ms. waters. after 2007, i think that overleveraged issue sort of prove the point. and looking at the headlines the headlines read government keeps pushing mortgage guarantees as risk index rises. here's another headline. fhfa orders of gses to start supporting affordable housing trust fund. surprisingly the year is not 2005. it's 2015. and so we find the fha today

engaged in this race with fannie and freddie to see who can more swiftly cracked up the private sector, who can't assume more risk on behalf of the american taxpayer. i would just point out this is kind of a frightening race because in my view we have seen it before. the fhfa has joined sort of a moral hazard problem here. and in december you announced 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's 200 billion, but it was a lot of money lost at the end of the day because of overleveraged.

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 340101. now, that's capital ratio point to 9%. freddie mac 153 to one. and equally concerned leverage ratio of .65%. the rumor a decade ago i was arguing about 100 to one leverage ratios. this is excessive of that. you said earlier the leverage ratio is not something the statute requires you to look at when suspending allocations. i've got a different reading of the statute that i will share with you. but the statute requires is that you shall suspend allocations not me the statute 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, you know to come into play. so director, how can the enterprises be in this state with these leverage ratios, and not be deemed both financially and stable and undercapitalized? that's my question. >> so first of all we put in place prudential stops its circumstances go back in the other direction. if we ever have a draw on the treasury, that would automatically stop funding of

the housing trust fund. >> but it's already undercapitalized is the point i'm making. >> we don't have when fannie and freddie were put into conservator should and the preferred stock purchase agreements were entered into with treasury, that suspended the capital of fannie and freddie. if we were building up capital i understand exactly what you were saying, but those two criteria don't apply anymore because they are in conservatorship. every dime is going to the taxpayers if there's a profit. >> there is statutory language that requires an end to the allocation. i think it's very straightforward but i will close with this. today i along with many of my republican colleagues will reintroduce the payback 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. good to see you again. >> the gentleman's time has expired. pitcher in that recognizes the gentleman from missouri, mr. cleaver. >> thank you, mr. chairman. rankin, thank you for being here as well. there's been a lot of discussion about the 3% down and i'm not sure if the suggestion is that 3% down is reckless. i was looking at a study, a 0% down at a lower foreclosure rate than the prime lender. is there any evidence that 3% is going to cause more foreclosures

if 0% is not causing foreclosure? what is it about zero to three that creates this problem? >> well, i think representative cleaver, the challenge is to look at the lenders and make a determination when the down payment is lower that the potential that it could be a riskier loan. but if you pair that with other compensating factors, which this product does you offset that additional risk, and that's exactly what we have done. lending is about assessing the ability of people to pay. and what most people don't realize, even 90 probably 90% of the people who are underwater have no equity in their mortgage at this point are continuing to

pay their mortgages. right? so that's not a criteria whether somebody is going to pay whether you've got 3%, 10%, you know, it's about whether you want to have a home that you own, right? and so you access those criteria, and their substantial studies that suggest that that confirm that housing counseling homeownership counseling makes people better borrowers, more reliable borrowers. this program that's one of the compensating factors. and if all else fails you've got to have private mortgage insurance to back the loan. so it's not as if we have created a risky situation. these are not the loans that had no documentation no, you know

resets after 90 days or three years. i mean 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's what i was happy to come here and have the opportunity to talk about the prudential compensating factors that we put around this thing to make sure that you understand that my philosophy has not changed. if somebody can't pay a loan, they shouldn't be given alone. 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. >> i think i heard you clearly.

[laughter] maybe i have time for a quick question. let's remove the sociological issues if people want to connect that to the loan. the economy is not healing for some people. we still have stagnant wages and, in fact hourly wages are actually taking down in terms of keeping up with inflation. so if we are having stagnant wages and were trying to heal the economy and housing is a significant part in russian healing the economy, having a housing market that is healthy, does it make sense than for us to put interest rate and down payments high we are trying to

get the housing industry yield? i mean, can we heal the housing industry without getting more people to buy houses, people who qualify, credit where the people? is there any other way to do it to get people to buy more housing without making it affordable? >> congress has given us this mandate, the lending back loans that are safe and sound and provide liquidity in the market. we are constantly balancing those two objectives. that's what we are in business to do and that's what our plan to continue. >> the gentleman's time has expired. the chair now recognizes the gentlemen from michigan, mr. huizenga. >> thank you, mr. chairman. welcome back to i guess this isn't quite home turf since we are visiting someone else's committee hearing room while ours is under so much needed repair. almost two years ago i had a chance to ask her predecessor mr. demarco, about fhfa's

intentions as a religion the regulations in the linda placed insurance market, the lpi market. i urged director market -- a marker to make sure any predictions met the test of producing a fair and open marketplace for providers, lpi and more important 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 and this particular area that has gone on? i know at the time he was looking at some rules. >> first of all the acting director of the marker is to be commended in 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 address some of those inappropriate practices by directing the enterprises to

prohibit servicers or a service or affiliate from receiving -- receiving compensation in the form of commissions for placing insurance, because it was a perverse financial incentive for placing insurance in these circumstances with affiliates or people who were paying commissions. and we've reformed a working group because this is an issue that is not only an fhfa issue, its impact -- it impacts everybody was a mortgage in this country, and we've set up a regulatory working group consisting of 14 state insurance regulators the national

