freddie to buy certain mortgages with a 3 percent downpayment, which will allow borrowers 

with strong credit histories but not stockpiles of extra cash to get 

a mortgage. I think that decision is tremendously important. And 

he was guided by the data, which clearly demonstrates that the 

size of the downpayment is not the most important factor in predicting default rates. 

Finally, he recently made the decision to start funding the National Housing Trust Fund and the Capital Magnet Fund, which 

will provide hundreds of millions of dollars for affordable housing 

programs. This was a critically important decision, because this 

was one of the only dedicated sources of funding for affordable 

housing that we have. 

Thank you very much. We are delighted to have you back here 

before the committee. 

6 

Chairman HENSARLING. The gentlelady yields back. Director 

Watt, welcome once again to that side of the witness table. And you 

are now recognized for your opening statement. 

STATEMENT OF THE HONORABLE MELVIN L. WATT, 

DIRECTOR, FEDERAL HOUSING FINANCE AGENCY (FHFA) 

Mr. WATT. Chairman Hensarling, Ranking Member Waters, and 

members of the committee, thank you for inviting me to discuss the 

work we are doing at the Federal Housing Finance Agency, and for 

providing my first opportunity to return to this committee since I 

left Congress. This actually might be the first time since I left that 

I have the sense that I might be better off on that side of the table. 

FHFA is mandated by statute to ensure the safety and soundness of the Federal Home Loan Banks, Fannie Mae, 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 also in conservatorship, we are also mandated by statute to preserve and conserve 

their assets. Earlier this month, FHFA issued a new scorecard that 

outlines our conservatorship expectations for the enterprises in 

2015. FHFA’s conservatorship strategic plan that we issued in 2014 

and the scorecards we issued in 2014 and 2015 are centered around 

three strategic goals that are fully aligned with FHFA’s statutory 

mandates. 

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. During 2014, in support of this goal, 

FHFA made considerable progress with the enterprises to clarify 

their representation and warranty framework, to encourage responsible lending to creditworthy borrowers, and to enhance the enterprises’ outreach and provision of services to small and rural lenders. 

In 2015, the enterprises will continue their work on these and 

other priorities, such as analyzing the potential benefits and feasibility of using updated or alternative credit score models. 

The second goal is to reduce taxpayer risk. The primary way we 

do this is by increasing the role of private capital in the mortgage 

market. In 2014, FHFA tripled the enterprises’ credit risk transfer 

requirement and the enterprises’ executed transfers on single family mortgages with a combined unpaid principal balance of over 

$300 billion last year. 

In 2015, the enterprises will continue to use the models that 

have already proven successful to transfer credit risk, and they will 

explore other ways of transferring and reducing risk to taxpayers. 

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. Last year, we defined the 

governance structure of the common securitization platform, and 

the enterprises announced a CEO for this joint venture. We also 

made significant progress toward our multiyear goal of developing 

common securitization platform technology and a single security. 

Our strategic plan and the 2015 scorecard also have affordable 

rental housing priorities for the enterprises. 

7 

The focus here is not to compete where there is adequate 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. 

FHFA is also focused on regulating the Federal Home Loan 

Banks. As part of our responsibility to ensure that the Banks fulfill 

their statutory mission and support housing finance in a safe and 

sound manner, we proposed a rule last year concerning the Banks’ 

membership requirements. Our comment period ended earlier in 

January, and we received approximately 1,300 comments. 

I want to emphasize that getting and evaluating input from 

stakeholders is a crucial part of our policymaking process. We will 

carefully consider comments made by members of this committee 

and the public in determining our final rule on the bank membership standards. We are also actively considering input we have received on guarantee fees, single security, and the enterprise housing goals. 

I have covered a lot more areas and provided a lot more details 

in my written statement. And I look forward to responding to your 

questions. Again, thank you for the opportunity to testify. I am 

happy to be back, especially since I know that I am free to leave 

after the hearing is over. 

[The prepared statement of Director Watt can be found on page 

66 of the appendix.] 

Chairman HENSARLING. The Chair now yields himself 5 minutes 

for questions. Again, thank you, Director Watt. 

I wish to echo the comments of the Chair of our Capital Markets 

and GSEs Subcommittee. I fear, Director Watt, that you have reversed the policies of your predecessor, which will make it more difficult to have a sustainable housing finance system. 

I want to first focus on what you have done in authorizing the 

GSEs to backstop 3-percent-down loans. You have previously testified before the Senate that, ‘‘We know that the size of a downpayment by itself is not the most reliable indicator of whether a borrower will repay a loan.’’ All things being equal—because I have 

looked, and I can’t find your thoughts on this subject—is a 3-percent-down loan riskier to the taxpayer than a 10-percent-down 

loan? 

Mr. WATT. I would say, Mr. Chairman, that is generally true. 

But when you pair the downpayment with other compensating factors—which is part of the sentence that apparently people missed 

when I announced this—you can make a 3-percent downpayment 

loan as— 

Chairman HENSARLING. —I understand there are other factors— 

okay. I understand there are other factors, Mr. Director. But also, 

ability to repay certainly is an indication of whether or not a homebuyer can save. If they can only afford 3 percent down, do you believe that 3 percent down is riskier to the home purchaser than 10 

percent down? 

Mr. WATT. Again, the same considerations would apply to the 

borrower as would apply to the lender. If you carefully look at 

other considerations and take them into account in deciding whether to extend that credit—or in Fannie and Freddie’s case, whether 

8 

to back that credit—then you can ensure that a 3 percent loan is 

just as safe as a 10 percent downpayment loan. 

Chairman HENSARLING. Let’s explore some information that has 

come out of your agency previously. Can I have the chart from the 

Federal Register, please? 

Your agency, frankly, along with Treasury, the Fed, the FDIC, 

the SEC, and HUD—I know, like most charts, it is somewhat difficult to read. But on the horizontal axis, this is loan-to-value ratio. 

On the vertical axis is default rate. And to the far right-hand corner, you see a precipitous rise in default rates when you go from 

90 percent loan-to-value. And particularly, an incredible slope from 

95 percent as we reach no downpayment whatsoever. 

Again, this is information that is coming from your agency, along 

with just about every other prudential banking and housing regulator. So doesn’t that seem to indicate that, again, a 3 percent 

downpayment, not only is it not too good for the taxpayer—you are 

once again putting people in homes that they can’t afford to keep. 

And you had previously testified when you were on this side of the 

table during the Dodd-Frank Act proceedings, ‘‘I have always believed that you cannot make a loan to somebody who cannot afford 

to repay it. That is unstainable.’’ This is data from your agency and 

others. So why is it sustainable? 

Mr. WATT. Mr. Chairman, I haven’t changed my position on that. 

And I want to assure this committee that I have not changed my 

position. You should never make a loan to somebody that you cannot anticipate would pay it. But if you couple— 

Chairman HENSARLING. Again, this is data. This is data from 

your agency— 

Mr. WATT. —other factors and make a loan as safe, which is exactly what we have done with this 97 percent product; compensating factors including housing counseling, including— 

Chairman HENSARLING. Okay. Well, Director Watt, let’s not just 

look— 

Mr. WATT. —private mortage insurance— 

Chairman HENSARLING. —let’s not just look— 

Mr. WATT. —all of those things— 

Chairman HENSARLING. —you do recall I get to control— 

Mr. WATT. —taken into account in determining— 

Chairman HENSARLING. Let me quote from the same document, 

‘‘Default rates increase noticeably among loans used to purchase 

homes at LTV ratios above 80 percent. There is substantial data 

indicating that loans with LTV ratios of 80 percent or less perform 

noticeably better than those with LTV ratios above 80 percent.’’ 

So notwithstanding, Mr. Director, with all due respect, I understand what you are saying. But I fear what you are doing is again 

repeating the exact same mistakes that brought us here in the first 

place. And now, you are in a contest with FHA to see who can be 

the Nation’s largest subprime lender. I fear we are going in the 

complete wrong direction with your policy. 

I now recognize the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much. Mel Watt, I really wanted 

to spend my time on the Affordable Housing Trust Fund. But I 

must step in here to basically ask, when we take a look at those 

that we would lend to with the 3 percent down, are we not talking 

9 

about people who have shown that they pay their bills every 

month, they have basically good credit, they have not defaulted, 

they don’t have any bankruptcies? They just are not able to save 

up a 10 to 20 percent, as some more wealthier people are able to 

do. 

But these are good, hardworking taxpayers. Are these the kind 

of people you are talking about? 

Mr. WATT. That is exactly the kind of people that we would be 

looking for. And we would pair that with strong credit scores, lower 

debt-to-income ratios, housing counseling, and private mortgage insurance. All of which put together, compensate for the fact that you 

are making a loan to somebody with a lower downpayment. 

We have no interest in going back to irresponsible lending. And 

it is part of our statutory mandate to make sure that doesn’t happen. 

Ms. WATERS. Thank you. I think that even though I don’t have 

the data or the information, that a large part of our society fits into 

that category. And they deserve to be homeowners if, in fact, they 

are hardworking citizens who pay their bills, who have not had any 

problems. A 3 percent downpayment should not cause us any problems at all. 

Let me get to the Affordable Housing Trust Fund. I would like 

to commend you on your recent decision to follow the requirements 

set forth in the Housing and Economic Recovery Act of 2008 and 

lift the suspension on Fannie Mae and Freddie Mac’s obligation to 

fund the National Housing Trust Fund and the Capital Magnet 

Fund. 

As you are well-aware, we are in the worst rental housing crisis 

this Nation has ever seen. In the richest country in the world, it 

is unconscionable that there are 7.1 million American households 

for whom safe and decent housing is neither affordable nor available. In my own district alone, there is a shortage of nearly 43,000 

affordable and available rental units for extremely and very-low-income households. 

These critical new funds will not only add to the supply of affordable rental housing, but will also help to address homelessness and 

poverty across the country. Please talk to us about what factors 

you considered in coming to your decision to end the suspension of 

contributions to the funds. 

Mr. WATT. Ranking Member Waters, I simply followed the statute. The statute tells us the exact circumstances for the criteria to 

be applied on the suspension of the contributions to the Housing 

Trust Fund. And it tells us the criteria to be applied under normal 

circumstances for funding. And that is whether the contributions to 

these funds would contribute or are contributing to the financial instability of the enterprises, whether they are causing or would 

cause the enterprises to be classified as undercapitalized, or whether they are preventing or would prevent the enterprises from successfully completing a capital restoration plan. Those are the statutory provisions. 

They are the same provisions that Mr. DeMarco applied appropriately, in my opinion, at the time that they were applied to suspend contributions to the trust fund. They are the same criteria 

that I applied, appropriately in my opinion, to reinstate them. BeVerDate Nov 24 2008 16:23 Aug 06, 2015 Jkt 095045 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\95045.TXT TERRI
10 

cause circumstances have changed in that interim. So I simply followed the statute. That is all I did. 

Ms. WATERS. Thank you very much. That is very important to 

know, because there are those—and some are my friends on the opposite side of the aisle—who would have us believe that you have 

done something outside of the statutory requirements or mandates. 

And so I am very pleased that you were able to clarify that. And 

I think it is going to be—if we can get this implemented, it is going 

to be very good for this country. 

I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. The Chair 

now recognizes the gentleman from New Jersey, Mr. Garrett, chairman of our Capital Markets and GSEs Subcommittee. He is recognized for 5 minutes. 

Mr. GARRETT. Thanks, Mr. Chairman. I will follow up, Mr. 

Chairman, on your questions with regard to the downpayment. 

So obviously, we are seeing a return to loose underwriting standards at the agencies. I am sure, Director, you have read that one 

of the largest banks in the country has publically stated that 3 percent downpayment loans are simply too risky for them to originate. 

And yet here, on the other hand, you are having the agencies—you 

are instructing them to basically take on more risk than the largest 

too-big-to-fail banks. 

Now, every day we read in the paper how Wall Street banks are 

greedy and risk-taking. But it would appear that in this situation, 

you are doing just the exact opposite of what they are doing; they 

are being more prudential in this matter, and you are saying, as 

someone else once said, let’s roll the dice. But the difference here 

is we are rolling the dice once again with taxpayer money, as opposed to private investors. Is that wise to do, to be riskier than— 

Mr. WATT. —let me clarify that I haven’t instructed any bank to 

make any loans that they think— 

Mr. GARRETT. Well, not the banks. You are instructing your 

agencies. 

Mr. WATT. I have instructed that Fannie and Freddie can guarantee loans that are made responsibly that fit our criteria. The 

bank you are talking about, I think, is the same one that made the 

decision to acquire Countrywide. In following their experience, I 

can understand why they might be a little bit reticent to go back 

into that business, but that shouldn’t control the entire mortgage 

market— 

Mr. GARRETT. I am reclaiming my time. 

They are doing that on behalf of their investors. And I guess I 

am speaking on behalf of the American taxpayer, that we are concerned that where the taxpayer dollars could potentially be as we 

return to these very loose underwriting standards. 

Another point that we read in the paper is how after the last crisis, a lot of people felt they did everything right and still they got 

burned at the end of the day from this crisis. And it seems to me 

that with the handling you are doing with the g-fees, that is exactly the same thing you are doing now. 

With regard to loan-level price adjustments there is, as you 

know, a fair amount of cross-subsidization that occurs on the pricing here. What does that mean? That means that you have good 

11 

borrowers with high downpayments and better credit scores, they 

are being told that they have to pay the exact same fees as borrowers who have lower downpayments and have worse credit 

scores. 

Would you explain to me why you consider it is fair to tell people 

who have done everything right, saved their money, acted in a prudential way, that they have to pay the exact same fees and have 

the cross-subsidization there to those people who have done everything wrong, haven’t saved, have bad credit, worse credit scores, 

and what have you? Why is that fair? 

Mr. WATT. I think your question illustrates the complexity of this 

issue, Representative Garrett. And all I did was suspend it, suspend the increase in guarantee fees, until we had a chance to 

evaluate all of the implications of it. And when we announce the 

guarantee fees—which we will do hopefully by the end of this quarter—we might take into account some of the things that you are 

talking about. 

But doing that without a thorough evaluation and consideration 

of all of the aspects of it—as you suggest we should do—I think 

would have been irresponsible. 

Mr. GARRETT. But it is pretty—and you only suspended the decreases, I understand. And it seems to be pretty plain on its face 

that those that did good are being penalized for those that did 

poorly. And yet, here we are three hundred—a year later, and we 

are still in the situation of rewarding bad behavior and unfairly 

treating those who showed good behavior. 

Moving over to some other items. We don’t have a clock on here. 

The securitization platform—I mentioned earlier that there is bipartisan support as far as moving forward. One of those areas is 

the securitization platform. All parties, I think, seem to agree that 

we should be having this. 

And yet, we see that the industry seems to be cut out of some 

of the development of the securitization platform. They are not 

really allowed in at the ground floor, the creation of it and the governance of this. Why are we, when we have a bipartisan initiative 

here, when we have both sides of the aisle and both chambers looking at it in the same manner, why are you cutting out industry? 

Is this another attempt by the GSEs to try to continue what they 

did before, to control the marketplace, to manipulate the going reforms, as opposed to allowing those players in the future to be able 

to have a say in it? 

Mr. WATT. My response would be twofold. Number one, we are 

not cutting out private industry in our consultations. We are in 

regular consultation with private idustry on the common 

securitization platform. But— 

Mr. GARRETT. Do they have a role in the governance? Do they 

have a role in the governance of— 

Mr. WATT. —the Chair when I discussed it with him, what I did 

was exactly what I thought Republicans really support, is de-risk 

this whole process by not trying to form a common securitization 

platform for a future that you all had not yet defined. 

Chairman HENSARLING. The time of the gentleman has expired. 

Members probably don’t need to be reminded that we are not in 

our usual hearing room. Obviously, we are lacking the individual 

12 

clocks. So to gauge your time, you need to look at the little color 

wheel, if you will, at the witness table. And I think you otherwise 

know the drill. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, ranking member of our Capital Markets and GSEs Subcommittee. 

Mrs. MALONEY. Thank you. 

Director Watt, I was pleased last year when you delayed your 

predecessor’s decision to raise g-fees. As you know, your predecessor wanted to raise g-fees even more in four States, one of which 

was New York. And New York and the other four have particularly 

strong consumer protections for foreclosures. This would have needlessly harmed New York’s economy and would have discouraged 

States from enacting stronger consumer protections. I think this 

was an important decision. We should be rewarding States that put 

strong consumer protections in, not penalizing them. 

Now, of course, what I am hearing the markets are telling me— 

or some of them—that they anticipate a possible decrease in the gfees, rather than an increase. So can you just give an update on 

your review of the g-fees in general? And do you anticipate that 

they will be going down and not going up? That is what I was told, 

so— 

Mr. WATT. I don’t know where that information would come 

from. We are still in the process of evaluating the input that we 

have gotten in response to a request for input from the public on 

this issue. And we anticipate making a decision hopefully by the 

end of this quarter. It may slip into next quarter. But we are going 

to make a decision, and then we will talk; we will justify and outline the reasons for that decision. 

I don’t think I have any information about whether they are 

going down or going up. Risk-based might have some adverse impact on some of the States that you were talking about. But at this 

point, I think it would be premature to talk about what that result 

will be. Because I don’t even know what it will be. We are in the 

process of evaluating it. 

Mrs. MALONEY. In your deliberations, I hope that strong consumer protections for foreclosures are considered a plus, something 

for which States should be rewarded. 

I have another question. Director Watt, we have heard a lot 

about the Housing Trust Fund and the Capital Magnet Fund, some 

of which has been critical. But, of course, we know the facts are 

that the Capital Magnet Fund has already had one successful 

round of funding in 2010, and it was a huge success through a public-private partnership model: $80 million in funding from the Capital Magnet Fund was turned into $1 billion for affordable housing. 

And I congratulate this effort. 

Now, with your decision to start funding for both the Housing 

Trust Fund and the Capital Magnet Fund, there will be hundreds 

of millions of dollars for affordable housing every year. Can you 

talk a little bit about the impact that you expect this funding to 

have on the affordable housing crisis that our country is facing? 

