later a look at the international response to the ebola outbreak in west africa. wednesday the senate banking committee held a hearing on freddie mac, fannie mae and the state of the housing mortgage industry. congressman mel watt took the -- updated members on new efforts to assist homeowners. this is 90 minutes.

i call this hearing, your honor, welcome back to the committee. since this is likely my last hearing regarding gses i would like to encourage my colleagues to -- for the past three years, we and our staff have spent count less hours wrestling with the possible solutions and pittal falls. some options are not practical, while others are too it logical, yet we still need to find a

solution. the enterprises remain trapped today. fhfa continues to perform the dual role of both regulating and rating the business of the largest entities in the mortgage market. this is not sustainable. and there is no consensus in congress regarding how to move forward. all the while, the credit box remains extremely narrow, locking out many potential borrowers with good credit including first-time home buyers who are needed to expand and sustain our recovery. while i oppose returning to products with confusing terms, we need to find a way to bring the pendulum back to rational underwriting, unfortunately, the

tight credit conditions will remain a challenge while the future structure of the mortgage market is uncertain. fhfa, under director watts guidance has taken steps to p provide for certainty in the market and protections for buyers. these initiatives include expanding the loan to value requirements from 95 ltv to 97 ltv, updating mortgage frame works. i applaud director watts and his team at fhfa for taking steps to stabilize the enterprises and the household market, focussing

on the common securitization platform on the enterprises, exploring a single security to increase liquidity and developing stronger counter party oversight are all efforts that will help stabilize the market for the future. however, there is only so much that can be accomplished while the enterprises are in limbo. everyone agrees that the conservatorship cannot continue forever. so i hope my colleagues will keep working towards a more certain future for the housing market. however, if congress cannot agree on a smooth or certain path forward, i urge you, director watt, to engage the treasury department in talk to end the conservatorship.

before i finish, i want to thanning my colleagues on this committee as well as their staff and my staff for all their hard work in housingne reform. with that i turn to the senator for his opening statement. >> u thank you very much, mr. chairman, i appreciate those kind words and i also appreciate the tenor of your remarks. today is an important hearing. this is the first time that director watt has been before this committee for an oversight hearing since he has become the director of the fhfa and it is also as you indicated mr. chairman, probably the last housing hearing of the senate banking committee that you will be chairing. mr. chairman, i want to take this opportunity right now to tell you it's been a pleasure working with you. both in the capacities that we

have had as the chairman and the rangi ranking member and also in the capacity that you and i have held as chairman and ranking members through the year. i have truly appreciated our working relationship. i have especially enjoyed working on election to address housing reform, fha reform, improving the terrorism risk program and other important topics. we have had a productive collaboration over the years and i wish you the best and thank you for being a great partner. as director watts primary roles are fannie mae and freddie mac and regulator of the home loan system, this is what i want to address 25i. these are separate and distinct tasks that are incredibly possibility. -- until congress acts to reform

our housing finance market. i wish that we were sitting here today to hear director watt describe his plan for the implementation of the phase in to the next housing finance system. i suspect director watt may wish this were the case as much as anyone else. while we were successful in passing a bipartisan path forward out of this committee, the ultimate goal of enacting legislation is not going to be achieved in this congress. this being the case, director watts job of protecting these companies is even more important. since taking over as conserva r conservator, director watt has been action tiff. such as a change in the strategic -- reducing their dominance in the market, a shift in the focus of the common securitization platform to focus solely on fanny and freddie as

opposed to it's original -- and expanding fannie and freddie's business by expangding home borrower equity. home secretary castro is u now making statements that the fhfa will soon start setting aside money for trust funds. if this were to occur, it would happen despite the fact that these companies would that little or no capital. while i have serious concerns with some of these ideas individually. perhaps my largest concern is that collectively they appear to -- over the course of the last two years, this committee held a series of in depth hearings that examined the failures of our broken housing market and various -- while

there was -- one of the areas of consensus was that the status quo had failed us and we should not return to that in the fight. we cannot allow fannie and freddie back to toxic mortgages with little or no capital. our path forward should be on sustainable homeowner ship, facilitated by a strongly capitalized private sector. while i understand that some individuals and entities have been pressuring director watt to institute changing they favor via the conservatorship, we all understand that that is not the proper role of the conserve for. as director watt floated in his confirmation hearing, the conservator's role is to build a solid bridge from where we now are to wherever the congress decides the future of the housing finance system will be. i look forward to hearing from director watt as he tells us how he plans to build that bridge.