association of insurance commissioners, and eight federal regulatory agency representatives to try to figure out how best to attack this problem. >> and when was that form? >> that was formed in 2013. >> okay. and is there a status update? >> they passed seven eight -- 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 industry. >> do you have a timeline of when it was completed? i think anything that is in limbo like that probably needs to get wrapped up. >> it's hard to set a timeframe

on a lot of these things as you noted. but we are going to do it as soon as they come up with a set of recommendations. and we are -- >> but have have not come out with conditions as of yet? >> it's in the 2015 scorecard and so we expect that to happen sometime during this year. >> we will follow-up on the. i'm going to ask a question as us go back over some of the testimony back then, a question i asked mr. demarco as well. is a 30 year mortgage necessary and why? >> now you've got me into congressional territory. i think that's 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 bottoms on people staying in the same place for 30 years or that assumption. >> and unaffected what did you and lower payment. so there i mean, there are a lot of factors that go into that but that's not really the a decision that fhfa is going to make. that's a decision that is because more appropriate made in the legislative context. >> personally, i think it might be the private market space that is probably where most of that is. i don't know if you're aware of this, and i'm going to quote this. most mortgages -- the 50 year home loan. that gets me very, very nervous when we are having these types of time friends out there.

thank you, mr. chairman. >> mr.. >> mr. chairman, just for his information. we don't allow that fannie and freddie, to back 50 years mortgage. 30 years is our limit, to be clear. >> it was one of the few times i agree 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 five minutes. >> thank you, mr. chairman. i apologize. 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 and 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 a liquid in the mortgage market and promoting homeownership. however, due to their financial trouble in recent years, we've seen attempts to not just refund

them the wind done completely, and i don't agree with that. i would like to go right into the questions, and transport last year president obama made remarks that he would like to see fannie mae and freddie mark wanted down and replaced by government back mortgage bond insurer. can you tell us where you stand on the proposal, and do you think this will negatively or positively affect the home buying market? >> that's a subject that i'm not going to express an opinion about. that's a legislative congressional decision and just a kind of put into perspective when i got to fhfa, there were multiple visions of views about gse reform, and i kind of took fhfa out of that discussion

because we're 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. >> i respect your answer but i want to commend you. wants to conservatorship of fannie and freddie, we've 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 enemy and for the mac announced new guidelines designed to help more low-income and first time buyers afford

homes, including a reduction of the minimum down payment for a home from 5% to 3%. what other proposals is fhfa looking at to encourage first-time homebuyers, and how is the agency making people aware of these initiatives that i've mentioned? >> well, we have a number of things that are 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 a refinance program for people who are underwater but have been regularly paying their mortgage. and the 97% loan product, you

know i think what we tasked fannie and freddie to do is to come in this space evaluate and how we can make credit available, credit for the people. and that's 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 tried to make good prudent decisions in the interest of safety and soundness, and the interest of liquidity in the market. >> i want to make my last question, what steps, if any, is fhfa taking to ensure that private capital is we entering

the market? because i can see some months where the numbers being, that people are buying new homes or use home has been going up and then suddenly they went in. so this is important on the private capital reentering the market. >> well, the major way is that we are doing aggressive risk transferring to the private sector. we are not holding on to these loans. we are transferring that risk back into the private sector, and we have tripled quadrupled really the risk transfers since i've been there. >> thank you, mr. chairman. >> the gentleman's time has expired. a chair now recognizes the gentleman from wisconsin, 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 statute which we appreciate that because we always don't think the laws and statutes are followed. i want to follow-up on mr. royce is line of questioning in regard to the funding of the housing trust fund. you are on this aware of section 1337, and basically we have a discussion about how whether the gses are well capitalized. and if they're under capitalized you really can't find the housing trust fund. would you agree with that? >> yes. well, no. not under capitalized, but if you'rethey're not making a profit at soviet agree with you. capital is a whole different issue that basically when when fannie and freddie were put into conservatorship, the capital considerations went away because basically we don't have any capital at this point.

>> one of the drawbacks is you don't get to split hairs to the language is usually pretty clear. you would agree that the language in the statute requires that the gses are well capitalized, not under capitalized correct? before you can find the housing trust fund yet to find the gses are not under capitalized, greg? >> no, i don't think that's the case here it says i can't make a decision that causes or would cause the enterprises to be classified as under capitalized 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 that provision, nor the third provision was applicable anymore because they were in conservatorship. it was the only only the first

provision that was applicable to my decision. >> can you direct me to the section of the statute that says unless the gses are in conservatorship? >> well, there's nothing in there that says unless they're in conservatorship but speeded so where did you come up with that? >> the conservatorship statute tells us whether -- what authorities we have in conservatorship. it wouldn't be in the housing trust fund's statute spent so that trumps section 1337? >> i think the preferred stock purchase agreements drones -- trumps that yes. >> so you're saying specifically that 1337 b. doesn't really apply image of the authority to fund the housing trust fund? >> that's correct. yes, if i hadn't conclude that i wouldn't have done it spent would you mind sending me the legal analysis on that?