And can you talk a little bit about the public-private partnership 

that emerged to help magnify the money? And are you looking at 

13 

more public-private partnerships? Just in general, where this program is going for affordable housing. 

Mr. WATT. Representative Maloney, to be quite honest, I didn’t 

take any of that into account. Those are policy decisions that I 

think are legislative decisions, congressional decisions. And we 

don’t have any control over at FHFA over the use of these funds. 

Those decisions are actually made at Treasury and HUD. Our decision related only to whether or not to fund it, and applying the 

statutory criteria to determine whether it should be funded or 

should not be funded. 

And so, we didn’t look at the use of these funds. We didn’t look 

at the history of—I didn’t—I am not even sure I knew that there 

had been projects— 

Mrs. MALONEY. Thank you for clarifying. 

I would like to ask you about the risk retention rule. As you 

know, the final rule inadvertently failed to exempt Freddie Mac’s 

multifamily securities, even though it did exempt Fannie’s multifamily securities. And I understand that the FHFA is working on 

a possible solution for this already. Can you give us an update on 

these efforts? 

Mr. WATT. The risk retention rule was not done by FHFA. That 

was a combined—that was a joint rulemaking process. So I am not 

sure that we are looking at anything that is— 

Mrs. MALONEY. But the fact that it inadvertently failed to exempt Freddie Mac’s multifamily securities, even though it did exempt Fannie’s multifamily securities—they should be treated the 

same. That is a— 

Mr. WATT. I would hope that whatever rule comes out would 

treat both Fannie’s and Freddie’s securities the same. That is what 

we are trying to work our way towards— 

Mrs. MALONEY. Okay. 

Mr. WATT. —in the single security. So— 

Mrs. MALONEY. Thank you. 

Mr. WATT. —certainly— 

Mrs. MALONEY. My time has expired. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from North Carolina, Mr. 

McHenry, vice chairman of the committee. 

Mr. MCHENRY. Director Watt, thank you. It is good to see you 

again. And it is always good to see you on the plane coming back 

and forth from your former district in Charlotte. 

Mr. WATT. Congratulations on that beautiful baby. 

Mr. MCHENRY. Thank you. Thank you, Mel. I appreciate it. And 

I appreciate your kindness and friendship over the years. We have 

been able to have conversations even when we disagree about 

issues. And so, I just wanted to ask you a few questions. But you 

know me fairly well, so I figured at some point, you will cut me 

off here. 

So it seems that we have some conflicting actions that you have 

taken. One is you suspend the g-fees, right, and you move away 

from risk-based pricing. At the same time, you start holding up reserves to the Housing Trust Fund and allocating capital to the 

Housing Trust Fund. In one respect, you are conserving capital for 

14 

an assessment. In the other, you are actually moving capital away 

from the enterprise. How do you reconcile that? 

Mr. WATT. Representative McHenry, all I am doing is following 

the statutes that were written by Congress and passed by Congress. And we are trying to do it as judiciously and prudently as 

we can. I am not even trying to connect those two things. The 

Housing Trust Fund funding was an independent decision that was 

based on the statute. The g-fee decision was a prudence decision 

just to give us an opportunity to study the issue thoroughly. And 

we are doing that. And we don’t know where we are going to get 

to on that. So I think judging where that might go at this point 

would be premature. 

Mr. MCHENRY. So under the statute, you have no choice? You 

have to allocate capital for the Housing Trust Fund? 

Mr. WATT. If the statutory standards are met, the contributions 

to the trust fund can be suspended. They were suspended in 2008 

by the acting Director at that time. And we applied the same principles under changed circumstances to reinstate them. That is all 

we did. 

But the Housing Trust Fund was not created by FHFA. The 

Housing Trust Fund was created by Congress. And the decision to 

fund it or not fund it is based on statutory criteria. 

Mr. MCHENRY. Yes. But most of us look at Freddie being leveraged at 156 to 1, and Fannie being leveraged at 134 to 1, and think 

that the conditions are not right. Because the requirement to suspend the allocation of capital to the Housing Trust Fund shouldn’t 

be justified under these circumstances with this type of leverage 

rate of these institutions. 

Mr. WATT. That is not what is one of the statutory criteria that 

Congress set for evaluating whether to fund the Housing Trust 

Fund or not fund the Housing Trust Fund. 

Mr. MCHENRY. So is this an odd circumstance? Because you were 

outspoken about the subprime lending in the private sector leading 

up to the crisis. I heard you in debates here, I heard you on TV 

at home; you said that these really high-LTV loans were problematic, that this was deeply concerning, especially for those who 

didn’t have savings, that a small fluctuation in the marketplace 

could cause problems. 

Do you have that similar concern? Because in many respects, you 

are making substantial decisions—no, no—you are making huge 

decisions. And the consequences of these actions are real. I know 

you know that. But is there that conflict looking back at what you 

said about the private sector versus the actions you are taking 

right now? 

Mr. WATT. I don’t think there is any conflict between what I said 

then and what I am doing now. You need to make responsible 

loans. And this decision was surrounded by a bunch of compensating factors for every borrower who would make their loan as reliable a loan as a 10 percent downpayment loan, a 20 percent 

downpayment loan. And that is our responsibility. 

And I would hope that you all would rely on the same things 

that I said in advocating for reform in this area, to know that we 

are going to apply those principles and not sanction loans backed 

15 

by Fannie and Freddie and the taxpayers that are not reliably expected to be paid. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. And welcome, esteemed colleague Director Watt. 

I just would like to revisit again the question that was asked by 

Congresswoman Carolyn Maloney regarding the National Housing 

Trust Fund. I heard you when you said that it will be hard on 

Treasury, the one making the decision as to which projects to fund. 

My question to you is, when will that money make it out there? 

Have you had any discussion with those two agencies? 

Mr. WATT. I have not had any discussions with them about the 

application of the funding. That is their decision to make. Treasury 

makes the decisions about the Capital fund, and HUD makes the 

decisions about Housing Trust Fund side of it. So those are their 

decisions to make. 

Ms. VELAZQUEZ. But do you have any idea as to when this money 

will start? 

Mr. WATT. Yes. I can tell you that because the process that we 

followed directs Fannie and Freddie to start setting aside the funds 

in January of 2015; and at the end of 2015, if circumstances don’t 

reverse, then the moneys would actually be allocated into the Trust 

Fund and the Capital Magnet Fund and could be used. So there 

won’t be any use of those funds during 2015. It would be 2016 at 

the earliest before the funds would be available. 

Ms. VELAZQUEZ. Thank you. Director Watt, as part of the public 

mission, Fannie Mae and Freddie Mac maintain a duty to serve the 

entire housing market and support affordable housing preservation. In 2008, Congress asked FHFA to issue a rule to implement 

this duty-to-serve requirement. But while a proposed rule was 

issued in 2010, a final rule has not been promulgated to date. 

When do you plan to issue a final rule? 

Mr. WATT. We are in the process of looking at that. And you are 

right, a proposed rule was issued in 2008 or 2009. It never was finalized because of whatever reasons. I don’t know. We haven’t tried 

to evaluate that. But we are going to have a duty-to-serve rule finalized hopefully in the year 2015. 

Ms. VELAZQUEZ. Thank you. In August, FHFA proposed a new 

housing rule category for small multifamily properties that have 

units affordable to low-income families. This effort, of course, is 

very important for places like New York City, where these properties are an important part of the housing stock. 

While your agency has set initial benchmarks in an effort to take 

a gradual approach, please explain how this goal will be evaluated 

so that more ambitious targets can be set in the future. 

Mr. WATT. We will evaluate it on the same terms that we evaluate everything. First of all, make sure that the loans are safe and 

sound. And second of all, that they achieve the purpose of serving 

a group or a category of people who have been underserved. Which 

is why we encouraged—directed Fannie and Freddie to look at how 

to incentivize small developments. Because generally, smaller deVerDate Nov 24 2008 16:23 Aug 06, 2015 Jkt 095045 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\95045.TXT TERRI
16 

velopments have more orientation toward middle- and lower-income people. 

So that is included in the 2015 scorecard for Fannie and Freddie 

to continue to work to encourage those kinds of loans. And we will 

have in place an evaluation mechanism that makes sure that is effective. Or we will revise the expectations in the future based on 

experience, which is something that we do quite regularly. 

Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Oklahoma, Mr. Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman, and my old colleague, Director Watt. 

I would like to address the Federal Home Loan Housing Finances proposed rulemaking regarding membership requirements 

for Federal Home Loan Banks. And I am concerned that the proposed rule would unnecessarily harm a significant number of community financial institutions in Oklahoma and across the country 

by limiting membership in the Federal Home Loan Bank System. 

In recent years, it is been increasingly difficult for these institutions to provide mortgage financing needed in their communities. 

And the Federal Home Loan Banks have served a very critical role 

as a source of liquidity during these challenges times. 

I guess my question, Mel, is why propose such a regulation at a 

time when community banks and credit unions are in need of every 

credit resource available to them to serve their communities? Or as 

Congressman Watt would have said, what is the problem you are 

trying to fix with this rule? 

Mr. WATT. There are some potential problems that we are trying 

to fix to make sure that the Federal Home Loan Banks meet the 

statutory purposes that have been set. 

First of all, you don’t want anybody to be a member of the Federal Home Loan Bank System and get the benefits of it unless they 

meet the criteria that Congress has set. And we were concerned 

that some of the members of Federal Home Loan Banks were not 

meeting these criteria. 

I can go into more detail. I can give you a complete outline of 

the rationale. But we are trying also to do this in a way that does 

not have the adverse impact that you are talking about. 

Mr. LUCAS. But as I understand it, Director, under the present 

system, once an institution meets the requirement to participate, 

they still have all the obligations and all the standards that have 

to be met by any Home Loan Bank board institution. 

There is just some concern out there in the countryside, and perhaps in the hallways of Congress, that there is more to this than 

just an ongoing set of standards, that perhaps since the Administration has not really been able to legislate much in the last 4-plus 

years, that this is another effort to change how the system works 

by rule and not by law, since I don’t think this institution would 

pass a bill to do this. 

So I guess my question is, is this an effort by the Administration 

to be able to channel and steer how these institutions use this resource? 

Mr. WATT. First of all, let me be clear with you, as I have been 

with the Administration. I am not part of the Administration. The 

17 

Federal Housing Finance Agency is an independent regulatory 

agency. We don’t play out the Administration’s policy. We follow 

the statute. And that is what we are doing in this case. 

Mr. LUCAS. But once again, to paraphrase Congressman Watt: 

The folks what brung ya are the folks what keep you there; i.e., 

the question still goes back to, is this an effort to try through the 

rule process to determine how these resources are used and, in effect, to put the institutions that are a part of the Home Loan Bank 

board system on a rather short leash? 

Mr. WATT. We have no agenda, other than making sure that 

they—that members of Federal Home Loan Banks meet the criteria 

that Congress has established for membership. 

The one that—and I know this is a controversial issue because 

we put out the rule, we got 1,300 comments. That is almost unprecedented. We are going to go through every one of those comments 

and evaluate every single one of them. And most of them, to be 

quite—I would say probably 90 percent of them appear to be 

against the proposed rule. So obviously, we have touched a nerve. 

Mr. LUCAS. It is good— 

Mr. WATT. But we are going to apply the statute and try not to 

have the adverse impact that people are contemplating might be a 

result of this rule. 

Mr. LUCAS. You have always been a man of your word. I take 

you as a man of your word. But we are in an environment where 

a lot of things are going on in very interesting ways. And I would 

just note that I would hope the committee would be very sensitive 

about doing anything to a model that has worked really well and 

is working well in a particularly tough set of times for those institutions. 

Mr. WATT. I agree with you. 

Mr. LUCAS. I appreciate our friendship. And many of the underclassmen weren’t here when you and I worked to help whomever 

the ranking member and chairman were at any given time, over 2 

decades almost. So as we helped leadership, I am going to try and 

help you, sir. 

Mr. WATT. Thank you so much. It is great to see you again. 

Mr. LUCAS. I yield back, Mr. Chairman 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from Massachusetts, Mr. Lynch, for 

5 minutes 

Mr. LYNCH. Thank you, Mr. Chairman. And I want to welcome 

back Director Watt. It is good to see you again. And as you can see, 

some things have not changed here in terms of how we might view 

affordable housing and the way FHFA works 

There was a great article yesterday in the New York Times by 

Searcey and Bob Gebeloff. It talked about how the middle class is 

continuing to shrink. And this phenomenon is resulting in more 

people being squeezed into the very bottom of income earners. That 

is obviously putting a lot of pressure on affordable housing, which 

is where you come in. 

According to the National Low Income Housing Coalition, we 

need about 7 million more homes nationwide that are affordable 

and available to extremely-low-income households and those with 

incomes at 30 percent or less of the area median income. And I 

18 

know that in my home State of Massachusetts, there is a shortfall 

of about 175,000 affordable units, and in my district it is about— 

let’s see—16,000 units. 

There are a couple of tools that you have. And I am happy to see 

that they are beginning to be used. The Housing Trust Fund and 

the Capital Magnet Fund, I think can be part of the solution. And 

now, I know that you are following statutory directives in terms of 

the Magnet Fund. But can you talk a little bit more broadly about 

how your affordable housing goals are consistent with the reality 

that we are seeing out there? 

I know that the situation seems to be getting worse for that tier 

of people who would benefit from access to affordable rental housing, never mind the 3 percent downpayment on purchasing housing. But there are folks who are, I think, have resigned themselves 

that they are not home purchasers, that they are renters now. How 

does your affordable housing goal help those people? 

Mr. WATT. First of all, we haven’t finalized the affordable housing goals yet. The rule is in process. And we are evaluating comments, so— 

Mr. LYNCH. How do you anticipate your goals once you figure 

them out? 

Mr. WATT. Here is the way we think of this. First of all, we want 

to, on the ownership side for people who can afford to pay a mortgage, make it available to them. On the rental side, we want to 

make sure that affordable housing is available in the marketplace. 

There is, actually, a very robust multifamily market on the high 

end, but not so much on the affordable end. Which is why when 

we wrote the scorecard criteria, we exempted from the $30 billion— 

or whatever the figure was; I can’t even remember what it was— 

cap, affordable housing developments to try to encourage Fannie 

and Freddie to be more involved and active in getting into that 

space, which is underserved by the private sector. 

So, that is what we have done. And the rule itself, we will try 

to build on that and incentivize that. You are right; there are a lot 

more people renting now than had been historically renting. The 

rental market is robust and there are not enough units to serve 

that market. 

Mr. LYNCH. Okay. I see my time is just about expired. I yield 

back. And I thank you. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee. 

Mr. NEUGEBAUER. Director Watt, it is good to see you again. You 

mentioned a couple of times—I want to talk about g-fees first. That 

goal—or you are currently studying the g-fee issue and will make 

a determination? It is my understanding that a study was done 

prior to the previous Director issuing a directive to increase the gfee to 10 percent. 

So I guess my first question is, if we have already studied it, why 

are we studying it again? 

Mr. WATT. I don’t think we should ever stop evaluating issues. 

I was not a party to the study that was done before. We obviously 

are taking that study and any conclusions that it reached into account in reaching our conclusion. But we have been very transVerDate Nov 24 2008 16:23 Aug 06, 2015 Jkt 095045 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\95045.TXT TERRI
19 

parent in seeking input about how these g-fees should be set, what 

criteria should be applied in setting the g-fees, should it be just 

about protecting against the risk that Fannie and Freddie are assuming? Should it be about capital formation? Should it be about 

attracting private capital into the—the process has been very 

transparent. And— 

Mr. NEUGEBAUER. So you decided to study it again, is what— 

Mr. WATT. Yes. 

Mr. NEUGEBAUER. Okay. So the cross-subsidization issue that the 

gentleman from New Jersey brought up I think is an issue that I 

am interested in, as well. And, in fact, I had conversations with 

your predecessor in that there are some States that have very, very 

stringent foreclosure procedures that in many cases keep the people who loan the money in good faith, not months from getting 

their property back if the person’s not paying, but in some cases 

years. 

And so I think that in those cases, I support those—that is a 

higher risk to those entities and those—where those foreclosure 

rules are very consumer-oriented. And so I am not opposed to those 

States deciding that. I think that is their right. But I think what 

they have to also understand is when you make it so consumer-oriented, you penalize the people who are loaning the money and 

causing losses—and what we have seen in many of those States 

where they had—where it is very difficult to get your property 

back, that those properties were stripped of windows and sinks. 

And so, I just want to say to you that I think pricing your g-fees 

on risk is important. 

Now, one of the things that you alluded to you in your report— 

I mean in your written testimony, and you brought it up as well, 

is you have been doing some risk transferring. And I guess the 

question is, if you are not taking a risk, you don’t have to transfer 

it. But I wondered if you could give the committee some idea how 

many basis points it is costing to transfer that risk. What is the 

pricing on those transactions that you are doing that would—to 

give us some idea of what it is costing to reinsure those risks? 

Mr. WATT. I can’t tell you in basis points. But I can tell you that 

one of the criteria that is always applied is that a risk transfer 

must be done in a commercially reasonable manner, and it can’t be 

just giving away assets. Because that would be inconsistent with 

our conserve and preserve mandate under the conservatorship statute, so— 

Mr. NEUGEBAUER. I think what I am trying to get to, though, is 

in the current situation, where Freddie and Fannie really don’t— 

they need to make a profit but there are really no market forces 

in place there to determine whether—what is the value of these entities. 

And so the question is, is if you are transferring that risk, it 

would be helpful for us to know that. Because that may—should 

also influence what your g-fee pricing is going to be. In other 

words— 

Mr. WATT. We have that information. I don’t mean to suggest 

that we don’t have that information. We have the information on 

every risk transfer transaction that has been undertaken: the cost; 

what the models say the value was; what Fannie and Freddie made 

20 

on the transactions. We have that information. But you asked me 

what are the number of basis points. That is information I wouldn’t 

have off the top of my head. But we can provide more information 

to you, if that is what you need. 

Mr. NEUGEBAUER. I would like that. And the final point I would 

make is that, on the downpayment, I think it is erroneous—kind 

of ironic—maybe erroneous, too. But it is ironic that we made FHA 

increase their downpayment to 3.5 percent. And it looks like the 

two of you have a race here of seeing who can get the most market 

share here. And so you have kind of one-upped FHA by going to 

a 3 percent downpayment when they have a 3.5 percent downpayment. 