because the statute seems pretty clear. i want to follow up so if you helping out on how you reason -- >> be happy to do that. >> that would be wonderful. >> in regard to the housing trust fund how is that going to be funded? >> how is it going to be funded? out of the profits of fannie and freddie spent where does come from? is there any surcharge or tax? >> no. in fact, the statute specifically says there cannot be a surcharge to the fund the housing trust fund and we have put out a rule that ensures that that does not happen to will it increase the cost, do you think, to the end home purchaser in the form of a cross? >> no. the statute says we're not allowed to increase the cost to the borrower spent the statute says a lot of things but sometimes it's applicable and sometimes not.

speedwell, all the time we try to follow the statute of the. >> i appreciate that. mr. garrett and i have central letter with regard to the gses lobbying. and this is sent on december 11 and we haven't received a response from you yet. if you received that letter? >> yes, sir, i did. >> can we respect that they can we expect space i thought you all would say we were doing it just in response to the hearing. we take every inquiries we get seriously and would try to go and get to the bottom of what of whatever speed is are you going -- are you going to continue to bet on gses lobbying? we continue the ban on gse lobbing? >> yes. we actually are continued the ban on gse lobbing. >> tranthank you, mr. chairman.

welcome back director watt. how is the family? >> the family is good. >> good, good. thank you. >> we hope it's going to grow. >> thank you for being here. although there are operational costs involved in requiring the gses to update the credit scoring model that they used in their cellar service guidelines, the gses are still using the fight go classic model in their service or guidelines, despite the fact that newer versions of fight go including fight go '08 and fight go on nine are currently available in the marketplace. given us how concerned are you that the failure to compel the gse to use the most updated credit scoring models in their seller service guidelines may not be given the gses the best

available assessment of whether a borrower is a good credit risk and may be unnecessarily restricted credit eligible borrower? >> well, your question illustrates the difficulty of this because to move from fico classic to fico '08 or '09 and it is the same challenge we have to move from fico classic to vantage or some other credit scoring model. so what we've done is in the 2015 scorecards, we've instructed fannie and freddie to evaluate both the feasibility and the operational complexity challenges related to using updated or alternative scoring models. now, feasibility is are these are these credit scoring models

better than the ones that's been 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 using alternative credit scoring models, because you know, turning the ship is a major task. >> so have the credit scoring agencies, have they been receptive or have they pushed these new versions of? >> yes, they have. both fico has updated this it's credit scoring model, and vantage and others are. we are regularly talking to them about this process yes. >> let's move over to h.a.r.p.

director watt, fhfa recently launched an interactive map showing that there are more than 722000 eligible households nationwide that could still benefit from h.a.r.p., a program that allows certain homeowners with gse backed loans to refinance in the mortgages with lower interest rates. thereby reducing their payment by as much as 200 a month while also reducing risk to the tax thereby reducing the likelihood to default on their mortgages. what is your agency doing to ensure that households are aware of this refinancing program? >> well, first of all we are very proud of that map because it gets you to the people who are eligible for hard

refinancing, 3.2 3.3 million people have already taken advantage of h.a.r.p. there are over 700,000 who would still be eligible for it we are trying to get to those people. now, let me just emphasize that these are people, every single one of them, i'll 3.3 million of them 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, you know this notion that you got to the down payment, you've got to have equity in the house for people to continue to be reliable homeowners and borrowers is just in the face of all of that. so we're trying to get to those people. we have done a series of meetings around the country and

the highest concentration where those people are and trying to get them to take advantage of a harper refinance program. >> the gentleman's time has expired. the chair now recognizes the gentleman from south carolina mr. mulvaney. >> thank you mr. chairman. i appreciate your dedication to following the law and follow the statute. i hope it's an example he sets up for the rest of the administration. regarding the statute, i think we talked a little bit today about the statute regarding the extension the what statute did you rely on in ending the suspension? >> the housing trust fund statute the affording -- of herbal housing -- it was reauthorized by congress in error. >> correct. i misunderstood what you said but that's the statute that says when to suspend correct? there is the statutory guidance for you on how to end a suspension, is there?

>> it says the director shall temporarily suspend. i would assume the word temporarily has an inverse that says you can on suspend. you know, technically you may be right that there's no statute that specifically says -- >> let's walk through this. >> but you apply the same criteria to suspend and unsuspend and that so we did. >> i think that's fair but by the same token the mandate there's a discretion to you shall suspend if you find one of these three conditions correct? >> yeah, and i interpreted it the same way. you shall unsuspend if you find these three things don't apply anymore. >> let's walk through them. it's as they contribute to the financial instability of the enterprise causing would cause to be on a tablet or preventing it from -- but heard to say something to mr. duffy that was new. which is reference to fannie and

freddie making a profit. that's not in the statute right? that's not one of the factors you can consider is it the? >> well, number one says contributing or would contribute to the financial instability of the enterprises. if you are waiting the -- >> is amy stable? >> the primary factor looking at is whether they're making money or not. >> really? whether a bank is making my is the only issue it look as to whether not they are stable. is that what you're saying? if bank of america's making a profit and, therefore, they must be stable? >> i don't make decisions about hank of america. i'm following the statute was written and applies to federal housing finance agency. >> is amy stable? >> we think it is -- is if amy stable. we go into the decision to reverse the suspension, prudent reasonable safeguards in the

event that they go back speed again, i read that in the letter. we will suspend the payments i get that. not in the statute, is it? the protection you put in the letter is not part of the statutory consideration. i hear what you're saying but i think it's a good idea but it's not statutory. you can't take the position we are falling to statute, don't worry because of something and let this has if we have to go back to treasury will stop the suspension to you are rewriting the law, aren't you? >> i'm following the conservatives to statute there, mr. mulvaney. spin some would say number two under capitalist, i think you've taken the position sometimes your agreement with the treasury moods this section, is that fair? >> yes. >> minus 10 and again i am new to this is your agree with treasure is an agreement, right? >> that's correct. >> how does an agreement trump

the law? >> well, i think the law got trumped when they went into conservatorship and the taxpayers had to ante up $187 billion and so an agreement was made. that was before i got there but i didn't know go should the agreement, but the agreement was in place when i became the director of this agency. >> between one ages in another department cannot trump the law spent i agree with that. >> so into conservatorship statute doesn't explicitly repeal section b2 then section b2 is still valid law. >> i don't agree with that but i make a understand what you're saying. i just disagree with you. >> if the statute doesn't speak to b2, why is b2 still not the law? >> well, it just doesn't apply

here i don't i'm not sure national we are engaging in a legal argument here that speed is that so we are supposed to do. >> if you all did want to fund the housing trust fund, you have the authority to stop the housing funding of the housing trust fund but don't expect me to disregard the law and do it for you but if you want to do that, i mean that's what's in congressional authority speed under these circumstances we don't think we should be funding the trust fund and all we're asking you to do is follow the law. and if you believe it is undercapitalized or you believe it is unstable, then you should stop the payment. i yield back. >> jeff guinn yields back. the chair now recognizes the gentleman from california, mr. sherman, for five minutes. >> mr. chairman, you think we could take a two-minute break? >> the chair declares a five minute recess. [inaudible conversations]

>> the committee will come to order. members will please take their seat. the chair now recognizes the gentlemen from california, mr. sherman, for five minutes. >> well, welcome back to the only thing that would be better than seeing you at a distance would be having you close at hand but i've been i've taken your advice on some issues involving financial services, i'm sure to get, i look forward to your input over the next five 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 it into the record, and so i request unanimous consent to put this fine letter in hearing. >> without objection. >> and to commend mr. watt for his actions. first a kind of technical question. hud one is being phased out by the new integrated mortgage disclosure form that combines the tila respa forms and is to give consumers all line item cost of the home closing. i wonder if you're focused on the this rule and what steps, if any, fhfa has taken on this rule to make sure consumers are fully informed? >> i believe that is under the

consumer financial protection bureau's jurisdiction. we haven't been actively involved in it. i did 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. >> okay. i'm sure that you are focused more on real estate lending than some of the more general folks involved in the benefit from your input. your predecessor pushed for a lower conforming loan limit. you demonstrated your wisdom in

going in a different direction and action that has done more than anything else to impress me with your wisdom. d.c. that -- do you see that ugly proposal rearing its head again any time since? >> well, 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. >> i look forward to continued wisdom on your part, and i yield back. >> gentleman yield back to the chair now recognizes the gentleman from new mexico, mr. pearce, for five minutes. >> thank you, mr. chairman. a.q. director. although we haven't always agreed i've admired your

straightforward responses and i find myself admiring that today. as we look back to the problems that put you into conservatorship, we found that fanny began and everyone began to expand the number of loans that were given to people that probably shouldn't have gotten them. the oig in 2012 found that fhfa was somehow, some of responsible because they overlooked the fact that cheney was beginning to relax its underwriting guidelines. they were getting -- fannie. they were beginning to violence they said they wouldn't buy the they didn't a college that was a change in law. 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. i just wanted if you are

independent from us. there are members of this congress and this body who are pushing for those relaxing, relaxing of those standards so that people can get loans. and i hear some of the same language today so when we making to do what are we doing to make sure this happened again? >> 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 makes and we take very seriously our statutory mandate both to do things faithfully and soundly, and to do things in a way that will provide liquidity in the housing finance market. and that's what i said in my opening statement we are constantly walking that balance.

so we would be as responsible for those decisions now as fannie and freddie would be because of their in conservatorship and as part of our conservatorship -- >> i understand. i again wonder about the oversight mechanism that will take a look at what they're doing because it was them that facilitated if any have not bought those mortgages, they were never going to be often people knew they would never pay off, they didn't care because they're able to get rid of them out of the banks and sent them on to someone else and let them worry about it. so as we go through into the future i worry the same thing. i wonder also so fannie and freddie are making a profit, and so i guess you were talking about a model to all of them. have you gotten the models that i won't rate of growth that we're going to start experiencing troubles? and should we increase our surveillance? what rate of growth would that

be? >> well, we don't do it at what rate of growth. >> or whatever you have spent we do it on a loan by loan basis and we said credential standards that apply to loans to 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 space i reclaim my time. having run a business with 50 employees, i find it beyond imagination that you can take a trillion dollar portfolio and looked loan by loan. with all respect, i appreciate you saying but i find that really hard to believe. >> i apologize. that probably was an overstatement, but we said credential standards that have to apply to the prudential standards that have to apply loan by loan by loan spent those existed before.