Mr. WATT. First of all, you should be clear that we are not in 

competition with FHA. 

Mr. NEUGEBAUER. Sure you are. 

Mr. WATT. We are not. The market might—the market is going 

to go to whomever gives them the best deal. We know that. But we 

are not competing with FHA. We are trying to provide liquidity in 

the market, which is what our mandates says we are supposed to 

do. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. And welcome, Director. I 

feel good and I feel proud to see you sitting where you are sitting 

and doing what you are doing for the people of this Nation. Congratulations. I think you are doing a great job. 

I would like for us to revisit for a moment the Housing Trust 

Fund. And I would like to clear up some things so that folks will 

understand. First of all, both you and I were here sitting on this 

committee when none other than President George W. Bush authorized this Housing Trust Fund. And if you recall, when he authorized it he said that this is perhaps the best tool that we could 

use to help get housing for our most vulnerable population. 

So I want to set the record straight that this is both a Democratic and a Republican initiative. And secondly, you have moved 

to reinstate the payments largely following the orders of us in Congress. Because during the economic recovery, we put three criterion 

in for suspending it. Those criterion now no longer exist for the 

GSEs. 

And so you are operating on this trust fund within the authority, 

first of all, that President George Bush gave you. And secondly, 

what the Congress of the United States reinforced. I just want to 

make sure that is clear. 

Now I want to talk about one other thing, because I think it is 

very important, and that is principal reduction. That is really at 

the core of helping people. And all the evidence is that that is the 

case. 

Recently, you went to—and that is another thing I want to commend you for. Because you go out where the problems are. You 

have been out in the Nation. You have been to Atlanta, and we certainly appreciated you there with the HARP program. But you 

went to Detroit where this problem is very pronounced. And I think 

you articulated there your concern about being able to use the necessary tools for principal reduction. 

21 

I think that this is the core of it. Would you mind addressing 

that within the light of what you said and how important principal 

reduction is? 

Mr. WATT. It allows me to go back to a point that I made with 

Representative Neugebauer. This is one of those issues that I have 

received a lot of second-guessing about. Because there was a study 

done about principal reduction before I got there at FHFA also. 

And I haven’t done principal reduction either. We are still studying 

that issue, just like we are still studying the g-fee issue. 

And what we are trying to do on principal reduction is find a 

place where it is beneficial to borrowers and not negative net 

present value to Fannie and Freddie. Right? 

And there are some instances in which that is the case; it is beneficial to borrowers and not negative to Fannie and Freddie. And 

when we find that niche, that is when we are going to make a decision about this. 

Now, in Detroit, we are, under the Neighborhood Stabilization 

Initiative, testing some things there to see where that sweet spot 

is. Because if you have a whole neighborhood that is sitting there 

with vacant properties, half of the properties— 

Mr. SCOTT. Right. 

Mr. WATT. —vacant, it pulls down the value of the other properties in that neighborhood. So we are trying to craft something 

that will work for the enterprises and for the borrowers. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, chairman of our Housing and Insurance Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. And congratulations to you, Mr. Watt, on your appointment. I don’t know whether 

to congratulate you or empathize or sympathize with you. But we 

are glad you are here today. 

So, to follow up on a couple of comments that were made earlier 

with regards to the capital that you have in the GSEs and the ability to provide stability, one of the things that I am looking at here 

as I look through this is, your past dues on Fannie Mae and 

Freddie Mac right now are just a little less than 2 percent, both 

of them. So that is good. Is my microphone not on? 

Mr. WATT. I can hear you, but I am having a little trouble picking up all of your sentences. I’m sorry. 

Mr. LUETKEMEYER. Okay. Then I will hold the microphone a little closer. I apologize. Your past dues for Fannie and Freddie both 

are a little under 2 percent right now, which is very good. But your 

capital is at .4 percent. We are supposed to be at 2. And so I guess 

my question is how—and in your testimony, you say enterprises do 

not have the ability to build capital internally while they remain 

in conservatorship. How do we solve the problem of additional bad 

debts popping up? 

And I guess another subsequent question to go with that is, do 

you have any lawsuits pending that can bring in cash to add to 

your capital count? Or whenever a lawsuit is filed and you win it, 

does that money go to the treasurer or does it go into—how do you 

solve the problem of having enough capital to absorb the losses, is 

my question. 

22 

Mr. WATT. We can’t build up capital because we are operating 

under a preferred stock purchase agreement with Treasury in conservatorship that sweeps all of the profits that Fannie and Freddie 

make to the taxpayers. 

Mr. LUETKEMEYER. Right. 

Mr. WATT. That was the quid pro quo for— 

Mr. LUETKEMEYER. If that is the case though— 

Mr. WATT. —keeping them from going—Fannie and Freddie from 

going into— 

Mr. LUETKEMEYER. If that is the case, though, how do you— 

whenever further bad debts losses occur, where do you take those 

losses? Eventually just go to the treasurer and ask them to write 

a check to build more accounts? 

Mr. WATT. That is what would happen under the preferred stock 

purchase agreements. Basically, the taxpayers are backing Fannie 

and Freddie. And they will be until GSE reform is done. And we 

don’t—we can’t do that. We don’t do GSE reform. That is why it 

is so important for Congress to act on GSEs. 

Mr. LUETKEMEYER. So I saw that you had some nice income figures. And I assume part of that is also the settlement of lawsuits 

with different entities. Are there any— 

Mr. WATT. It has been substantial. 

Mr. LUETKEMEYER. —lawsuits pending now? 

Mr. WATT. There are three more lawsuits—two more lawsuits 

pending. 

Mr. LUETKEMEYER. Okay. When you win those lawsuits, do those 

dollars go to your capital account, or do they go to the Treasury? 

Mr. WATT. They will go into Freddie and Fannie’s account. And 

if at the end of the year they are— 

Mr. LUETKEMEYER. That gets swept— 

Mr. WATT. —they are profits, they will be swept— 

Mr. LUETKEMEYER. All right. 

Mr. WATT. —to Treasury. Yes. 

Mr. LUETKEMEYER. Very good. 

One of the concerns that I have—excuse me—also is with regards 

to the way that you are pricing things and the way that you are 

changing some of your rules and regulations. Having been in the 

money loaning business for 35 years, I can tell you that there are 

certain tenets of lending you can’t get away from, no matter how 

much you want to do it. Certain things have to happen. If they 

don’t, you lose. It is just that simple. 

Mr. WATT. It is a risk. You are right. 

Mr. LUETKEMEYER. Just that simple. Everybody wants to say 

well, I can slice the bread thinner. I am a little smarter than the 

next guy. All I have to do is just tweak here, tweak there. I’m 

sorry. It doesn’t work. After 35 years, I have stubbed my toes 

against certain things stumbling over this. There are certain tenets 

that have to be there, that is it. 

And so my concern is that when we change these things and we 

loosen rules up—as you have seen over the last 6 years, Fannie 

and Freddie have had a resurgence. They actually now are profitable; they are turning a profit. So why in the world do you go back 

now and want to change those sound tenets of lending to loosen it 

up and head down the same path that caused the problem before? 

23 

Mr. WATT. First of all, you are absolutely right; we are in the 

risk business. And there is no way to get away from risk. You can 

make—any loan at some point can become risky. So what we do is 

on every loan that we back, we try to assess what are the risks associated with this loan. And we try to minimize those risks. Now, 

you can’t eliminate risk— 

Mr. LUETKEMEYER. With respect, I have one more question, and 

I see my time is about up here. 

Mr. WATT. Okay. 

Mr. LUETKEMEYER. With regards to—in your testimony, you also 

want to try to move a lot of stuff to the private sector. And I think 

that is laudable. That is a thing that we need to be doing. 

My concern is, though, that if you continue to compete with the 

private sector by lowering guarantee fees, by loosening lending 

standards, it makes it more difficult for the private sector to step 

in and do that. Would you agree with that statement? 

Mr. WATT. Yes. I agree with it generally. But at the same time, 

our responsibility is to assure a liquid housing finance market in 

the interim until you all do GSE reform. So we are balancing risk 

and availability of housing finance, which is what I said in my 

opening statement— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

ranking member of our Oversight and Investigations Subcommittee. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member, as well. And Director Watt, it was a preeminent privilege 

to serve with you for nearly a decade in Congress. You were always 

a voice of reason. And I see that you continue to be that voice of 

reason. 

I would like to talk to you about the FICO score that the GSEs 

are required to adhere to. Under this current FICO standard, we 

have a circumstance that allows bad credit for utilities and rental 

payments to be utilized when ascertaining a score, but the good 

credit that one has for these very same utilities and rental payments is not utilized. 

And I am mentioning this to you because I think we need a more 

inclusive model. I am not talking about doing anything that would 

in any way impair or prevent a good FICO score from being developed. I just think that it is fair—we have used this term ‘‘fairness’’ 

this morning, ‘‘fair play.’’ It seems fair to me that if you are going 

to use the adverse information, that we should use that information in a positive way when it is available for Fair Isaac to score. 

These FICO scores, as you know, are exceedingly important. In 

fact, they are everything when it comes to getting a loan. 

So can you please give me just a bit of intelligence on this in 

terms of how we might work with your office to try to expand and 

have a more inclusive credit scoring model? 

Mr. WATT. First of all, you are right—credit scoring is one of 

those areas where there have been— 

Chairman HENSARLING. Director Watt, is your microphone on? 

Mr. WATT. Did it go off? I’m sorry. 

Chairman HENSARLING. If you could pull it a little closer to you, 

please. 

24 

Mr. GREEN. Would you add these 30 seconds to my time, please? 

Chairman HENSARLING. I will consider it. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. WATT. Some things don’t change in this committee. 

So there are alternative credit scoring models that are beginning 

to be out there now. FICO is updating its credit scoring model. 

Vantage has a credit scoring model. There are several. And what 

we have done in this year’s 2015 scorecard is we have instructed 

Fannie and Freddie to evaluate these credit score—these alternative credit scoring models to see if we can get to a better place 

in this area. Not a race to the bottom. We don’t want credit 

scores— 

Mr. GREEN. Exactly. 

Mr. WATT. —that get more people the ability to get loans and are 

not reliable. So we asked them to evaluate the reliability of it. We 

asked them to evaluate the operational challenges that would go 

with implementing alternative credit scoring models. 

So this is an area that we are working aggressively on this year. 

We started it last year in response—well, not in response, but a 

number of people on this committee have written to me about the 

alternative credit scoring models, both on the Republican side and 

the Democratic side. It is not a partisan issue. So we are trying to 

figure out how we can do this, but do it in a reliable way and in 

a way that operationally doesn’t create angst in the entire market. 

Because what we do in this space could have some significant implications. 

Mr. GREEN. Thank you for exploring the possibilities. Because I 

concur with you, there are alternative models that seem to indicate 

that we have some opportunities. 

Let me move quickly to the Housing Trust Fund, because I think 

it is important for us to explain that when we—and you were 

here—developed the formula, if you will, we put a trigger in. And 

that trigger was placed there to prevent a person who might be in 

your position, who might have opinions that would vary from what 

we thought the law should require. So the trigger required that we 

not fund because of circumstances, and then it requires that we do 

fund because of circumstances. It allows circumstances to dictate 

the actions of the Director, as opposed to the will of the Director. 

I think it was a pretty good idea then. It seems like it is a pretty 

good idea now to take the Director to the extent that you can out 

of play. And this is no disrespect to you. It is just like we were trying to protect the process that could help the people that I was sent 

here to represent, a good many of whom don’t have as much in assets liquidity as others. 

Chairman HENSARLING. Very brief answer, please. 

Mr. WATT. I am happy to follow the statute that was written. 

And that is exactly what we have done. And I stand by that decision— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, Chair of the House Foreign Affairs Committee. 

Mr. ROYCE. Director, congratulations. It is good to see you again. 

Mr. WATT. Thank you. It is good to see you again. 

25 

Mr. ROYCE. Thank you. As you know, my concerns have always 

gone to these issues of moral hazard and over-leverage, whether it 

was a Republican Administration or a Democratic Administration. 

But I think until 2007, we probably could have considered some of 

my concerns hypothetical or philosophical. But after 2007, I think 

that over-leverage issue sort of proved a point. 

And looking at the headlines—the headlines read, ‘‘Government 

keeps pushing mortgage guarantees as risk index rises.’’ Here is 

another headline, ‘‘FHFA orders GSEs to start supporting affordable housing trust funds.’’ Now, surprisingly, the year here is not 

2005, it is 2015. 

And so we find the FHA today engaged in this race with Fannie 

and Freddie to see who can more swiftly crowd out the private sector, who can assume more risk on behalf of the American taxpayer. 

And I would just point out that this is kind of a frightening race 

here. Because, in my view, we have seen it before. The FHFA has 

joined sort of a moral hazard problem here. 

In December, you announced that the GSEs should begin to put 

more money into the coffers of housing advocacy groups through 

the Housing Trust Fund, established under the Housing and Economic Recovery Act. And you made this move, despite the fact that 

Fannie and Freddie have yet to repay a lot of the money due to 

the American people. We can argue about whether it is $200 billion 

or—but there was a lot of money lost at the end of the day because 

of over-leverage. 

So it is difficult to see how you can argue that as it is required 

by law, the GSEs are financially stable enough to begin the transfer of money to housing groups. Let me show you the ratios here. 

And I think this was pointed out earlier. Fannie Mae leveraged at 

341 to 1. Now, that is a capital ratio of .29 percent. Freddie Mac, 

153 to 1, and an equally concerning leverage ratio of .65 percent. 

You remember a decade ago, I was arguing against 100 to 1 leverage ratios. These ratios are excessive of that. 

And you said earlier in this hearing that the leverage ratio is not 

something the statute requires you to look at when resuming allocations. I have a different reading of that statute that I will share 

with you. What the statute requires is that you ‘‘shall’’ suspend allocations, not ‘‘may.’’ The statute reads, ‘‘shall suspend allocations 

if they would contribute to the financial instability of the enterprise 

or would cause the enterprise to be classified as undercapitalized. 

So in reality, the statistics cited earlier do come into play. So, Director, how can the enterprises be in this state with these leverage 

ratios—in one case 341 to 1—and not be deemed both financially 

instable and undercapitalized? That is my question. 

Mr. WATT. First of all, we put in place prudential stops if circumstances go back in the other direction. If we ever have a draw 

on the Treasury, that would automatically stop the funding of the 

Housing Trust Fund. 

Mr. ROYCE. But it is already undercapitalized, is the point I am 

making. 

Mr. WATT. We don’t have—when Fannie and Freddie were put 

into conservatorship and the preferred stock purchase agreements 

were entered into with Treasury, that suspended the capital of 

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26 

stand exactly what you are saying. But those two criteria don’t 

apply anymore, because they are in conservatorship. Every dime is 

going to the taxpayers if there is a profit. 

Mr. ROYCE. There is statutory language here that requires an 

end to the allocation. I think it is very straightforward. But I will 

close with this. 

Today I, along with many of my Republican colleagues, will reintroduce the Pay Back the Taxpayers Act. And this bill will ensure 

that money coming in from the GSEs will go to the taxpayers, in 

other words, will go to address this issue, instead of being diverted 

to the Housing Trust Fund. But thank you, Director. It is good to 

see you again. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, ranking member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman, and Ranking Member 

Waters. And thank you for being here, Mr. Watt. 

There has been a lot of discussion about the 3 percent down. And 

I am not sure if the suggestion is that a 3 percent down is reckless. 

I was looking at a study, V.A. has a 0 percent down and a lower 

foreclosure rate than the prime lenders. 

So is there any evidence that 3 percent is going to cause more 

foreclosures if 0 percent is not causing foreclosures? And what is 

it about 0 to 3 that creates this problem? 

Mr. WATT. I think, Representative Cleaver, the challenge is to 

look at lenders and make a determination; when the downpayment 

is lower, there is the potential that it could be a riskier loan. But 

when you pair that with other compensating factors—which this 

product does—you offset that additional risk. 

And that is exactly what we have done. Lending is about assessing the ability of people to pay. And what most people don’t realize 

is that probably 90 percent of the people who are underwater, who 

have no equity in their mortgages at this point, are continuing to 

pay their mortgages. 

Right? So that is not a criteria whether somebody is going to pay, 

whether you have 3 percent, 10 percent. It is about whether you 

want to have a home that you own, right? And so you assess those 

criteria. And there are substantial studies that suggest that—confirm that housing counseling, homeownership counseling, makes 

people better borrowers, more reliable borrowers. This program 

is—that is one of the compensating factors. And if all else fails, you 

have to have private mortgage insurance to back the loan. 

So it is not as if we have created a risky situation. These are not 

the loans that had no documentation, no resets after 90 days or 3 

years. These are not risky loans. And we have made that assessment based on research, not based on politics. Based on research, 

we have made that assessment. And I stand behind this decision. 

That is why I was happy to come here and have the opportunity 

to talk about the prudential compensating factors that we have put 

around this thing to make sure that you all understand that my 

philosophy has not changed; if somebody cannot pay a loan, they 

shouldn’t be given the loan. 

27 

If you look down there and say this person can’t pay this loan, 

it would be irresponsible for us to say that we should be making 

loans to those people, or that Fannie and Freddie should be backing those loans— 

Mr. CLEAVER. Yes. I think I heard you clearly. 

Mr. WATT. —to understand. 

Mr. CLEAVER. Maybe I have time for a quick question. Let’s remove the sociological issues, if people want to connect that to the 

loans. The economy is not healing for some people. We still have 

stagnant wages. And, in fact, hourly wages are actually ticking 

down in terms of keeping up with inflation. So if we are having 

stagnant wages and we are trying to heal the economy and housing 

is a significant part of healing the economy, having a housing market that is healthy, does it make sense then for us to put interest 

rates and downpayments high when we are trying to get the housing industry healed? 

Can we heal the housing industry without getting more people 

to buy houses, people who qualify, creditworthy people? Is there 

any other way to do it, to get people to buy more houses without 

making it affordable? 