people who were getting tremendous bonus is prohibited time begin to cheat the city. they begin to rig it to where they could get bigger bonuses. so until you reevaluate human nature. last point i think i want to make, another great pressure in the system was the low interest rate. so some point the federal reserve whether they like it or not will have to go up on interest rates. that will put more pressure on the housing market and i just, i see that we don't have our ship really right when he it goes into the troubled waters of lower growth rate, higher interest rates, that we will have exactly the same thing the same problem with an agency that is what undercapitalized. you have to admit that there in a shaky financial shape as we move forward and as we get into troubled waters. with that i yield back my time. >> the chair now recognizes the gentlelady from wisconsin, ms. moore. >> thank you so much, mr.

chairman and ranking member. and 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. i would like to start off by just sort of making a comment before engaged the director in questions. because much has been said today about the credit worthiness of the borrowers with a 3% down and there has been much information that lower income borrowers were the cause of the financial crisis. in 2008. and so i just would like mr. chairman, with unanimous consent to put into the record a report

done by duke university and mit. >> without objection. >> thank you and dartmouth, and also a seminar from harvard business school speak the gentlelady will suspend the little audio problem here with the gentlelady's microphone. maybe you ought to hit it once or twice. [laughter] >> try again. >> thank you. this is a 42 page report, mr. director and mr. chairman but its conclusions are that the higher default rate can be attributed to loans made to middle and upper income folks and not low income folks. and so i just wanted to clarify are for the 1 millionth time that the lower income borrowers

were not the primary reason for the financial meltdown. i do know if you have any comment about that research, but i would like to enter that into the record. >> i'm glad i don't have to participate in that debate anymore. >> okay. thank you. i was looking for your prepared testimony, and you talked about mortgage servicing. and i guess i didn't come it wasn't really clear to me through your testimony what was the product of the there hasn't been changes in the compensation structure, better aligning of services with those of the enterprises and i was wondering how that translated into better mortgage servicing for the customers? >> well, that's a very difficult

subject because it's massive. what essential has happened over time as a result of the meltdown is servicing went from just collecting money on mortgages too much much more difficult process of dealing with people who are in default. and so that'll industry has evolved -- that whole industry has a bold, 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 we've had to deal with because some of them even though they might've been better servicers, were not necessarily as financially sound for the long-term. so we've had to deal with that.

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 loan for like 50 since alone, now it's up -- or $50, a fee to a superstar, now it is up to well over $2000 as a result of the increase responsibilities. but it's a very difficult area and we interned 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

mortgage and now when people are -- >> reclaiming my time. i would have assumed -- well, i won't. i have another question -- >> the gentlelady may have another question, she is sadly out of time so she could submit the question for the record and the witness can respond. the gentleman's time has expired. the chair now recognizes the gentleman from north carolina mr. pincher. >> thanks, mr. chairman. mr. watt, good to see my friend from charlotte. >> good to see you. >> you seem to be relishing your new job and we wish you well. in fact, we want you to be successful. and as noted by our comments today, we share or have the concern that of the what would come out of the current

policies easy credit that you believe is complicit in the housing crisis that we have previously experienced. as you know, former acting director demarco, he proposed increases for the guaranteed fees for gses would charge the lenders. and under your leadership you suspended them -- you suspended implementimplement ation from those increases. this last december the cbo made a public statement or report that suggested how we should attract new capital into the secondary mortgages. i could quote vendor a state policymakers should increase the to gses, guaranteed fees to attract new private capital to the secondary market. and even a small increase in guaranteed fees from the present level allow private firms to immediately compete to the highest quality loans. you've also stated that you want

to find ways to bring additional private capital into the system in order to reduce taxpayer risk. your own decision you have chosen to go against the former director and your chosen against taking the cbo. if you're not willing to increase the guaranteed fees what additional steps would you recommend to increase the role of private capital, and to decrease the role -- the exposure of fannie and freddie and, frankly, to the american taxpayer? >> let me just put into perspective one thing. i've never done anything in opposition to the former acting director. i have the greatest amount of respect for acting director demarco and his decisions. so i just want to be on record making that clear. and i've taken some abuse for saying that but i just have to

say it. >> sure. >> the primary means that we're using is to test different risk-sharing models, and they have been very successful. we have tripled, quadrupled the amount of risk-sharing we've done in the one year that i've been there. the enterprises had a goal of $31 in 2013. we increased it in the scorecard and $90 billion, and shot right past it before the third quarter was over in 2014. 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 already proven successful. we have encouraged them to look

at whether it is practical to even go back and risk shared some of the legacy book of loans. all of this risk-sharing we've done essential has been with the new loans, the more pristine loans. so we are very active in that space. we are also looking at the gc question, the conclusion 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're going to change it or not, and we're 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 gses should be set what factors should be considered in setting guaranteed 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 have never noted out how they were set. >> quickly may i ask you suggested are you've stated policy changes. allow these down payments to be as low as 3%. you stated there are offsetting measures you would implement. would you give more clarity to what those are? >> homeownership of -- >> given that we believed easy credit you saw the chart earlier, was a major factor in current demise. >> very brief answer, please. >> homeownership counseling mortgage insurance, private mortgage insurance higher fico scores. i mean, there are a number of factors we're taking into

account that would offset the lower down payment. >> the gentleman's time has expired. the chair recognizes the gentleman from minnesota mr. ellison. >> thank you, mr. chairman and ranking member. my colleague brad sherman bbq by putting the letter that we sink into the record but i just wanted to say that i was glad to see we 61 members of congress, including almost half of this committee agree that your action to end the temper suspension of occupations to fannie and freddie to the housing trust fund was the right thing to do. and so we are very happy about it, it is over in the records i don't need to enter it in a just wanted to make note of that. i also want to comment that it's true that you have to face a lot of questions from folks who believe that the real problem of the crisis of 2008 was gses

and borrowers. but it's also true that you have to contend with people who think you ought to be moving faster in the other direction. and i know that because i've had constituents of mine said, well, why doesn't director watt do this and did do that, move quicker things like that. i think one of the other things that your office has done after taking a lot of care, a lot of time, a lot of research is decided to review the process of arms length transaction and not doing any arms length transactions, and reviewing that policy. i wonder, could you talk about some of the thinking that you entertained as you are reviewing that policy and why is it that you came out how you did? >> well, 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'd be incentivizing that kind of negative behavior. and that have kind of taken hold and was wagging the dog, you know. there probably are one two, 3% of the people in the world who would think that far ahead that they would default on a loan and then after foreclosure will 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. so that's what we did. it's not automatic and 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 everyone of these things. .. met with ordinary homeowners. you met with policymakers. you have done exhaustive thing. i want to commend your staff.

you have a pretty good staff member. she used to work with my office and gone on to bigger and better things. i am glad she is in the right place over there. can you talk about why you think it is so important to do all-out reach you have done and consult everybody you consulted and do all the research you have done? >> i think one of the members over here pointed out they appreciated plain talk. >> yes. >> there is a lot of misinformation in this, 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 demystify this whole process the better off we are but most of the outreach we have done going out has been about specific things that would benefit borrowers, such as the harp

program. or the neighborhood stabilization initiative in detroit. we have, i have kept a very, very low profile. i have no interest in being in front of a camera. >> too late. >> the gentleman's time expired. >> we have got a different approach tonight. thank you, sir. >> the chair recognizes four or five minutes mr. rothfus from pennsylvania. >> thank you mr. chairman. is this on? can you hear me? is this good? director watt welcome back to the committee, for a couple of hours anyway. i want to talk a little bit about the 3% down payment program. fannie mae in its 10-it filed with the sec, third quarter of 2014 mentioned the program. here's what they said. we also plan to offer a 97% ltv

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 period. however we believe our single family acquisitions will continue have a strong overall credit risk profile given our current underwriting eligibility standards and product design. seems to me fannie mae in its filing with the securities & exchange commission has admitted that the program is going to result in loans with a higher risk. would you agree with that assessment? >> i have admitted that today too that possibility exist if you're not careful which is exactly why we're being careful and. that was a third quarter

analysis and you notice they didn't announce this until december because we were it putting all of these constraints around them to make sure that we minimized that risk. so -- >> if i looked at when they file a 10-q for the quarter we're in right now, i would not expect to , see something like that. >> you may see something similar. 10 hqs as you know are designed to -- 10-qs as you know are designed to i have got public and people out there the worst possible case. >> aware of the risks. >> right. >> the administration in 2011 released its so-called white paper, entitled reforming america's housing finance market. page 14 of the document administration recommends that one fha market share should be reduced, two fha should return

to precrisis low for lower credit and mod rad credit. moreover the administration recommends coordination between fannie and fha to help insure the private market not fha fills the market opportunities created by reform. do you previous the recent policy announcement by hud effective yesterday to lower fha annual mortgage premiums by 50 basis points will affect the return of private capital to the markets? >> i don't have an opinion on that representative because hud is not fha is not under my justdy and hud is is a part of the administration. we're an independent regulatory body. >> how many new homeowners had you anticipated with the 97% ltv program? >> i'm sorry? >> how many new homeowners have you anticipated with the 97% ltv program? >> 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'm not sure i can access them quick enough to give them to you here. >> i'll follow up. >> we'll be happy to provide them to you. >> when we talk about the 3% down payment you've been talking a little bit about the creditworthiness of people paying back their mortgage if they're able to pay it back, but we do issue out there with people who are underwater. one of the concerns i have is, when you have institutions such as fannie and freddie, in the scale they're able to influence the market coming up with a program like this, i read an article, just this weekend you may have seen it in the "washington post" about a family in prince george's county where they have a $560,000 mortgage but the home is worth 480,000. while that family may continue to pay on the mortgage there is really another eshoo here.

it is families who do not feel as though they're getting ahead. families who may feel trapped in their house and when we have a program that has a chance to encourage this. we saw significant increase in mortgages that were underwater following the crisis. what would you say to a family like that who buys into a program? >> 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're in a situation and we're trying to make sure that future borrowers don't get themselves in that same situation. >> gentleman's time expired. chair recognizes for five minutes the gentleman from delaware mr. carney. do you want to maybe try the one next to you, mr. carney?