Mr. WATT. Congress has given us this mandate: Do lending, back 

loans that are safe and sound, and provide liquidity in the market. 

We are constantly balancing those two objectives. That is what we 

are in business to do, and that is what we are planning to continue 

to do. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. And welcome back 

to—well, I guess this isn’t quite home turf, since we are visiting 

somebody else’s committee hearing room while ours is under some 

much-needed repair. But almost 2 years ago, I had a chance to ask 

your predecessor, Mr. DeMarco, about FHFA’s intentions as it related to new regulations in the lender-placed insurance market, the 

LPI market. And I urged Director DeMarco to make sure that any 

such regulations met a test of producing a fair and open marketplace for providers of LPI and for, more importantly, even the consumers, which in turn would produce potentially lower prices for 

these consumers. 

Can you please provide the committee with any kind of update 

in this particular area that has gone on? I know at that time he 

was looking at some rules, so— 

Mr. WATT. First of all, Acting Director DeMarco is to be commended and FHFA is to be commended for getting into this space. 

Because there was a lot of abuse going on. There were virtually no 

controls. And FHFA addressed some of those inappropriate practices by directing the enterprises to prohibit servicers or servicer 

affiliates from receiving compensation in the form of commissions 

for placing insurance, because there was a perverse financial incentive for placing insurance in these circumstances with affiliates or 

people who were paying commissions. 

We have formed a working group, because this is an issue that 

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28 

gage in this country. And we have set up a regulatory working 

group consisting of 14 State insurance regulators, the National Association of Insurance Commissioners, and 8 Federal regulatory 

agency representatives to try to figure out how best to attack this 

problem. 

Mr. HUIZENGA. And when was that formed? 

Mr. WATT. Beg your pardon? 

Mr. HUIZENGA. When was that formed? 

Mr. WATT. That was formed in 2013. 

Mr. HUIZENGA. Okay. And is there a status update? 

Mr. WATT. They have had seven meetings up to this point. And 

in the meantime, things have improved because of these interim requirements we imposed on Fannie and Freddie. But we are continuing to work on a set of guidelines that would apply across the 

whole housing industry. 

Mr. HUIZENGA. Do you have a timeframe/timeline of when that 

will be completed? I think anything that is in limbo like that is, 

probably needs to get wrapped up. 

Mr. WATT. It is hard to set a timeframe on a lot of these things, 

as you have noted. But we are going to do it as soon as soon as 

they come out with a set of recommendations. We are evaluating 

those. And we are— 

Mr. HUIZENGA. So they have not come up with those recommendations as of yet? 

Mr. WATT. They have not come up with those recommendations 

as of yet. 

Mr. HUIZENGA. Okay. 

Mr. WATT. And so we expect that to happen sometime during 

this year. 

Mr. HUIZENGA. Okay. All right. We will follow up on that. 

Now I am going to ask you a question as I was going back over 

some of the testimony from back then. I am going to ask you a 

question that I asked Mr. DeMarco, as well. 

Is the 30-year mortgage necessary, and why? 

Mr. WATT. Now you have gotten me into congressional territory. 

I think that is a decision that really is more appropriately made— 

I can tell you that demographics are changing. People are a lot 

more mobile than they used to be. And a 30-year mortgage was 

bottomed on people staying in the same place for 30 years, or that 

assumption. And on the fact that it would get you a lower payment 

if it—so there—there are a lot of factors that go into that. But that 

isn’t a— 

Mr. HUIZENGA. But isn’t that really— 

Mr. WATT. —decision that FHFA is going to make. That is a decision that I think is more appropriately made in the legislative context. 

Mr. HUIZENGA. Personally, I think it might be the private market 

space that is probably where most of that is— 

Mr. WATT. That is true also. 

Mr. HUIZENGA. I don’t know if you are aware of this. And I am 

going to quote this: ‘‘The Methuselah of mortgages has arrived; the 

50-year home loan.’’ That gets me very, very nervous when we are 

having these types of timeframes out there. But I appreciate it. 

Thank you, Mr. Chairman. 

29 

Mr. WATT. Mr. Chairman, just for his information, we don’t allow 

Fannie and Freddie to back 50-year mortgages. Thirty years is our 

limit. So, be clear on that. 

Chairman HENSARLING. In listening to your comments, it was 

one of the few times I agreed with you. I was about to yield you 

more time. But instead, we will turn to the gentleman from Texas. 

Mr. Hinojosa is recognized for 5 minutes. 

Mr. HINOJOSA. Thank you, Mr. Chairman. I apologize for not 

being here earlier, but I was at another committee where we were 

reorganizing. I want to say good morning and thank you to my 

former colleague, Director Watt, for being here today to give the Financial Services Committee an update on the changes to the housing finance system and FHFA’s role going forward. 

I believe that Fannie Mae and Freddie Mac share very important 

goals such as ensuring liquidity in the mortgage market and promoting homeownership. However, due to their financial trouble in 

recent years, we have seen attempts to not just reform them, but 

wind them down completely, and I don’t agree with that. 

I would like to go right into the questions. Director Watt, last 

year President Obama said that he would like to see Fannie Mae 

and Freddie Mac wound down and replaced by a governmentbacked mortgage bond insurer. Can you tell us where you stand on 

that proposal? And do you think this could negatively or positively 

affect the homebuying market? 

Mr. WATT. Representative Hinojosa, that is a subject that I am 

not going to express an opinion about. That is a legislative congressional decision. And just to kind of put it in perspective, when I got 

to FHFA, there were multiple visions or views about GSE reform. 

And I kind of took FHFA out of that discussion, because we were 

sending mixed messages. It wasn’t part of the statutory mission 

that FHFA has, which is to, in the present, guarantee liquidity and 

safety and soundness in the market. That is a congressional decision, not an FHFA one. 

Mr. HINOJOSA. I respect your answer. But I want to commend 

you, because since FHFA’s conservatorship of Fannie Mae and 

Freddie Mac, we have seen a stark change in the finances of GSEs 

for the better. And we thank you for your leadership and your 

being able to make those improvements. I especially like the $38 

billion in extra funds that you gave our Nation’s Treasury. 

I have another question. Late last year, Fannie Mae and Freddie 

Mac announced new lending guidelines designed to help more lowincome and first-time buyers afford homes, including a reduction of 

the minimum downpayment for a home from 5 percent to 3 percent. What are other proposals is FHFA looking at to encourage 

first-time homebuyers? And how is the agency making people 

aware of these initiatives that I have mentioned? 

Mr. WATT. We have a number of things already on the books. I 

don’t know that we are looking at any new proposals that I would 

indicate to you. But we have homeowner modification programs. 

We have the HARP program, which is a refinance program for people who are underwater but have been regularly paying their mortgage. And the 97 percent loan product. 

I think what we have tasked Fannie and Freddie to do is to in 

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30 

worthy people. And that is part of the 2015 scorecard. It was part 

of the 2014 scorecard. They operate in this area regularly. We 

evaluate what they propose. It is all research-based. And we try to 

make good, prudent decisions in the interest of safety and soundness and the interest of liquidity in the market. 

Mr. HINOJOSA. I want to ask my last question. What steps, if 

any, is FHFA taking to ensure that private capital is reentering 

the market? Because I can see some months where it—the numbers being—that people are buying new homes or used homes has 

been going up, and then suddenly they went down. So this is important to be on the private capital reentering the market. 

Mr. WATT. The major way is that we are doing aggressive risk 

transferring to the private sector. We are not holding onto these 

loans. We are transferring that risk back into the private sector. 

And we have tripled—quadrupled, really, the risk transfers since 

I have been there. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, chairman of our Oversight and Investigations Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. And welcome again, Mr. 

Watt. Over the course of your testimony, you have indicated that 

you are following the law and following the statute, which we appreciate, because we don’t always think that laws and statutes are 

followed. 

I want to follow up on Mr. Royce’s line of questioning in regard 

to the funding of the Housing Trust Fund. Now, you are obviously 

aware of Section 1337. And basically, we have a discussion about 

whether the GSEs are well-capitalized. And if they are undercapitalized, you really can’t fund the Housing Trust Fund. Would 

you agree with that? 

Mr. WATT. Yes. Well, no. 

Mr. DUFFY. Kind of? 

Mr. WATT. Not undercapitalized. But if they are not making a 

profit, I absolutely agree with you. 

Mr. DUFFY. They have to be well-capitalized. 

Mr. WATT. Capital is a whole different issue that basically when 

Fannie and Freddie were put into conservatorship, the capital considerations went away. Because basically, we don’t have any capital at this point. 

Mr. DUFFY. One of the drawbacks of statutes is you don’t get to 

split hairs. The language is usually pretty clear. And you would 

agree that the language in the statute requires that the GSEs are 

well-capitalized, not undercapitalized; correct? 

Mr. WATT. They— 

Mr. DUFFY. Before you can fund the Housing Trust Fund, you 

have to find that the GSEs are not undercapitalized; correct? 

Mr. WATT. No, I don’t think that is the case. 

Mr. DUFFY. You think the GSEs— 

Mr. WATT. It says I can’t make a decision that causes or would 

cause the enterprises to be classified as undercapitalized. But the 

decision about capital was not on my plate. That was in the letter 

that I wrote that reinstated the contributions. I specifically said 

that neither that provision nor the third provision was applicable 

31 

anymore, because they were in conservatorship. It was the only the 

first provision that was applicable to my decision. 

Mr. DUFFY. Can you direct me to the section of the statute that 

says unless the GSEs are in conservatorship? 

Mr. WATT. There is nothing in there that says unless they are 

in conservatorship. But we— 

Mr. DUFFY. Where did you come up with that? 

Mr. WATT. Beg your— 

Mr. DUFFY. Where did you come up with that? 

Mr. WATT. The conservatorship statute tells us what authorities 

we have in conservatorship. It wouldn’t be in the Housing Trust 

Fund statute. 

Mr. DUFFY. So it is your testimony that that trumps Section 

1337(b)? 

Mr. WATT. I think the preferred stock purchase agreements 

trump (b)(2), yes. 

Mr. DUFFY. So you are saying, just to be clear, that Section 

1337(b) doesn’t really apply, and that you have the authority to 

fund the Housing Trust Fund. Is that— 

Mr. WATT. That is correct, yes. If I hadn’t concluded that, I 

wouldn’t have done it. 

Mr. DUFFY. Would you mind sending me the legal analysis on 

that? Because the statute seems pretty clear. And I want to follow 

the statute for your testimony. So if you would help me out on how 

you have reasoned— 

Mr. WATT. I would be happy do that. 

Mr. DUFFY. —that would be wonderful. Just quickly, in regard 

to the Housing Trust Fund, how is that going to be funded? How 

is it going to be funded? 

Mr. WATT. How is it going to be funded? 

Mr. DUFFY. Yes. 

Mr. WATT. Out of the profits of Fannie and Freddie. 

Mr. DUFFY. Where do those profits come from? Is there any kind 

of a surcharge or tax or assessment? 

Mr. WATT. No, no, no. In fact, the statute specifically says there 

cannot be a surcharge to fund the Housing Trust Fund. And we 

have put out a rule that ensures that does not happen. 

Mr. DUFFY. Will it increase the cost, do you think, to the end 

home purchaser? 

Mr. WATT. No. 

Mr. DUFFY. In the form of— 

Mr. WATT. Because the statute says we are not allowed to increase the cost to the borrower. 

Mr. DUFFY. I know statutes say a lot of things. But sometimes 

it is applicable and sometimes not. 

Mr. WATT. Sometimes—all the time we try to follow the statute, 

though. 

Mr. DUFFY. I appreciate that. I want to just—Mr. Garrett and I 

had sent you a letter in regard to the GSEs lobbying. This was sent 

on December 11th, and we haven’t received a response from you 

yet. Did you receive that letter? 

Mr. WATT. Yes. Yes, sir, I did. 

Mr. DUFFY. Can we expect a response— 

Mr. WATT. Yes. 

32 

Mr. DUFFY. —in regard to— 

Mr. WATT. Yes, sir, you can. 

Mr. DUFFY. Can you give me— 

Mr. WATT. You might have gotten it yesterday. But I thought you 

all would be saying that we were doing it just in response to the 

hearing. 

Mr. DUFFY. We probably would. 

Mr. WATT. We take every inquiry we get seriously. And we try 

to go and get to the bottom of whatever— 

Mr. DUFFY. Are you going to continue to— 

Mr. WATT. —but we will respond— 

Mr. DUFFY. Are you going to continue the ban on GSE lobbying? 

Mr. WATT. I beg your pardon? 

Mr. DUFFY. Are you going to continue the ban on GSE— 

Mr. WATT. Yes. 

Mr. DUFFY. —lobbying? 

Mr. WATT. Absolutely, we are continuing the ban on GSE lobbying. 

Mr. DUFFY. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. Clay, 

the ranking member of our Financial Institutions Subcommittee. 

Mr. CLAY. Thank you, Mr. Chairman. And welcome back, Director Watt. How is the family? 

Mr. WATT. The family is good— 

Mr. CLAY. Good. Good. Thank you. 

Mr. WATT. —growing— 

Mr. CLAY. Okay. Thank you for being here. Although there are 

operational costs involved in requiring the GSEs to update the 

credit scoring model that they use in their seller service guidelines, 

the GSEs are still using the FICO classic model in their seller 

servicer guidelines, despite the fact that newer versions of FICO, 

including FICO 2008 and 2009 are currently available in the marketplace. Given this, how concerned are you that the failure to 

compel the GSEs to use their most updated credit scoring models 

in their seller service guidelines may not be giving the GSEs the 

best available assessment of whether a borrower is a good credit 

risk, and may be unnecessarily restricting credit to eligible borrowers? 

Mr. WATT. Your question illustrates the difficulty of this. Because to move from FICO classic to FICO 8 or 9 is the same challenge that we have to move from FICO classic to Vantage or some 

other credit scoring model. So what we have done is in the 2015 

scorecards, we have instructed Fannie and Freddie to evaluate both 

the feasibility and the operational complexity challenges related to 

using updated or alternative scoring models. 

Now, feasibly, are these credit scoring models better than the 

ones that—than FICO classic? We think they are, but we have to 

document that. And then operational feasibility relates to what 

would it take to change not only Fannie and Freddie, but the industry, to using alternative credit scoring models. Because turning 

that ship is a major task; right? 

Mr. CLAY. So have the credit scoring agencies—have they been 

receptive, or have they pushed these new versions? 

33 

Mr. WATT. Yes, they have. FICO has updated its credit scoring 

model. And Vantage and others are—we are regularly talking to 

them about this conversation— 

Mr. CLAY. Okay. 

Mr. WATT. —yes. 

Mr. CLAY. All right. Let’s move over to HARP. Director Watt, 

FHFA recently launched an interactive map showing that there are 

more than 722,000 eligible households nationwide that could still 

benefit from HARP, a program that allows certain homeowners 

with GSE-backed loans to refinance into mortgages with lower interest rates, thereby reducing their payments by as much as $200 

per month while also reducing risk to the taxpayer by reducing 

their likelihood to default on their mortgages. 

What are you—what is your agency doing to ensure that households are aware of this refinancing program? 

Mr. WATT. First of all, we are very proud of that map. Because 

it gets you to the people who are eligible for HARP refinancing; 3.2, 

3.3 million people have already taken advantage of HARP. There 

are over 700,000 who would still be eligible for it, who would get 

an advantage of taking advantage of it. And we are trying to get 

to those people. 

Now, let me just emphasize that these are people—every single 

one of them, all 3.3 million of them, who have no equity in their 

home. Their homes are underwater. And they have been continuing 

to pay their mortgage, despite the fact that they are underwater. 

That takes us back—this notion that you have to have a downpayment, you have to have equity in a house for people to continue to 

be reliable homeowners and borrowers, it is just in the face of all 

of that. So we are trying to get to those people. We have done a 

series of meetings around the country in the highest concentrations 

where those people are and trying to get them to take advantage 

of the HARP refinance program. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, Mr. 

Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. Mr. Watt, thank you 

for coming back. I also appreciate your dedication to following the 

law and following the statutes. I hope it is an example you can set 

for the rest of the Administration. 

Regarding the statutes, I think we have talked a little bit today 

about the statute regarding the suspension. What statute did you 

rely on in ending the suspensions? 

Mr. WATT. The Housing Trust Fund Statute, the Affordable 

Housing Allocations. That is in HERA. It was reauthorized by Congress in HERA. 

Mr. MULVANEY. Correct. Oh, okay. I misunderstood what you are 

saying. But that is the statute that says when to suspend, correct? 

Is there— 

Mr. WATT. Yes. 

Mr. MULVANEY. There is no statutory guidance for you on how 

to end a suspension, is there? 

Mr. WATT. It says the Director shall temporarily suspend. I 

would assume that the word ‘‘temporarily’’ has an inverse that says 

34 

you can unsuspend. Technically, you may be right that there is no 

statute that specifically says— 

Mr. MULVANEY. Let’s walk through it then. 

Mr. WATT. —that you do this if you unsuspend. But you apply 

the same criteria to suspend and unsuspend, and that is what we 

did. 

Mr. MULVANEY. I think that is fair. But by the same token, the 

mandate to suspend is not—there is no discretion there. You shall 

suspend if you find one of these three conditions, correct? 

Mr. WATT. Yes. 

Mr. MULVANEY. Okay. 

Mr. WATT. And I interpret that the same way; you shall 

unsuspend if you find that these three things don’t apply anymore. 

Mr. MULVANEY. These things don’t apply. Then let’s walk 

through them. It says that they contribute—contribute—to the financial instability of the enterprise, causing—would cause the enterprise to be classified as undercapitalized or preventing it—preventing it from doing their capital restoration plan. But I heard 

you say something to Mr. Duffy earlier that was new, which is a 

reference to Fannie and Freddie making a profit. That is not in the 

statute, right? That is not one of the factors you can consider in 

making a decision to suspend or end a suspension, is it? 

Mr. WATT. Number one says are contributing or would contribute 

to the financial instability of the enterprises. If you are evaluating 

the financial stability or instability of the enterprise— 

Mr. MULVANEY. Is Fannie stable? 