there we go. we have a live one. >> me or the mic? >> both of you. >> i hope this doesn't mean i have to sound as smart as mr. foster. mr. chairman, ranking member waters, thank you for opportunity to ask a few questions. mr. director, welcome back to the committee of 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're not going to comment on the specifics gse reform, that is a legislative responsibility but you have made some public

comments on whether it is necessary or not. 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? >> well there is nothing worse i found in 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. is not about what they do. it is about providing more certainty. we have challenges at fannie and freddie, maintaining and an employee base in this environment. because they don't know what the

future of fannie and freddie is. so, i mean there are multiple implications that follow from the failure to do gse reform. >> so would you say it should be a high priority for us, for the congress and administration to get that done? i mean when i first came here, the former chairman was criticizing the administration for not doing anything on gse reform. former chairman mr. frank was criticizing republicans about not doing anything on gse reform. i'm part of the team that has come up with a proposal i like to talk to but do you think it is time for that to get done? >> i think there are implications for not doing it. for me to put a priority on it. >> fair enough. >> i think is inappropriate role for me because there are a lot of things that congress deals with that are priorities.

that is just not my role to set those. >> one of the things our legislation does is invite require right capital to be in a first loss position over an explicit federal guaranty. in some ways similar to the white paper that treasury presented here in this chamber when you were a member of the panel four years ago. you've done some of that in terms, my question is what is the appetite for private capital to enter into this space and do you have any sense as to what that premium might be for that first loss position? >> well, private capital there is, there is an appetite. i don't know that i can assess the magnitude of the appetite but, i mean i think they're playing a an important role in

the availability of housing finance in this country, private capital, that is and we're trying to facilitate that role by takeing loans off of their books so they can make more loans. that was the whole philosophy under which fannie and freddie were founded in the first place. and we're facilitating it through transferring risk back to the private sector. so but, that still does not negate the importance of providing certainty in the future by doing gse reform. >> well, thank you. a number of us as i said are working on that and we had discussions with members of the senate with democrats and republicans on this committee and hopefully there will be an opportunity in this congress to move something forward that basically contains a federal

guaranty to i happen to believe, the question was asked of 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 affordability perspective. the only way to sustain that is through some government guaranty. let me close by thanking you. i was one of the members who signed congressman ellison's letter ending suspension the fee to the housing trust fund and capital market fund. appreciate your decision to do that. good luck to you. >> thank you. >> the gentleman's time is expired. the chair now recognizes the gentleman from arizona mr. schweikert. for five minutes. >> thank you mr. chairman. is it chairman duffy now? i wish everyone embraced your current position is substantially risk management. i'm not sure a lot of folks

appreciate that 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, excuse me, servicing. i accept that a lot of 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 loan impairment issues. how is that harmonization of servicing standards that i believe your folks have been working on? do you know where progress is? >> we're making progress. you know 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 because it was either too complicated or 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 the longer term implications of that? are you capitalized well enough to, to be in this business for the long haul, if things go south? >> my great hope, i know it is complicated and folks appreciate that that you work on the harmonization. >> we are definitely doing that. >> for paper, or a loan that has some difficults to be able to be

moved easily, efficiently low costwise to servicers who will actually do that, reach out to protect the securitization here but also work with those homeowners. second -- >> can i just make a point? i think you would be happy with the most recent set of things we've 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. staying out of foreclosure as opposed to going to foreclosure. >> only obligation on your side is simple, efficient low-cost ability to move paper back and forth when necessary. second one is, this is more just from a being from the west. i know you said you're working on it. you're working on sort of risk pricing models. you saw it pop up. for those of us out in the west

we're deed to trust states. we're very efficient. we're very low cost in the ability to do sometimes what's difficult. some states are mortgage states that put on lots and lots of consumer protections but have raised the costs. and it is only appropriate only fair that those different cost structures be priced into the product because for those particularly out west, we often feel like in our pricing if you have universal natural pricing on that risk that we are subsidizing states that made it much more difficult to move through that foreclosure process. so something, it's there and it's math. hopefully you will treat it that way. the thing i'm most interested in, some i will have to give you in writing because we'll never have time was it last week you did the stacker deal? >> yes. we're regularly doing stacker deals. >> but the most recent one was first loss piece that was

transferred out which is fascinating to me because in that sort of model you're actually creating a securitization where the gse ultimately is a catastrophic coverage. help me understand in remaining secondings how that works and how that may help us drive towards gse reform. >> so 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 private --