Mr. WATT. —the primary factor you are looking at is whether 

they are making money or not— 

Mr. MULVANEY. Oh, really? So whether a bank is making money 

is the only issue we look at as to whether or not they are stable? 

Is that what you are saying? If Bank of America is making a profit, 

then therefore, they must be stable? 

Mr. WATT. I don’t make decisions about Bank of America. I am 

following the statute that was written that applies to the— 

Mr. MULVANEY. And I am trying to press you on that. 

Mr. WATT. —Federal Housing Finance Agency. 

Mr. MULVANEY. Is Fannie stable? 

Mr. WATT. We think it is. And we built into the decision to reverse the suspension prudent, reasonable safeguards in the event 

that— 

Mr. MULVANEY. Again— 

Mr. WATT. —they go back in the other direction. 

Mr. MULVANEY. —and I appreciate that, and I read that in the 

letter. It says that if we ever have to go back to the Treasury, we 

will suspend the payments. I get that. Not in the statute, is it? The 

protection you have supposedly put in the letter is not part of the 

statutory consideration. 

I hear what you are saying, Mr. Watt, and I think it is a good 

idea. But it is not statutory. You can’t take the position that you 

are following the statute and then say well, really what we are considering is profitability, and don’t worry, because we put something 

in the letter that says if we ever have to go back to the Treasury, 

we will stop the suspension. You are rewriting the law, aren’t you? 

35 

Mr. WATT. I am following the conservatorship statute there, Representative Mulvaney. 

Mr. MULVANEY. Come with me then to number two, regarding 

the undercapitalized. Because I think you have taken the position 

several times that your agreement with the Treasury moots this 

section. Is that fair? 

Mr. WATT. Yes. 

Mr. MULVANEY. That—my understanding—and again, I am new 

to this—is that your agreement with Treasury is an agreement, 

right? 

Mr. WATT. That is correct. 

Mr. MULVANEY. How does an agreement trump the law? 

Mr. WATT. I think the law got trumped when they went into conservatorship and the taxpayers had to ante up $187 billion and 

there had—and so an agreement was made. That was before I got 

there. I didn’t negotiate the agreement. 

Mr. MULVANEY. But you would agree with me typically— 

Mr. WATT. The agreement was in place when I became the Director of this agency. 

Mr. MULVANEY. —typically, an agreement between one agency 

and another department of government cannot trump the law. You 

can’t get around the law— 

Mr. WATT. I absolutey agree with that. Right. 

Mr. MULVANEY. So if the conservatorship statute doesn’t explicitly repeal Section (b)(2), then Section (b)(2) is still valid law. 

Mr. WATT. I don’t agree with that. But I understand what you 

are saying. I just disagree with you. 

Mr. MULVANEY. Why don’t you agree with that? If the conservatorship statute doesn’t speak to (b)(2), why is (b)(2) still not 

good law? 

Mr. WATT. It just doesn’t apply. I don’t—I am not sure— 

Mr. MULVANEY. Well, what is your— 

Mr. WATT. We are engaging in a legal argument here that— 

Mr. MULVANEY. That is what we are supposed to do, though, isn’t 

it? 

Mr. WATT. If you all didn’t want to fund the Housing Trust 

Fund, you have the authority to stop the funding of the Housing 

Trust Fund. 

Mr. MULVANEY. And we exercised that authority, didn’t we? 

Mr. WATT. Don’t expect me to disregard the law and do it for 

you. If you want to do that, that is— 

Mr. MULVANEY. I would suggest to you, Mr. Watt, that we did 

just that. We said look, under these certain circumstances, we don’t 

think we should be funding the trust fund, and all we are asking 

you to do is follow the law. And if you believe that it is undercapitalized or you believe it is unstable, then you should stop the 

payments. I yield back. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from California, Mr. Sherman, for 5 

minutes. 

Mr. WATT. Mr. Chairman, do you think we could take a 2-minute 

break? 

Chairman HENSARLING. The Chair declares a 5-minute recess. 

[recess] 

36 

Chairman HENSARLING. The committee will come to order. Members will please take their seats. The Chair now recognizes the gentleman from California, Mr. Sherman, for 5 minutes. 

Mr. SHERMAN. Mel, welcome back. The only thing that would be 

better than seeing you at a distance would be having you close at 

hand, but I have been—I have taken your advice on so many issues 

involving financial services, and I am sure to get some more. I look 

forward to your input over the next 5 minutes. 

Good move on the Housing Trust Fund. I want to commend our 

colleague, Mr. Ellison, for organizing the letter, and unless he objects, I would like to put that in the record of this hearing. And 

so, I request unanimous consent to put this fine letter in the hearing. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. SHERMAN. And to commend Mr. Watt for his actions. 

First, a kind of a technical question. The HUD-1 is being phased 

out by the new integrated mortgage disclosure form that combines 

the TILA, or T-I-L-A RESPA forms and is intended to give consumers a better understanding of all itemized line item costs of the 

home closing. I wonder if you are focused on this rule, and what 

steps, if any, has the FHFA taken on this rule to make sure consumers are fully informed? 

Mr. WATT. I believe that is under the Consumer Financial Protection Bureau’s jurisdiction. We haven’t been actively involved in 

it. I do meet regularly with the Director of the Consumer Financial 

Protection Bureau to make sure that we are not at odds. 

And we are also members of the FSOC committee together, 

which allows us to exchange ideas at that level. But we are not directly involved in that. 

Mr. SHERMAN. I am sure that you are focused more on real estate 

lending than some of the more general folks involved and they benefit from your input. Your predecessor pushed for a lower conforming loan limit. You demonstrated your wisdom in going in a 

different direction, an action that has done more than anything 

else to impress me with your wisdom. 

Do you see that ugly proposal rearing its head again any time 

soon? 

Mr. WATT. It has to because statutorily it has to be reviewed regularly and so we are almost constantly in the process of reviewing 

conforming loan limits. And so, yes, it will raise its head again. 

Mr. SHERMAN. I look forward to continued wisdom on your part, 

and I yield back. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from New Mexico, Mr. Pearce, for 5 

minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. Thank you, Director. I 

know that we haven’t always agreed but I have always admired 

your fine language and straightforward responses, and I find myself admiring that today. 

So as we look back to the problems that put you into conservatorship, we found that Fannie began, and then everyone began, to expand the number of loans that were given to people who probably 

shouldn’t have gotten them. 

37 

And the OIG in 2012 found that Fannie—FHFA was somehow, 

somewhat responsible because they overlooked the fact that Fannie 

was beginning to relax its underwriting guidelines. They were beginning to buy loans that they said they wouldn’t buy. And they 

didn’t accomplish that with a page in law. They accomplished it 

with variances. 

And so I guess my question is, what are you all doing to see that 

the agency doesn’t go around the rules again? They were being 

pushed, not by the White House. You said before you are independent from the White House. I just wonder if you are independent from us. 

Because as Members of this Congress and this body, we are 

pushing for the relaxing of those standards so that people could get 

loans. And I hear some of the same language today. 

So what are we doing to make sure this doesn’t occur again? 

Mr. WATT. First of all, at that point Fannie and Freddie were not 

in conservatorship, and so the regulatory role was a lot looser than 

the conservatorship role that we are playing now. We are involved 

in virtually every decision that Fannie and Freddie make, and we 

take very seriously our statutory mandate, both to do things safely 

and soundly, and to do things in a way that will provide liquidity 

in the housing finance market. 

And that is why I said in my opening statement that we are constantly walking that balance. So we would be as responsible for 

those decisions now as Fannie and Freddie would be because they 

are in conservatorship, and as part of our conservatorship. 

Mr. PEARCE. I understand, but someday they will be out of conservatorship, and so I again wonder about the oversight mechanism that will take a look at what they are doing. Because it was 

them that facilitated. 

If Fannie had not bought those mortgages that were never going 

to pay off, and people knew they would never pay off—they didn’t 

care because they were able to get rid of them out of the banks and 

send them on to someone else and let them worry about it. And so 

as we go through into the future, I worry about that same thing. 

I wonder also, so Fannie and Freddie are making a profit and so 

I guess you were talking about the models that you all have done. 

Do you have models that tell you at what rate of growth we are 

going to start experiencing troubles? Should we increase our surveillance? What rate of growth would that be? 

Mr. WATT. We don’t do it at what rate of growth— 

Mr. PEARCE. Well, whatever you have. 

Mr. WATT. We do it on a loan-by-loan basis and we set prudential 

standards that apply to loans so we make sure we never get to determining where you fall off that cliff or don’t fall off that cliff. We 

are nowhere close to the level of risk that was being— 

Mr. PEARCE. Let me claim my time. Having run a business with 

50 employees, I find it beyond imagination that you can take a trillion dollar portfolio and look loan-by-loan, with all due respect. I 

appreciate your saying it, but I find that really hard to believe. 

Mr. WATT. I apologize. That probably was an overstatement. But 

we set prudential standards that have to apply to loan-by-loan— 

Mr. PEARCE. But those standards existed before. 

Mr. WATT. Yes. 

38 

Mr. PEARCE. Those standards existed before and under the table 

or wherever, the people who were getting tremendous bonuses at 

that period of time began to cheat the system. They began to rig 

it to where they could get bigger bonuses and so until you re-evaluate human nature. 

The last point I think I want to make is that another great pressure in the system was the low interest rates. And so at some point 

the Federal Reserve, whether they like it or not, is going to have 

to go up on interest rates. That is going to put more pressure into 

the housing market. 

I see that if we don’t have our ship really right when it goes into 

the troubled waters of lower growth rates, higher interest rates, 

that we are going to have exactly the same thing, the same problems with an agency that is way undercapitalized. 

You have to admit that they are in shaky financial shape as we 

move forward, and if we get into troubled waters. 

With that I yield back my time, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentlelady from Wisconsin, Ms. Moore, the 

ranking member of our Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Thank you so much, Mr. Chairman, and Ranking 

Member Waters. It is so good to see the Honorable Director Watt 

here with us. He is here in really good form. Just the facts. And 

really it is a relief to have you around. And the chairman just rode 

off into the sunset. 

I would like to start out by just sort of making a comment before 

I engage the Director in a question. Because much has been said 

today about the creditworthiness of borrowers with the 3 percent 

down, and there has been much intimation that lower-income borrowers were the cause of the financial crisis in 2008, so I just 

would like, Mr. Chairman, to ask unanimous consent to put into 

the record a report done by Manuel Adelino from Duke University, 

and Antoinette Schoar of MIT. 

Chairman HENSARLING. Without objection, it is so ordered. 

Ms. MOORE. Thank you. And Felipe Severino from Dartmouth. 

And also a seminar from Harvard Business School and MIT. 

Chairman HENSARLING. If the gentlelady will suspend, we seem 

to have a little audio problem here with the gentlelady’s microphone. Maybe you ought to hit it once or twice. Try again. 

Ms. MOORE. Thank you. This is a 42-page report, Mr. Director, 

and Mr. Chairman. But its conclusions are that the higher default 

rates can be attributed to loans made to middle- and upper-income 

folks but not low-income folks. And so I just wanted to clarify for 

the one millionth time that the lower-income borrowers were not 

the primary reason for the financial meltdown. 

I don’t know if you have any comment about that research, but 

I would like to enter that into the record. 

Mr. WATT. I am glad I don’t have to participate in that debate 

any more. 

Ms. MOORE. Thank you. I was looking through your prepared testimony, and you talked about mortgage servicing, and I guess I 

didn’t—it wasn’t really clear to me through your testimony what 

was the product of the—there haven’t been any changes in the 

39 

compensation structure, better aligning of servicers and senses 

with those of the enterprises. 

And I was wondering how that translated into better mortgage 

servicing for customers? 

Mr. WATT. That is a very difficult subject because it is massive. 

What essentially has happened over time as a result of the meltdown is that servicing went from just collecting money on mortgages to a much, much more difficult process of dealing with people 

who were in default. 

And so that whole industry has evolved, and most of it was done 

originally by lenders themselves in-house, and much of it now has 

gone to outside people who specialize in servicing. And that has 

created a set of issues that we have had to deal with because some 

of them, even though they might have been better servicers, were 

not necessarily as financially sound for the long term, so we have 

had to deal with that. 

There is a wonderful study that was just put out by the Urban 

Institute that talks about that evolution and the costs that have 

been associated with servicing that, where you could service a performing loan for like $50 a loan, now it is up over to well over 

$2,000 as a result of the increased responsibilities for nonperforming loans. 

But it is a very difficult area, and we internally at FHFA have 

had difficulty because this whole meltdown has put stresses on the 

servicing industry. I made a speech over at Brookings where I said 

it was easy to service when all you had to do was collect money. 

It is very difficult servicing mortgages now when people are in— 

Ms. MOORE. Reclaiming my time, I would assume that—well, I 

have another question. 

Chairman HENSARLING. The gentlelady may have another question. She is just simply out of time, so she can submit the question 

for the record, and the witness can respond as quickly as possible. 

The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. Mr. Watt, it is good 

to see my friend from Charlotte. 

Mr. WATT. It is good to see you. 

Mr. PITTENGER. You seem to be relishing your new job, and we 

wish you well. 

Mr. WATT. Thank you. 

Mr. PITTENGER. Frankly, we want you to be successful. And as 

noted by our comments today, we share—or have the concern that 

what would come out of the current policies—easy credit, we believe was complicit in the housing crisis that we have just previously experienced. 

Mel, as you know, former Acting Director DeMarco proposed 

these increases for the guaranteed fees that GSE’s would charge 

the lenders. And under your leadership you suspended the implementation of those increases. 

This last December the CBO made a public statement, a report 

that suggested how we should attract new capital into the secondary mortgages, and I could quote them. They stated, ‘‘PolicyVerDate Nov 24 2008 16:23 Aug 06, 2015 Jkt 095045 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\95045.TXT TERRI
40 

makers should continue to increase the two GSEs’ guarantee fees 

to attract new private capital to the secondary market.’’ 

And even a small increase in guarantee fees from the present 

level would allow private firms to immediately compete for the 

highest quality loans. You have also stated that you want to find 

ways to bring additional private capital into the system in order to 

reduce taxpayer risk. 

Now for your own decision, you have chosen to go against the 

former Director, and you have chosen to go against the thinking of 

the CBO. If you are not willing to increase the guarantee fees, 

what additional steps would you recommend to increase the role of 

private capital, and to decrease the role of exposure of Fannie and 

Freddie, and frankly, the American taxpayer? 

Mr. WATT. Let me just put in perspective one thing. I have never 

done anything in opposition to the former Acting Director. I have 

the greatest amount of respect for Acting Director DeMarco and the 

decisions— 

Mr. PITTENGER. Contrary to his proposal. 

Mr. WATT. Yes. So I just want to be on record as making that 

clear. And I have taken some abuse for saying that, but I just have 

to say it. 

The primary means that we are using is to test different risksharing models, and they have been very successful. We have tripled, quadrupled the amount of risk-sharing we have done in the 

1 year that I have been there. 

The enterprise has had a goal of $30 billion in 2013. We increased it in the scorecard to $90 billion and shot right past it before the third quarter of 2014 was over. We have increased it again 

in the 2015 scorecard. We are encouraging them to look at different 

risk-sharing alternative models to do it, not just the ones that have 

already proven successful. 

We have encouraged them to look at whether it is practical to 

even go back and risk-share some of the legacy book of loans. All 

of this risk-sharing we have done essentially have been with new 

loans, the more pristine loans. So we are very active in that space. 

We are also looking at the g-fee question. The conclusion that 

you reached that we are not going to change or are going to change 

I think is premature. We just don’t know yet whether we are going 

to change it or not, and we are taking into account the study that 

was done, our own study, the input that we got to a series of very 

cogent questions about how g-fees should be set, what factors 

should be considered in setting guarantee fees. 

And when we come out with our report, hopefully by the end of 

this quarter, I think we will add a lot of information. In fact, even 

in the request for input, we put a lot of information out there that 

people had never known about how g-fees were set. 

Mr. PITTENGER. Quickly, may I ask, you have suggested—or you 

have stated one of your policy changes is that you would allow 

these downpayments to be as little as 3 percent. And you stated, 

well, there are offsetting measures that you implement. 

Would you give more clarity to what those are? Given that we 

believe that easy credit—you saw the chart earlier—was a major 

factor in the current demise. 

Chairman HENSARLING. Very brief answer, please. 

41 

Mr. WATT. Homeownership counseling, mortgage insurance, private mortgage insurance, higher FICO scores; there are a number 

of factors that we are taking into account that would offset the 

lower downpayment. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. Ellison. 

Mr. ELLISON. Thank you, Mr. Chairman, and Ranking Member 

Waters. My colleague, Brad Sherman, beat me to it about putting 

the letter that we sent you into the record, but I just wanted to 

say that I was glad to see that we had 61 Members of Congress, 

including almost half of this committee agree that your action to 

end the temporary suspension of contributions to Fannie and 

Freddie to the Housing Trust Fund was the right thing to do. I am 

so very happy about it. The letter is already in the record so I don’t 

need to enter it in, but I just want to make note of that. 

And I also want to comment, too, that it is true that you have 

to take a lot of questions from folks who believe that the real problem of the crisis of 2008 was GSEs and borrowers. But it is also 

true that you have to contend with people who think that you 

ought to be moving faster in the other direction. 

And I know that because I have had constituents of mine say, 

well, why doesn’t Director Watt do this and do that and move 

quicker, things like that. 

I think that one of things that your office has done after taking 

a lot of care, a lot of time, and a lot of research, is decide to review 

the process of the arm’s-length transaction and not doing any 

arm’s-length transactions and reviewing that policy. 

I wonder, could you talk about some of the thinking that you entertained as you were reviewing that policy and why it is that you 

came up the way that you did? 

Mr. WATT. There was a concern that if you allowed a borrower 

to default and then turn around and buy a piece of property at a 

lower rate that you would be incentivizing that kind of negative behavior. And that had kind of taken hold and was wagging the dog. 

There probably are 1, 2, 3 percent of the people in the world who 

could think that far ahead that they would default on the loan and 

then after foreclosure go back and buy it at a lower price and come 

out better. 

But we thought the moral hazard, which is what people were 

calling that, we could minimize that by putting some prudential 

factors around that decision, and so that is what we did. It is not 

automatic that somebody can do that, go back and buy the home 

back for a lower price. 

And we put a time period on it so that we could test it going forward to make sure that we didn’t do something that was irresponsible. But it was a slow, evaluative research process, as are every 

one of these things. 

You kind of put your finger on something. What I found in this 

position is that there is nothing generally as simple as I thought 

it was, right? All of these decisions are very difficult and require 

good research, and that is what we try to bring to every decision. 

Mr. ELLISON. Yes, I just want to also say that you have been 

available to talk to everybody who wants to talk to you. You have 

42 

met with ordinary homeowners, you have met with policymakers. 

You have done an exhaustive thing, and I want to commend your 

staff. Actually, you have a pretty good staff member, Carrie Johnson. She used to work at my office, and she has gone on to bigger 

and better things, but I am glad she landed in the right place over 

there. 

So could you just talk about why you think it is so important to 

do all the outreach you have done and consult everybody you have 

consulted and do all this research you have done? 

Mr. WATT. I think one of the Members over here pointed out that 

he appreciated plain talk. There is a lot of misinformation in this 

territory, and I think the more you can kind of break things down 

and explain them in terms that borrowers can understand, that the 

public can understand, de-mystify this whole process, the better off 

we are. 

But most of the outreach we have done in going out has been 

about specific things that would benefit borrowers, such as the 

HARP program, or the neighborhood stabilization initiative in Detroit. I have kept a very, very low profile. I have no interest in 

being in front of a camera. 

Mr. DUFFY [presiding]. The gentleman’s time has expired. 

Mr. WATT. We have a different approach to it. 

Mr. ELLISON. Thank you, sir. 

Mr. DUFFY. The Chair recognizes Mr. Rothfus from Pennsylvania 

for 5 minutes . 

Mr. ROTHFUS. Thank you, Mr. Chairman. Can you hear me? 

Director Watt, welcome back to the committee, for a couple of 

hours anyway. I want to talk a little bit about the 3 percent downpayment program. 

Fannie Mae, in its 10Q that it filed with the SEC, their third 

quarter 2014, mentioned the program, and here is what they said. 

‘‘We also plan to offer a 97 percent LTD ratio product to all customers in 2015. To the extent we are able to encourage lenders to 

increase access to mortgage credit, we may acquire a greater number of single family loans with higher risk characteristics than we 

have acquired in recent periods. However, we believe our singlefamily acquisitions will continue to have a strong overall credit risk 

profile, given our current underwriting and eligibility standards 

and product design.’’ 

So it seems to me that Fannie Mae, in its filing with the Securities and Exchange Commission, has admitted that the program is 

going to result in loans with a higher risk. Would you agree with 

that assessment? 

Mr. WATT. I have admitted today too, that that possibility exists 

if you are not careful, which is exactly why we are being careful. 

That was a third-quarter analysis, and you notice they didn’t announce this until December because we were putting all of these 

constraints around them to make sure that we minimized that risk. 

Mr. ROTHFUS. So if I looked at when they file a 10Q for the quarter we are in right now, I would not expect to see something like 

that? 

Mr. WATT. You may see something similar to that, yes. Because 

10Qs, as you know, are designed to give the public and people out 

there the worst possible case that you could present. 

43 

Mr. ROTHFUS. And awareness of the risks. 

Mr. WATT. That is right. 

Mr. ROTHFUS. The Administration in 2011 released its so-called 

White Paper entitled, ‘‘Reforming America’s Housing Finance Market.’’ On page 14 of that document, the Administration recommends 

that: one, the FHA market share should be reduced; two, FHA 

should return to its pre-crisis role as a targeted provider of mortgage credit access for low- and moderate-income Americans; and 

three, FHA mortgage insurance should be increased. 

Moreover, the Administration recommends a coordination between Fannie, Freddie, and the FHA to help ensure that the private market, not FHA, fills the market opportunities created by reform. 

Do you believe the recent policy announcement by HUD, effective 

yesterday, to lower FHA annual mortgage insurance premiums by 

50 basis points will affect the return of private capital to the markets? 

Mr. WATT. I don’t have an opinion on that, Representative, because HUD is not under—FHA is not under my jurisdiction and 

HUD is a part of the Administration. We are an independent regulatory body. 

Mr. ROTHFUS. How many new homeowners had you anticipated 

with the 97 percent LTD program? 

Mr. WATT. I’m sorry? 

Mr. ROTHFUS. How many new homeowners have you anticipated 

with the 97 percent LTD— 

Mr. WATT. It is a very, very small percentage of the overall portfolio, will be a very small—we anticipate that it will be a very 

small percentage of the portfolio of both Fannie and Freddie. And 

we have those numbers. I am not sure I can access them quickly 

enough to give them to you here— 

Mr. ROTHFUS. We will follow up with you on that. 

Mr. WATT. —but we will be happy to provide them to you. 

Mr. ROTHFUS. When we talk about the 3 percent downpayment, 

you have been talking a little bit about the creditworthiness of people paying back their mortgage as they are able to pay it back. But 

we do have an issue out there with people who are underwater. 

And one of the concerns I have is, when you have institutions 

such as Fannie and Freddie and the scale that they are able to influence the market, coming up with a program like this—I read an 

article just this weekend, and you may have seen it in the Washington Post, about a family in Prince George’s County where they 

have a $550,000 mortgage but the home is worth $480,000. 

And while that family may continue to pay on that mortgage, 

there is really another issue here, and it is families who do not feel 

as though they are getting ahead, and families who may feel 

trapped in their house. 

And when we have a program that has a chance to encourage 

this—we saw a significant increase in mortgages that were underwater following the crisis. What would you say to a family like 

that, who buys into a program? 

Mr. WATT. They are in a very difficult situation, and I have been 

in rooms with them and had discussions with them, and all you 

can do is tell them you regret that they are in a situation, and we 

44 

are trying to make sure that future borrowers don’t get themselves 

in that same situation. 

Mr. DUFFY. The gentleman’s time has expired. The Chair now 

recognizes the gentleman from Delaware, Mr. Carney, for 5 minutes. 

Mr. CARNEY. I hope this doesn’t mean I have to sound as smart 

as Mr. Foster. Mr. Chairman, Ranking Member Waters, thank you 

for the opportunity to ask a few questions. 

Mr. Director, welcome back to the committee. We certainly miss 

your common sense and straight talk here, and personally I miss 

your North Carolina drawl over my right shoulder most of the time 

during the hearings. 

You have said several times that you are not going to comment 

on the specifics of GSE reform; that is a legislative responsibility. 

But you have made some public comments on whether or not it is 

necessary. 

Could you comment for us now about the sustainability of the 

current situation, what we should be concerned about and your 

thoughts on that, without going into any specifics about what we 

should do? 

Mr. WATT. There is nothing worse, I have found, in this area of 

the market than uncertainty, and the longer this drags out, the 

more uncertainty there is. So you have that risk and imperative for 

Congress to do something. And that is not about what they do. It 

is about providing more certainty. 

We have challenges at Fannie and Freddie maintaining an employee base in this environment because they don’t know what the 

future of Fannie and Freddie is. So, there are multiple implications 

that follow from the failure to do GSE research. 

Mr. CARNEY. So would you say it should be a high priority for 

us, for the Congress, and the Administration to get that done? 

When I first came here, the former chairman was criticizing the 

Administration for not doing anything on GSE reform. The former 

ranking member, Mr. Frank, was criticizing the Republicans for 

not doing anything on GSE reform. 

There have been a lot of proposals. I am part of a team with Mr. 

Himes and Mr. Delaney that has come up with a proposal that I 

would like to talk to you about, but do you think it is time for that 

to get done? 

Mr. WATT. I would say there are implications for not doing it. 

For me to put a priority on it, I think is an inappropriate role for 

me, because there are a lot of things that Congress deals with that 

are priorities, and that is just not my role, to set those. 

Mr. CARNEY. So one of the things that our legislation does is invite—require private capital to be in a first-loss position over an 

explicit Federal guarantee, in some ways similar to the White 

Paper that Treasury presented here in this chamber when you 

were a member of the panel 4 years ago. 

You have done some of that in terms of—my question is, what 

is the appetite for private capital to enter into this space, and do 

you have any sense as to what the premium might be for that firstloss position? 

Mr. WATT. Private capital, there is an appetite. I don’t know that 

I can assess the magnitude of the appetite, but I think they are 

45 

playing an important role in the availability of housing finance in 

this country—private capital, that is—and we are trying to facilitate that role by taking loans off of their books so that they can 

make more loans. That was the whole philosophy under which 

Fannie and Freddie were founded in the first place. 

And we are facilitating it through transferring risk back to the 

private sector. But that still does not negate the importance of providing certainty in the future by doing GSE reform. 

Mr. CARNEY. Well, thank you. A number of us, as I said, are 

working on that, and we have had discussions with Members of the 

Senate, and with Democrats and Republicans both off and on this 

committee, and hopefully there will be an opportunity in this Congress to move something forward that basically contains a Federal 

guarantee—I happen to believe—the question was asked to you 

earlier about the importance of a 30-year fixed mortgage and you 

had some observations about that. 

I happen to believe it is important from an affordability perspective, and the only way to sustain that is through some government 

guarantee. 

Let me just close by thanking you. I was one of the Members who 

signed Congressman Ellison’s letter requesting that you end the 

suspension of the fee to fund those two, the Housing Trust Fund 

and Capital Market Fund. I appreciate your decision to do that, 

and good luck to you. 

Mr. WATT. Thank you. 

Mr. DUFFY. The gentleman’s time has expired. The Chair now 

recognizes the gentleman from Arizona, Mr. Schweikert, for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. Is it Chairman 

Duffy now? 

Director Watt, earlier you said something I truly appreciate and 

I wish everyone had sort of embraced, that your current position 

is substantially risk management. And I am not sure a lot of folks 

appreciate that really is the core of your job at this moment. 

But I have a handful of things I wanted to run through, and 

there is never enough time for all the questions. First one, you had 

an interesting discussion around servicing. I accept that a lot of 

this servicing can actually be fairly complicated, but a couple of 

mechanics. 

For a low-cost servicer, great. The ability to transfer impaired 

paper that may need some additional love and touches to a specialty servicer that deals with impairment issues. How is that harmonization of servicing standards that I believe your folks have 

been working on, do you know where progress is? 

Mr. WATT. We are making progress. We encountered a different 

set of circumstances after the meltdown. We went from a situation 

where lenders were primarily doing their own servicing to a situation where they wanted to get out of the servicing business—it was 

either too complicated or because they had to have higher capital 

requirements if they stayed in it. Various and sundry reasons. 

And so a lot of the servicing rights got transferred, and that imposed upon FHFA and Fannie and Freddie the responsibility to 

look closer at not only the ability to service a loan but what are 

46 

the longer-term implications of that. Are you capitalized well 

enough to be in this business for the long haul if things go south? 

Mr. SCHWEIKERT. My great hope, and I know it is complicated 

and a lot of folks don’t appreciate that, is that as you work on that 

harmonization— 

Mr. WATT. We are definitely doing that. 

Mr. SCHWEIKERT. —for paper or loans that has some difficulties, 

to be able to be moved easily, efficiently, low costwise, to servicers 

that will actually do that, reach out to both protect the 

securitization over here, but also work with those homeowners. 

Second— 

Mr. WATT. Can I just make a point? I think you would be happy 

with the most recent set of things we have been working on in that 

area to try to encourage loans to servicers, transfer of loans to 

servicers who have a history in working well with borrowers. So 

staying out of foreclosure as opposed to going to foreclosure. 

Mr. SCHWEIKERT. The only obligation there on your side is a simple, efficient, low-cost ability to move paper back and forth when 

necessary. 

Second one, and this is more just from a—being from the West. 

And I know you have said you are working on it. You are working 

on sort of the risk pricing models and you saw it pop up. For those 

of us out in the West, we are deed-of-trust States. We are very efficient, we are very low cost, with the ability to do sometimes what 

is difficult. 

Some States are mortgage States that put on lots and lots of consumer protection but have raised the cost. And it is only appropriate, only fair that those different cost structures be priced into 

the product because for those of us, particularly out West, we often 

feel like in our pricing, if you have universal national pricing on 

that risk, that we are subsidizing States that have made it much 

more difficult to move through that foreclosure process. 

So it is just something that is there, and it is math, so hopefully 

you will treat it that way. 

The thing I am most interested in—and some of this I am going 

to have to give you in writing because we will never have time— 

is, was it last week you did the STACR deal? 

Mr. WATT. Yes. Well, we are regularly doing STACR. 

Mr. SCHWEIKERT. But the most recent one, was it the first loss 

piece that was transferred out? Which is fascinating to me, because 

in that sort of model you are actually creating a securitization 

where the GSE ultimately is a catastrophic coverage. Help me understand in the remaining seconds how that works. And in some 

ways how that may help us drive toward GSE reform. 

Mr. WATT. When we started doing risk transfers, we started by 

having the GSEs, Fannie and Freddie, retain the first loss, transferring risk on some subsequent loss, and then coming back in with 

the GSEs retaining catastrophic loss. 

We are now experimenting and looking at the process of having—transferring the first loss position back to the— 

Mr. SCHWEIKERT. Director Watt, I am going to— 

Mr. DUFFY. The gentleman’s— 

Mr. SCHWEIKERT. —submit questions to you in writing, and I 

thank you for your patience. 

47 

Mr. DUFFY. Time has expired. The gentleman yields back. The 

Chair now recognizes Mr. Kildee from Michigan for 5 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. And at the risk of redundancy, Mel, it is good to have you back. I only got to serve a year 

with you, but as you can see, in the year that you have been gone, 

I have become the second ranking member on the Democratic side 

for the committee. At least for the moment. 

Before I ask some questions, I would ask you to comment, I 

would like to submit for the record some comments from the Homeownership Preservation Foundation regarding strengthening of the 

U.S. housing finance system through provision of housing counseling services. 

And we talked about credit score and downpayment-related risk 

mitigation factors. And as you have stated, there are other factors 

to be considered. We had a panel here some months ago, and I 

think it may have been after you left—you probably heard similar 

panels where we had a number of representatives from the mortgage industry talk to us in general about mortgage lending and the 

risks associated with mortgage lending. 

We happened to have an individual from an organization that 

does a lot of affordable housing work, and some of the lenders referenced that if they used the same process—which include a heavy 

emphasis on homeownership counseling—that they would have default rates that were lower. 

Could you quickly comment on that particular point? And Mr. 

Chairman, if you don’t mind, I would like to have these comments 

entered into the record. And then I have a couple of other questions. 

Mr. DUFFY. Without objection, it is so ordered. 

Mr. WATT. I don’t think there is any question that somebody who 

gets good homeownership counseling, either pre-ownership, or in 

some cases post-ownership—it makes them better borrowers. It 

can’t be just any counseling. It has to be good homeownership 

counseling, but it really has an impact because especially first-time 

homeowners have little appreciation for the responsibilities that go 

with homeownership, that are different than being a renter. 

Mr. KILDEE. It is a really important point. And I hope that as 

we move forward on whatever process we engage in, we make sure 

to consider those factors. 

I would like to turn to another somewhat related question, and 

it has to do with access not just to credit but access to mortgages 

even for creditworthy individuals in markets such as the markets 

I represent. I represent Flint, Michigan, my hometown, where the 

average home price is $47,500. 

And for many legitimate borrowers with decent credit—many 

banks, many mortgage lenders, say that mortgages of that size just 

don’t make economic sense. And I wonder if there is anything that 

you are working on or could refer to us in terms of the work of 

FHFA that will make sure that in those markets we still have opportunity for homeownership. Because otherwise we are basically 

consigning those communities to rent. 

And your point about the effect of vacant properties on surrounding values is an important one. But it is also—the percentage 

48 

of homeownership of those occupied properties that has a similar 

effect, and I wonder if you could comment on that. 

Mr. WATT. We put in the 2015 scorecard an obligation on the enterprises to work with community smaller banks and State housing 

finance agencies to try to get to those lower-cost areas and underserved areas. 

And I think we are going to make some progress on that this 

year. I think the 97 percent loan product will have some bearing 

on that, although it is not specifically designed for that category. 

Mr. KILDEE. I would agree. And this question—I obviously listened as you answered questions, particularly related to downpayment thresholds. I think we could all sort of agree—you don’t even 

have to bother to answer the question, is if we decided that a 20 

percent downpayment standard would be enacted, that we would 

have a far lower default rate. Or if you had to have a million dollars in net value, net assets in your own personal portfolio, you 

might have a lower default rate. 

The question is, how do we balance these interests so that the 

maximum number of Americans have the opportunity to achieve 

homeownership, understanding that there are many, many ways to 

mitigate risk associated with people who are in a financial condition that does not allow them, because they are dealing with other 

exigencies in their life every day, to save the kind of money that 

it takes. 

One of the ways, and I would just—you may comment on this. 

You may not be able to because of the rulemaking process, but the 

membership standards question for Federal Home Loan Banks is 

an area of some concern for me because in some ways, by limiting 

membership standards, we might actually cut off another source of 

revenue that can be directed to help some of these local community-based organizations that are working on homeownership. 

Mr. DUFFY. The gentleman’s time has expired. You, Mr. Watt, 

can respond to Mr. Kildee in writing. The Chair now recognizes 

Mr. Barr from Kentucky for 5 minutes. 

Mr. BARR. Director Watt, welcome back to the committee. 

Mr. WATT. Thank you. 

Mr. BARR. And congratulations on your confirmation. As you 

know, the Consumer Financial Protection Bureau has finalized its 

ability-to-repay qualified mortgage rule, and the purpose of that 

rule is ostensibly to encourage safe and sound mortgage loans. 

But a recent survey of mortgage lenders showed that about twothirds of respondents would restrict lending because of—directly 

because of the qualified mortgage rule as defined by the regulators 

under Dodd-Frank, and about 80 percent of those respondents expected the new regulations to measurably reduce credit availability. 

Obviously given your agency’s, FHFA’s, recent moves, recent policy changes, you appear to share the concern about credit availability and access to affordable mortgage credit. The changes to 

guarantee fees, the guidelines allowing GSEs to buy loans with 

ultra-low 3 percent downpayments. And all of this appears to conflict with the Bureau’s qualified mortgage rule. 