>> director watt, in writing thank you for your patience. >> time expired. gentleman yields back. much the chair recognizes mr. kildee from michigan for five minutes. >> thank you, mr. chairman. at risk of redundancy mel great to have you back. i only got to serve a year with you. in the year you've been gone i've become the second-ranking member on democratic side of the committee, at least for the moment. before i ask questions i would like you to comment, i would like to submit for the record comments from the homeownership preservation foundation regarding strengthening of the u.s. housing finance civil through provision of housing counseling services. we talked about credit score and down payment-related risk mitigation factors and as you have stated, there are other factors to be considered. we had a panel here some months ago, 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 about in general about mortgage lending and risks associated with mortgage lending. we happen to have 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 heavy emphasis on homeownership counsel, that they would have default rates that were lower. could you quickly comment on that particular point. mr. chairman, if you don't mind i would like the comments entered into the record and i have a couple of other questions. >> without objection. >> i don't think there is any question that somebody who gets good homeownership counseling, either preownership or in some cases post-ownership it makes them a 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. >> really important point. i hope as we move forward on whatever process we engage in, that we make sure to consider those factors. i would like to turn to another somewhat related question. it has to do with access not only to credit but access to mortgages even for credit worthy individuals in markets such as markets i represent. i represent flint, michigan, my hometown where the average home price is $47,500. and, for many legitimately legitimate borrowers with decent credit, for many banks, many mortgage lenders mortgages of that size they say just don't make economic sense. i wonder if there is anything that you are working on or could refer to us in terms of the work

of fhf-a that will make sure in those markets we still have opportunity for homeownership? otherwise we're basically consigning those communities to rent. your point about the effective vacant properties on surrounding values is an important one but it is also the percentage of homeownership of those occupied properties has similar effect. wonder if you could comment on that? >> we put in 2015 scorecard on obligation on enterprises to work with community smaller banks and statehousing finance agencies to try to get to those lower and underserved areas, lower cost areas and underserved areas. and i think we're going to make some progress on that this year. i think the 97% loan product will have some bearing on that,

although it is not specifically designed for that category of -- >> i would agree. this question we have, obviously listened as you answered questions about particularly related to down payment thresholds. i think we could all sort of agree, you don't have to bother to answer the question. if we decide ad 20% down payment standard would be enacted we would have far lower default rate. or a million dollars in net value, net assets in your own personal portfolio you might have lower default rate. the question how do we balance these interests so the maximum number of americans have the opportunity to achieve homeownership, understanding there are many, many ways to mitigate risk associated with people who are in a financial condition that does not allow then, because they're dealing with other exigencies in their life every day to save the kind of money it takes? one of the ways, you may comment on this, you may not be able to

pause of the rule making process, federal membership standards for home loan bank is some concern for me. in some ways limiting standards we might cut off another source of revenue can be directed to help community based organizations that are working on homeownership. >> gentleman's time expired. >> mr. watt will respond to mr. kildee in writing. the chair recognizes mr. barr from kentucky for five minutes. >> director watt welcome back to the committee. congratulations on your confirmation. as you know the consumer financial protection bureau has finalized its ability to repay qualified mortgage rule and purpose of that rule is ostensibly to encourage safe and sound mortgage loans but at a recent survey of mortgage lenders showed that about 2/3 of respond would restrict lending because of directly, because of

the qualified mort rule as rule as defined by regulators under dodd-frank. 0% of the respondents expected new regulations to measureably reduce credit availability. obviously given your agency's fhfa's recent moves, recent policy changes you appear to share the concern about credit affordability, access to affordable mortgage credit. changes to guaranty fees the guidelines allowing bses -- gses to buy loans with ultralow 3% down payments and all of this appears to conflict with the bureau's qualified mortgage rule. so my question is, is fhfa pursuing a policy of encouraging mortgage lenders to originate non-qm loans that the bureau would deem risky?

>> no. we're not. we're not without prudent compensating factors to take whatever that increased risk might be into account. >> well, isn't it, wouldn't it make sense that a a borrower that can only afford 3% down is likely to run into the debt to income ratio limitations imposed by the qm rule? >> yes. >> okay. so i guess, again, i just i'm just curious to understand how the american public is to interpret what the federal government is doing, sending mixed signals of including more credit availability on the one hand, your policy changes, versus what the bureau appears to be doing which is tightening or restricting access to

mortgage credit? >> 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. i don't know that that will sustain itself but that's where we are at this moment. >> director i introduced legislation called the portfolio lending act. i will be reintroducing that legislation. it has some bipartisan interest in it. 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 primary motivating policy in the dodd-frank law, 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% loans so the risk is on shareholders of the bank and not the taxpayer? >> i think that is a judgment for congress to make. that wouldn't be a judgment for me to make. if you introduced legislation then i'm sure congress will evaluate it. >> we, 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. .29%. freddie mac has roughly 2 trillion in assets and has a leveraged capital ratio of .64%. the typical bank i understand to be leveraged 10 to one.

current leverage at fannie and freddie is far greater than the typical financial institution. i heard your testimony to be earlier that you believe fannie and freddie are adequately capitalized and you're just following the statute? is that right, given those capital ratios is that true? >> i don't think i expressed any opinion about the adequacy of the capital. what i said was we're operating under a preferred stock purchase agreement that has basically taken capital out of the equation during the period of conservatorship. >> my time has expired but i would suggest if they are adequately capitalize i would wonder why they're still in conservatorship. >> the gentleman's time has expired. >> chairman duffy could i trouble you all for another two minute break. >> no objection. chair will recess for five minutes again for a second time.

the committee now reconvenes. the chair recognizes the gentlelady from ohio, miss beatty for five minutes. >> thank you so much mr. chairman. let me just say to director watt, what a pleasure for me to be here. i noticed you looked at me and saw the big book and list of questions. in full disclosure, director watt was my mentor. 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, that you 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've heard from both side, centered a