49 

So my question is, is the FHFA pursuing a policy of encouraging 

mortgage lenders to originate non-QM loans that the Bureau would 

deem risky? 

Mr. WATT. No. We are not. We are not, without prudent compensating factors to take whatever that increased risk might be into 

account. 

Mr. BARR. Wouldn’t it make sense that a borrower who can only 

afford 3 percent down is likely to run into the debt-to-income ratio 

limitations imposed by the QM rule? 

Mr. WATT. Yes. 

Mr. BARR. Okay, so I guess—again, I am just curious to understand how the American public is to interpret what the Federal 

Government is doing sending mixed signals of encouraging more 

credit availability on the one hand, your policy changes, versus 

what the Bureau appears to be doing, which is tightening and restricting access to mortgage credit. 

Mr. WATT. I think a judgment has been made that because 

Fannie and Freddie are under conservatorship, during the period 

that they are in conservatorship we could make those judgments 

without being subject to the qualified mortgage rules, for a period 

of time. Now I don’t know if that will sustain itself forever, but 

that is where we are at this moment. 

Mr. BARR. Director, I have introduced legislation called the Portfolio Lending and Mortgage Access Act. I am going to be re-introducing that legislation. It has some bipartisan interest in it. It is 

motivated by the same concern that you have about access to mortgage credit for responsible borrowers. 

And the idea would be to modify the QM rule to allow lenders 

to retain the risk, which was a primary motivating policy in the 

Dodd-Frank Act, retain the risk, portfolio those loans to get the 

same safe harbor that other QM loans would get. 

And my question is, wouldn’t that be a more sensible approach 

to dealing with these 3 percent loans so that the risk is on the 

shareholders of the bank and not on the taxpayer? 

Mr. WATT. I think that is a judgment for Congress to make. It 

wouldn’t be a judgment for me to make. If you have introduced the 

legislation, then I am sure Congress will evaluate it. 

Mr. BARR. Thank you. Let me just quickly follow up on some of 

the questions that Congressman Duffy was asking you about the 

Housing Trust Fund. With roughly $3.3 trillion in assets and $9.5 

billion in capital, Fannie Mae is currently leveraged at 341 to 1 

and features a leveraged capital ratio of .29 percent. Freddie Mac has roughly $2 trillion in assets and has a leveraged 

capital ratio of .64 percent. The typical bank, I understand, is leveraged at about 10 to 1. So the current amount of leverage of 

Fannie and Freddie is far, far greater than the typical financial institution. 

I heard your testimony earlier that you believe that Fannie and 

Freddie are adequately capitalized and you are just following the 

statute. Is that right? Given those capital ratios, is that true? 

Mr. WATT. I don’t think I expressed any opinion about the adequacy of the capital. What I said was that we are operating under 

a preferred stock purchase agreement that has basically taken capital out of the equation during the period of the conservatorship. 

50 

Mr. BARR. My time has expired, but I would suggest that if they 

are adequately capitalized, I would wonder why they are still in 

conservatorship. 

Mr. DUFFY. The gentleman’s time has expired. 

Mr. WATT. Chairman Duffy, could I trouble you all for another 

2-minute break? 

Mr. DUFFY. No objection. The Chair will recess for 5 minutes 

again. Second time. 

[recess] 

Mr. DUFFY. The committee now reconvenes. The Chair recognizes 

the gentlelady from Ohio, Mrs. Beatty, for 5 minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman. Let me just 

say to Director Watt what a pleasure it is for me to be here. I notice you looked at me when you saw this thick book and list of 

questions. In full disclosure, Director Watt was my mentor, and I 

recall him always saying to me, read everything and always have 

good questions. 

With that said, let me just say on a very serious note how much 

I appreciate the work that you and your team are doing to protect 

all of my constituents and constituents across the country with 

housing and those regulations. 

But today I would like to lend my voice to one of the questions 

that we have heard from both sides that centered around membership in the Federal Home Loan Bank (FHLB), related to the September FHFA issued ruling revising the membership requirement 

of FHLB. 

Of those 1,300-and-some comments that you received, my district 

was not silent there. So on behalf of my district, the Ohio Capital 

Finance Corporation, which serves thousands of households, raised 

concerns expressed by other community development financial institutions. 

They hold dearly the affordable housing program. It is one of the 

most important sources of funding for nonprofit housing communities. So the question is regarding the requirement to meet one 

and two ratio tests of mortgages to total assets. 

And what they want to know is, since they don’t hold mortgages—‘‘they’’ being the Ohio Capital Fund—that range from 1 to 

10 percent depends on the type or the asset size, that when that 

goes into effect it would cause them to terminate their membership 

with the Federal Home Loan Bank in Cincinnati because it doesn’t 

hold mortgages. 

So would you or your team give any consideration to doing an 

evaluation on the impact of the burden to community development 

financial institutions of a less severe remedy than loss of membership? 

Mr. WATT. We are looking at every aspect of this. We have, as 

I indicated before, approximately 1,300 comments in response to 

the proposed rule and we are going through them. Our preliminary 

analysis indicates that despite the fact that there are 7,500 members of the Federal Home Loan Bank System now, only 50 to 100 

of them would be adversely affected by the rule. 

And that is not to minimize the value of that 50 to 100, but we— 

that is definitely one of the factors that we will take into account. 

51 

Mrs. BEATTY. Thank you for that. Mr. Chairman, may I ask 

unanimous consent to have the letter from the Ohio Capital Finance Corporation entered into the record? 

Mr. DUFFY. Without objection, it is so ordered. 

Mrs. BEATTY. Thank you. The second question I have goes to 

OMWI. I am very honored that Ranking Member Maxine Waters 

asked me to be involved and to chair that committee. You certainly 

know through your organization, having OMWI prior to DoddFrank that there are different regulations. 

With Dodd-Frank they now have the whole issue of transparency, reporting back to the public on the number. Diversity is 

very important to me for a whole host of reasons, but can you briefly share with us what you are doing since you came under the Recovery Act, of how you are being transparent in sharing the diversity through OMWI? 

Mr. WATT. There are statutory reporting requirements and we 

obviously are complying with those. But more importantly, what 

we have done is try to take a look at how to make the OMWI office 

an important ingredient of our organization, not just keeping numbers but embed them in decisions that are being made. 

And in the selection of our Director of the OMWI office we found 

somebody who had transactional background, not just OMWI background, so that we could get that person involved in the kinds of 

decision-making that would have some impact on diversity. 

Mrs. BEATTY. Thank you. 

Mr. DUFFY. The gentlelady’s time has expired. The Chair now— 

yes? 

Ms. WATERS. I ask unanimous consent to enter into the record 

an article that ran in the Washington Post on the disparities in 

wealth between Black and White. 

Mr. DUFFY. Without objection, it is so ordered. 

Ms. WATERS. Thank you. 

Mr. DUFFY. The Chair now recognizes Mr. Tipton from Colorado 

for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Chairman. Director, thank you for 

taking the time to be here. I would like to follow up actually on 

a comment that Mrs. Beatty was just making in regards to our 

Federal Home Loan Bank. 

You made a comment earlier in our conversation here to my colleague from Oklahoma, Mr. Lucas, that we are following statute in 

regards to establishing some new rules in regards to membership 

in the Federal Home Loan Banks. 

And I would like to follow up with you on that, and looking in 

through the Bank Act, it does not address a minimum level of 

mortgage loans. That is not cited. And I guess my concern over this 

issue is Mrs. Beatty, and I think Mr. Lucas, both spoke to these 

issues. 

In my particular State of Colorado, we have over 200 community 

banks, credit unions, and insurance companies that are members 

of the Federal Home Loan Bank. And these financial institutions 

do responsibly utilize the liquidity that is provided in order to be 

able to deploy credit out in support of housing, finance, agricultural 

production, small business formation, and community development. 

And they do this currently in full compliance with the Federal 

52 

Home Loan Bank Act, and the congressional intent, as I read it, 

through the existing programs. 

This proposed rule, issued on September 12th, has the potential 

to be able to decrease Federal Home Loan Banking System membership. Have you quantified the potential impact that may have 

on rural America right now? Because while we may have pockets 

of prosperity in the country, rural America is not feeling it. 

Mr. WATT. As I have said in response to Representative Beatty, 

our preliminary analysis indicates that only 50 to 100 of those 

7,500 members would be adversely affected by either the 1 percent 

requirement or the 10 percent requirement. 

There is a statutory requirement. The question is whether it will 

be applied only when a member becomes a member of the Bank, 

or whether it will be applied on an ongoing basis. That is really 

what the rule addresses. The statute clearly says that you will 

have 1 percent of assets in home mortgage loans. That has been 

in the past applied only at the time of becoming a member, not on 

a continuing basis, right? 

So we are looking at whether that undermines the purpose, not 

to require it on an ongoing basis, not just a one-time basis. 

Mr. TIPTON. I guess what I would like to be able to express is 

that often in Washington, a smaller amount is often trivialized. In 

some of the small communities that I represent—I have 54,000 

square miles of Colorado. If one of those banks happens to be in 

that 50 to 100 that would then be shut down, it would be a reasonable assumption, obviously, that we weren’t going to be able to extend credit in that local community because it is going to be a 

small community. 

Mr. WATT. We will certainly take that into account. 

Mr. TIPTON. That is going to be critically important, I think, for 

us, as our communities truly are struggling under those what we 

feel are over-regulation coming in out of the Federal Government. 

So thank you on that, and with that I yield back, Mr. Chairman. 

Mr. DUFFY. Do you want to yield to the Chair? 

Mr. TIPTON. I will yield. 

Mr. DUFFY. Mr. Watt, I just want to follow up on some questions 

I had for you for the next minute. Is it fair to say that the g-fee 

is based on risk? It is risk-based, right? The g-fee is risk-based? 

Mr. WATT. The question is, what will the g-fee be designed to 

cover. Will it be only risk, will it be accumulation of capital, will 

it be— 

Mr. DUFFY. Today, is it— 

Mr. WATT. But one element is definitely risk. 

Mr. DUFFY. But are you charging more than the risk for the gfee? Some would argue that in our assessment if you have a credit 

score of 740 and you put 40 percent down, you might be paying a 

little more for your risk, and if your credit score is 650 and you 

only put 3 percent down, you get a little subsidy based on the risk 

of the g-fee. This is actually from your data. 

Do you disagree with your data? I can— 

Mr. WATT. No, I am not arguing with the data. I am trying to 

put it in a frame here that— 

Mr. DUFFY. I am going to have to gavel myself down in a second. 

And I guess maybe you could think about this, and maybe we will 

53 

have a chance to come back to it. Are you charging more on the 

g-fee than the actual risk? Or are you undercharging for the risk 

or are you hitting it just right? 

Mr. WATT. One of the things that a lot of people on this committee have been advocating is that we charge more than risk so 

that we can attract private capital. So, you kind of meet yourself 

in these arguments going and coming. 

Mr. DUFFY. I don’t want to abuse the gavel. Maybe we can come 

back to it later. The Chair now recognizes the gentleman from 

Texas, Mr. Williams, for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman, and thank you, Director, for being here today. We have covered a lot of ground. I appreciate your service. 

I am a private sector guy, I own businesses in Texas, and I am 

one of those who believes the private sector is the answer, not the 

Federal Government, to a lot of the issues we have. 

I do want to say one thing. You had mentioned earlier that you 

had a hard time with your employees with Fannie Mae and 

Freddie Mac because of the fact they weren’t sure what their future 

might be. I heard you say that. 

Mr. WATT. Yes. 

Mr. WILLIAMS. And I would just say, welcome to the private sector. The private sector is going through that every single day, wondering what their future is as small business owners, moms and 

dads and so forth. So that feeling is not unique to your group of 

folks. It is all over our country because of government regulations. 

My first question would be this: What is the Treasury doing with 

the money they get from the GSEs every quarter? If the Treasury 

spends the money now they get from Fannie Mae and Freddie, 

won’t they have to borrow more or tax more to raise the money in 

the future to meet the normal losses that could be coming in? 

Mr. WATT. I can’t answer that, Representative Williams, because 

I am not at Treasury. We sweep the money to Treasury, it gets applied to the deficit, it gets applied to government operations. I 

guess the argument is, should it be doing that or should it be building up a reserve, a capital reserve of some kind. That is not a decision that I can make. 

Mr. WILLIAMS. I think the concern is that we have such a big deficit and it is going in the hands of the Federal Government. You 

know where is it going. 

Also, just to kind of help me understand a little bit, like I said, 

we have covered a lot of ground today. What is the average credit 

score of a 3 percent customer? 

Mr. WATT. I don’t know that I can tell you that off the top of my 

head, Representative Williams. 

Mr. WILLIAMS. And we may have covered, I heard a figure of 2 

percent, but what is the foreclosure rate in your portfolio, percent 

to the total? I thought I heard a figure of 2 percent. Would that 

be right? 

Mr. WATT. I can tell you that, if you will let me get to— 

Mr. WILLIAMS. And while you are looking at that, when do you 

decide to foreclose? How far behind in payment? How far past due 

are homeowners before you say we need to foreclose on this piece 

of property? 

54 

Mr. WATT. There is no fixed answer to that. We get concerned 

if somebody gets 30 days behind in payment. We get more concerned if they get 60 days behind. We get more concerned—at what 

point you quit working with a borrower to try to get them back current, or alternatively make a decision to go to foreclosure is a very 

complex set of determinations. 

So I don’t know that I could give you a rule that would apply 

across-the-board on that. 

Mr. WILLIAMS. What is your foreclosure percent to the total? 

Mr. WATT. You got me off on— 

Mr. WILLIAMS. I’m sorry. I think I heard 2 percent. 

Mr. WATT. Let us provide that information in writing. 

Mr. WILLIAMS. Provide that back to us. 

Mr. WATT. We have the information about the loans since the 

meltdown. We have it overall for the whole history. We have it 

prior to the meltdown. I just—I am not finding it— 

Mr. WILLIAMS. That is fine. You can get that to me. And another 

thing, too. Of course equity is important to everybody. We want everybody to have equity, and of course the bigger the downpayment, 

the more equity they are going to have going in. 

There are some people, though, I guess, who can’t afford a home. 

And do you advise these people as such, that possibly now is not 

the time for them to buy a house? Maybe they need to go another 

direction, start renting or something so they can— 

Mr. WATT. When I was practicing law, and when I was a Member of Congress, I used to give that kind of advice, but I don’t have 

the opportunity to give that kind of advice, nor is it my role to give 

that kind of advice. Fannie and Freddie don’t make loans. We buy 

loans off of lenders’ books and guarantee them and put them into 

a secondary market. So there is just not an opportunity for me to 

be engaged in those kinds of discussions with borrowers now. 

But when I was practicing law, there were thousands of people 

to whom I would say, if you can’t afford to make a mortgage payment, you shouldn’t be a homeowner. Yes. Homeownership is not 

for everybody. 

Mr. WILLIAMS. I appreciate you being here. I hope that one day 

we can get the government out of the homeowner business and get 

it back in the private sector where it belongs. 

Mr. Chairman, I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Maine, Mr. Poliquin. 

Mr. POLIQUIN. Thank you, Mr. Chairman. Thank you very much 

for being here, Director Watt. I understand from your background 

you spent a little bit of time in New England, and I want to thank 

you very much in advance for rooting for the Patriots. Not that we 

will need it, but on Sunday I appreciate that very much. Thank you 

very much. 

Mr. WATT. I’m sorry. I can’t make that commitment to you. 

Mr. POLIQUIN. I was hoping we would start off on a good foot, 

Mr. Watt, but that is okay. 

Everybody that has been with you today, sir, understands that 

Fannie and Freddie are in conservatorship, and we of course understand that your organization is the in fact conservator. And I 

have also heard you say a couple of times today—actually several 

55 

times—that one of the roles that you are playing in this role, if I 

am not mistaken, is to be sure to the best of your ability that 

Fannie and Freddie are safely and soundly managed such that we 

keep the credit flowing to those who want to buy a home and are 

able to buy a home, and also to protect our hardworking taxpayers. 

Now I am going to be very honest with you, Mr. Watt. I have a 

little bit of a concern. If you look at Fannie, this is an organization 

that is connected to our Federal Government, was created by our 

Federal Government. It is responsible for $3.3 trillion in home 

mortgages and they use our hardworking taxpayers to backstop 

those mortgages. 

I am also concerned that Freddie Mac is also putting U.S. tax- payers on the hook for an additional $2.2 trillion. 

Now my other point I would like to make is that, if I am not mistaken, in 2014 Fannie and Freddie together were responsible for 

holding 51 percent of all home mortgages in America. That being 

the case, sir, would you agree with me that Fannie and Freddie are 

large financial institutions? 

Mr. WATT. Absolutely, they are large financial institutions. 

Mr. POLIQUIN. Good. Dodd-Frank, as I am sure you know, Mr. 

Director, requires nongovernment large financial institutions to 

hold substantial amounts of capital in reserve in the event that 

something goes wrong. 

Now I am not here advocating that those capital requirements 

for nongovernment entities be increased. However, don’t you think 

it is appropriate, sir, that Fannie and Freddie, especially organizations of this size that are backstopped by the taxpayers, also ought 

to live by the same rules as our nongovernment financial institutions when it comes to capital requirements? 

Mr. WATT. I don’t know if that is my decision to make, whether 

I agreed with it or not. 

Mr. POLIQUIN. Well, you are the Director— 

Mr. WATT. When I testified in the Senate, I said in response to 

a question, that I don’t have any personal opinions anymore. Every 

opinion I express now is an FHFA opinion, so I try not to express 

those personal opinions. 

Mr. POLIQUIN. I appreciate that very much, Mr. Watt. But with 

all due respect, you are in a position of great authority. You are 

the regulator for the GSEs, and I would like to beg to differ with 

you a little bit, that your opinion is greatly appreciated. 

And what I am trying to get across, if I may, is that we have 

two very large institutions that do not abide by the same capital 

requirements as other nongovernment institutions around this 

country. 

I might also add, if I may, that if you are looking at Fannie Mae, with $3.3 trillion in assets—and this has been said here before— 

they have roughly $10 billion in assets but they are asking the taxpayers to backstop $3.3 trillion in loans. Now if you are looking at Freddie Mac, they have about $13 bil- lion in assets and are backstopping $2.2 trillion. So I think we 

could both agree—I hope so—that these organizations are grossly 

undercapitalized and represent one heck of a risk to the taxpayers 

if something goes wrong. 

Would you agree with that, sir? 

56 

Mr. WATT. I have two responses to it, one of which I have already given, which is I didn’t set up the preferred stock purchase 

agreement. I wasn’t even there when it was created. So I am living 

under that. I can’t change it without—but the second response is, 

you all can change that. Everything that you just talked about you 

can change by doing GSE reform. 

Mr. POLIQUIN. Mr. Watt, everybody wants a healthy economy. 

And the taxpayers in my district in Maine, who are some of the 

hardest-working, most honest people you could ever meet, they 

want to make sure they have a government that works for them 

and not against them. 

And I happen to believe that accountability in all stages of government, all levels of government is a good thing. Now I am very 

concerned about these large institutions that are highly leveraged, 

with very little capital, that are requiring the taxpayers to backstop then. When we have interest rates at historic lows, with a rise 

in interest rates that could cause a problem with the housing market and also our economy, wouldn’t you agree that it makes sense 

to take a look at these institutions? 

Chairman HENSARLING. The time of the gentleman has expired. 

A brief answer, please. 

Mr. WATT. I think I have already answered your question to the 

best of my ability to do it, Representative. 

Mr. POLIQUIN. Thank you very much, sir. 

Chairman HENSARLING. That was brief. The Chair now recognizes the gentlelady from Utah, Mrs. Love. 

Mrs. LOVE. Welcome, Director Watt. I appreciate the opportunity 

to meet you here today. 

Mr. WATT. It is nice meeting you. 

Mrs. LOVE. I just wanted to say, as a former mayor I have had 

to ask myself three questions before making any new commitments 

or changes or going to a certain direction: is it affordable; is it sustainable; and is it my job? 

One of the questions I have today is, in your studies did you determine how many people the lowering of this standard was going 

to help? 

Mr. WATT. You are talking about the 97 percent product now? Is 

that the— 

Mrs. LOVE. I am talking about getting the standards to that, to 

the 3 percent payment. Did you determine how many people this 

was going to help get into homes, how many people it was going 

to hurt? Did you have any— 

Mr. WATT. We have some projections that it would be a very 

small percentage of the overall portfolio of either Fannie or 

Freddie, and I probably have those percentages but not the actual 

numbers. 

Mrs. LOVE. Okay, so a certain—a small percentage this was 

going to help, bringing down these was actually going to help get 

into homes. 

Mr. WATT. Yes. 

Mrs. LOVE. So obviously we talked about some risk and risking 

the taxpayer dollars. You have no guarantee—is it fair to say that 

you have no guarantee that the people who are going to get in and 

57 

borrow will be able to get into homes that they can afford and not 

default on their loans? 

Mr. WATT. I don’t think we are ever in a position to guarantee 

that. We make responsible decisions based on risk assessments, 

and I can guarantee you that we have made a robust risk assessment. I don’t think you could guarantee that anybody could pay a 

loan that they paid 99 percent down, because something might 

come up next week that would prevent them from doing that. 

So this is not about being able to guarantee it. It is about assessing the risk and likelihood of it, and we have done what we can 

to minimize— 

Mrs. LOVE. Okay, so when I asked those questions, the reason 

why I asked those questions is because when we get into risk involvement, and asking myself is it affordable, is it sustainable, is 

it my job, we realize inevitably we have actually taken a lot of the 

risk out of that decision-making. 

I believe, and I believe that Utah believes, and the majority of 

hardworking Americans believe that if Washington bureaucrats actually asked those same questions, we wouldn’t be in the financial 

crisis that we are in today. 

As I witnessed as a mayor, I have actually seen how these heavily-involved government policies have actually hurt many cities in 

their ability to thrive and to grow. We have watched homes being 

built and actually seen those homes a year later completely empty. 

And hardworking families lose their credit and their ability to get 

into a home. 

And so that is why I asked those questions about how does this 

actually help hardworking Americans get into a home and be able 

to sustain a future. Too many times I am afraid that these government-backed programs that vow to help and protect hardworking, 

poor Americans, it has actually done the opposite and hurt those 

that it vowed to protect. 

If the Administration, or as you would say, an independent regulatory agency, goes down this road of bigger government policies 

and getting involved more in what the free market should be involved in, I just want it on record that as hardworking Americans 

start losing their homes, that you remember this warning today. 

I have been in the trenches of this. I have actually seen this happen. I am not taking a 60-foot view of what has happened. I have 

actually been a mayor, and I have actually seen my city have a 

really hard time with the housing market, and I don’t want to go 

back in that direction. 

This is an area where I have said, this is not about hardworking 

Americans trusting you to do the right thing. It is about you trusting hardworking Americans to make decisions and do the right 

things for their future. 

I yield back my time. 

Chairman HENSARLING. If you are about to yield, would you yield 

to the gentleman from Wisconsin? 

Mrs. LOVE. Yes, I will yield my time to Chairman Duffy. 

Mr. DUFFY. I appreciate the gentlelady for yielding. Mr. Watt, 

going back to my previous question, the g-fee, which we were talking about was risk-based, basically is to make sure that the GSEs 

aren’t losing any money, right? You are trying to find that balance 

58 

to go, boom, what does it cost. I am not trying to trick you. This 

is a pretty simple, straightforward question. 

Mr. WATT. It is a straightforward question, but it is inconsistent 

with the approach that a number of people have used that we 

should be using g-fees to attract private capital. Because if we raise 

g-fees to that level, we would be making a bunch more money, but 

is that an appropriate thing to do— 

Mr. DUFFY. My question, Mr. Watt— 

Mr. WATT. —an appropriate purpose for g-fees. 

Mr. DUFFY. I am not asking anybody else. I am asking what 

you—are you trying to get the g-fee to hit just right to be able to 

cover your costs. You are not trying to bring in any extra money, 

you are not trying to lose any money, you are trying to hit the nail 

right on the head, hit the g-fees right on. 

Or are you trying to make money? Are you trying to lose money 

when you set the g-fee? 

Mr. WATT. We certainly don’t want to lose money, that I can assure you. 

Mr. DUFFY. Are you trying to make money? 

Mr. WATT. But I think it would be more appropriate to wait until 

we come out with what we are going to do on g-fee, articulate the 

reasons that we are doing it— 

Mr. DUFFY. But this is an important— 

Mr. WATT. —and then you will see where we come out. Right 

now, I don’t have an opinion about the things you are asking. 

Mr. DUFFY. You don’t know if the g-fee, if you are trying to set 

it a little bit higher than the actual cost or are you trying to hit 

it right on. You can’t tell us today in this hearing how you are— 

Mr. WATT. Representative Duffy, if I knew that, we would have— 

I wouldn’t be studying the issue. That is the reason why we are 

going through this expensive study, to keep from— 

Mr. DUFFY. So what is the goal? 

Mr. WATT. —applying my own opinion about that. 

Mr. DUFFY. Let us say, what is the goal? 

Mr. WATT. Our agency is research-based, and we are going to 

apply the research that we have to that question. 

Mr. DUFFY. Is the goal, though—let us take reality aside for a 

second—to get the g-fee just right? Whether you can or not, in theory you want to get it just right. We are not really making any 

money and you are not losing any money. You are charging for the 

services consistent with the risk and other factors that you referenced. 

Mr. WATT. One of the purposes is certainly not to lose money. We 

are not trying to set a g-fee that is going to lose money. Now, are 

there other factors in addition to covering the risk and breaking 

even that should go into setting the g-fee? That is a question that 

we are evaluating in the agency at this point. That is— 

Mr. DUFFY. But the intent is to look at all those things and try 

to hit it just right, correct? Not make any money, not lose any 

money, but take all those factors and hit the number just right. It 

is a pretty simple question. I would imagine the answer is yes, that 

is of course what we are trying to do here. We are trying to get 

it just right. 

59 

Chairman HENSARLING. The gentleman is going to need to wrap 

up this line of questioning. 

Mr. DUFFY. So, very quickly, if you take a sweep for the Affordable Housing Trust Fund of 4.2 percent, right, you are going to 

sweep that money—it is not a tax, you are saying. But if you hit 

the g-fee just right but then you sweep 4.2 basis points away to go 

into the Affordable Housing Trust Fund, you are actually now 

below the cost of your risk. 

And so the taxpayers are going to bear that cost. Or if you go 

above the actual cost of the g-fee, you are actually charging then 

the end homeowner an extra fee to drive money into the Affordable 

Housing Trust Fund. Either it is taxpayers who are going to pay 

or it is those who have a mortgage who are going to pay. But someone is going to pay. 

To come here and say that it is magical fairy dust and no one 

pays this money isn’t really being totally forthright. Taxpayers on 

the hook or mortgagees are on the hook. I would ask if Mr. Watt 

agrees with that. 

Mr. WATT. I have tried to answer this question as forthrightly as 

I can. With the size of our portfolio, I don’t think we could ever set 

g-fees to just break even. That could never happen. So if the question is, are you setting it just to break even, the answer is, no, we 

have to have some margin, even if we don’t take anything into account other than risk. 

Mr. DUFFY. Mr. Watt, you are a very good lawyer, and I can recognize that and I appreciate it, but you are not answering my question. With that, I yield. 

Mr. WATT. I don’t understand the question— 

Chairman HENSARLING. We will allow the two very good lawyers 

to perhaps have this conversation online. The Chair now recognizes 

the gentleman from Washington, Mr. Heck. 

Mr. HECK. Thank you, Mr. Chairman. Director Watt, let me add 

my voice of congratulations to all those that have been expressed 

here today. Much deserved. 

You had indicated in your written testimony, and it has been alluded to, that on the 22nd of December you approved a merger between the Federal Home Loan Banks of Seattle and Des Moines. 

I believe that is the first, is it not? 

Mr. WATT. It is. Yes. 

Mr. HECK. I am going to confidently predict it won’t be the last. 

Mr. Lucas also referred to the concerns among many of us in Congress about the new membership rules, which I don’t want to relitigate this but I want to state for the record—and you and I had 

a private—semi-private disagreement about this. 

I think both FHFA and Congress are missing an opportunity 

here to take a step back and reexamine just exactly what the role 

of the Federal Home Loan Bank should be going forward. 

Mr. WATT. To be clear, that is exactly what we are doing in this 

evaluation process. We received 1,300 comments. We are going 

through every single one of them before we make a final determination of what the final rule is. So we are in that, taking a step 

back, looking at all of the input that we have received. 

Just because we put out a proposed rule, a proposed rule is not 

a final rule. So we are doing exactly what you suggest. 

60 

Mr. HECK. It is not the specific rule that I am focused on. It is 

the larger issue of what role do we want the Federal Home Loan 

Banks to play in this new world that doesn’t look like it did when 

they were created in 1932 or thereabouts. 

Mr. WATT. But Congress has made that determination. That is 

not a determination that I— 

Mr. HECK. Which is exactly what you said to me earlier during 

our semi-private disagreement. I think it is something that you 

could do to advance to us policy proposals. 

I also think that it is an issue that members of this committee 

could well take up and ask the basic questions. What role do we 

want them to play? Is it strictly housing, is it liquidity? Are there 

other ways that it can be constituted, given the way that the whole 

world—but that is not really my question. 

I do have a question. My question does relate to the approved 

merger—again, which I don’t believe will be the last. I had communicated to you in correspondence deep concerns held by people in 

the region about the continuing commitment of any merged regional bank to invest in housing. 

I also communicated to you concerns about governance. And I 

also communicated to you concerns about operational issues because after all, Director Watt, this is a five time-zone Federal 

Home Loan Bank region now. And we have repeatedly asked for 

the letter setting forth the terms and conditions. We have been repeatedly told we cannot have it, we cannot know what those are. 

I want you to know that as that relates to sensitive financial 

matters, I completely understand. But I do not know what compelling public policy good is served by withholding information about 

how we will proceed with respect to the concerns that had been 

brought to you by many in the region. 

Mr. WATT. But during the pendency of a merger, for us to be putting out information that is still in the process of being discussed 

and negotiated, I think as an independent regulator would be irresponsible. I am sure every one of these things will be addressed. 

But we have a fiduciary responsibility, we have a trust responsibility as regulator here not to put out information that could jeopardize the discussions. And I hope you understand that. 

Mr. HECK. I acknowledge and embrace your fiduciary responsibility. Issues relating to housing investment and governance, and 

operational issues that allow for access I don’t personally believe 

fall within that realm. 

Mr. WATT. I can assure you that the merged Federal Home Loan 

Bank will be held to the same high standards on those issues that 

we have held the two independent banks to. So we are not going 

to relax the standard just because—the standards that we expect 

of them just because they are a merged bank. You can be assured 

of that. 

Mr. HECK. Knowing you as I do, I would expect no less, sir, and 

I thank you. 

One last quick question. Insofar as both Freddie Mac and Fannie 

Mae are under conservatorship, insofar as you are moving pretty 

quickly toward a common securitization platform, can you identify 

any compelling public benefit for these two entities other than it 

is status quo, to be separate as opposed to one? 

61 

Mr. WATT. That is a public debate that I think should be had. 

There is a value to competition because it makes both enterprises 

better. We have aligned Fannie and Freddie’s practices on a number of issues that were important to the public policy objectives. 

But I think there is some value to allowing them to compete on 

things that don’t have a public policy imperative to them. 

But we have aligned them on a number of issues. 

Mr. HECK. I would take it that quality of service would be an example of that. 

Mr. WATT. If you talk to one of them as opposed to the other, 

they will tell you that their quality of service is higher than the 

other one, depending on which one you talk to. But it is important 

for them to continue to compete on the quality of the service that 

they deliver. That is one of the things that it is important for them 

to compete on—not on a race to the bottom to extend more and 

more irresponsible credit. There is a whole range of things that we 

don’t want them competing on and there are some things that we 

continue to allow them to compete on. 

Mr. HECK. So it seems arguable to me whether or not that benefit trumps the economies of scale, given that for all practical purposes we—but with that, I yield back the time I do not have and 

thank the Chair for his indulgence. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Arkansas, Mr. Hill. 

Mr. HILL. Thank you, Mr. Chairman. Director Watt, once again, 

it is nice to see you. Thank you for appearing before the committee 

for an extended period of time. 

I think back to one of my favorite engravings in the City of 

Washington, which is on the National Archives building: What is 

past is prologue. And so I am having a terrible flashback from a 

very, very bad movie listening to this discussion today. 

In 1984, when I was a staffer over on the Senate Banking Committee staff, Fannie and Freddie had about one in 400 loans that 

were at a LTV of 3 percent. And when I came back to government 

in 1990 and was at the Treasury, that had moved to one in 10. And 

then at the height of the crisis it had moved to one in two-and-ahalf, or 40 percent of the loans in their combined portfolios were 

at that low downpayment. 

And at the same time, that same direction took place in the debtto-income ratios as well. So I just want to be on record with you 

that I share the concerns of many on this committee about this decision to lower downpayment rates, notwithstanding counseling 

and FICO scores and mortgage insurance. 

My question to you is, I want to turn back to a line of questioning that Mr. Duffy had on this subject of the preferred stock 

arrangement with Treasury. For you to accrue money for the Housing Trust Fund, pay it out potentially in the Housing Trust Fund, 

did you seek a waiver from the preferred stock arrangement with 

Treasury to do that? 

Mr. WATT. No, I did not. 

Mr. HILL. And so it is purely on your judgment that—from reading the statute that you have taken that money out of the system 

and not swept it to Treasury? 

62 

Mr. WATT. There is no money to sweep unless there is a profit 

at the end of the year, and there won’t be any swept if there is not 

a profit. 

Mr. HILL. Right, but you have made the decision to sweep money 

if there is a profit to the Housing Trust Fund. 

Mr. WATT. You mean put into the—yes. Unless doing that would 

put them into a deficit situation. 

Mr. HILL. But did you seek approval from Treasury to do that? 

Mr. WATT. No. 

Mr. HILL. And don’t you think that since they are the owner of 

that preferred stock on behalf of all the taxpayers, you should have 

checked with them first before taking money to the Housing Trust 

Fund as opposed to sweeping all the profits to the Treasury? 

Mr. WATT. No. 

Mr. HILL. And tell me again—I know you have covered some of 

this ground before. Tell me again why you believe that is the case. 

Mr. WATT. Why I should— 

Mr. HILL. Why you believe you don’t have— 

Mr. WATT. Why I shouldn’t get Treasury’s approval? 

Mr. HILL. Correct. 

Mr. WATT. Because there is nothing in the preferred stock purchase agreement, under which we operate, that addresses the 

Housing Trust Fund. And so we are not violating the terms of the 

preferred stock purchase agreement in doing this. We are just simply complying with the law. So there is no reason for me to get 

Treasury’s approval for that. 

Mr. HILL. It just seems like when we own the shares of that company as the taxpayers that we should want to have all the proceeds 

until there is a change, a structural change made all the earnings 

of the company outside the core business operations, any profit that 

is left should be sent to the Treasury. 

Mr. WATT. That is still the rule. And I keep reminding you, I 

wasn’t there when these preferred stock purchase agreements were 

negotiated. If they had put it into the agreement then I would be 

obligated by it. But there is no provision in the agreement that requires me to get approval to fund the Housing Trust Fund, or to 

comply with any other law that is in existence. So I didn’t get the 

approval. 

Mr. HILL. But you were there and made the decision to take 

money away from the sweep and put it in the Housing Trust Fund. 

That was your decision to do that. 

Mr. WATT. I made the decision to reverse the temporary termination of contributions to the Housing Trust Fund, yes. I was there 

for that. 

Mr. HILL. Thank you very much. I yield back. 

Chairman HENSARLING. The gentleman yields back. No other 

Member is in the room to be recognized. So again, I wish to thank 

Director Watt for coming to testify before us, our former colleague, 

and former and still current friend of this committee. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place his responses in the record. Also, without objection, 

63 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:58 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

January 27, 2015 

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