i also look forward to him hopefully dispelling any notion that fannie and freddie are somehow being re-established as the long-term secondary market -- in his role as conservator will address their dominance in the market, renounce any demands or outside pressures to divert the revenue of fannie and freddie to any sources other than the taxpayer and maintain sustainable, safe underwriting at these institutions. thank you for joining us today mr. watt and thank you mr. chairman again for holding this hearing. >> are there any other members that wish to make a brief opening statement? >> thank you. i want to remind my colleagues that the record will be open for the next seven days, for opening statements and any other materials you would like to submit.

now i would like to briefly introduce our witnesses. melvin l. watt is the first director of the federal housing finance agency. prior to his confirmation, director watt served for two decades as the u.s. representative for north carolina's 12th congressional district. director watt, please begin your testimony. >> chairman johnson, ranking member and members of the committee, thank you for inviting me to discuss the work we are doing at the federal housing finance agency. it's a privilege to participate in chairman johnson's last hearing and all of us at fhf ara appreciate his hard work and accomplishment on housing issues. i also want to share my personal best wishes as you enter the new

role of full-time grand parent. fhfa's statutory mandates require us to -- safety and soundness of the home loan banks, fannie mae and freddie mac and that they provide liquidity in the national housingness market. fhfa works to balance these obligations across all of our activities 89. because fannie mae and freddie mack are under conservatorship, we're also main dated to preserve and conserve their assets. in may, fhfa issued a strategic plan and score carda outlined three strategic goals for -- each of these strategic goals is fully aligned with fhfa's

statutory man dates and fully aligned with the commitments i made to this committee during my confirmation hearing. the first goal is to maintain the credit availability and foreclosure prevention activities supported by the enterprises and to do so in a safe and sound way. we have worked with the enterprises to update and clarify their representation and warranty frame work to encourage responsible lending to credit worthy borrowers and to enhance their outreach to small and rural lenders. our objective here has been to normalize the availability of credit within the enterprises approved credit box for borrowers who have the ability to repay a loan.

the second goal is to reduce taxpayer risk by increasing the role of private capital in the mortgage market. fhfa required the enterprises to triple their credit risk transfers in 2014 and they have already exceeded this goal by substantial margins. our third goal is to build a new securitization infrastructure for use by the enterprises and adaptable for use in the future mortgage market, wherever that might be. we have defined the governance vuk chur of the common -- recently announced a ceo for their joint venture and we are making much progress toward our multiyear goal of developing a single security.

our strategic plan and score card also have affordable rental housing priorities for the enterprises. the focus is not to compete where there is private sector coverage of the multifamily market, but to even sure that affordable housing is available and that the housing needs of people in rural and under served areas are met including areas that rely heavily on manufactured housing. fhfa has also focused on regulating the federal home loan banks, and our efforts include a proposed rule that would clarify their membership requirements. we propose this rule because fhfa has a responsibility to ensure that the banks fulfill their statutory mission to

support housing finance in a safe and sound manner. i want to emphasize that getting feedback from stake holders is a crucial part of our policy making process. we will strongly consider comments made by members of this committee, and the public in determining our final rule on the bank membership standards as well as our other proposals including guaranty fees, single security and enterprise housing goals. i thank you and i look forward to answering your questions. >> excuse me, director watt, but we have a quorum present so i move the committee to executive session to vote on the -- florida's to be assistant

secreta secretary of florida's housing and you are bang developmeurban. ms. ramirez has been nominated to leads the huds office. she's courage the president and ceo of san antonio housing authority and would bring nearly 20 years of experience, ranging from affordable housing and community development programs to this position. ms. mcmillan has been nominated to serve as administrative and fte. she has served as deputy administrator as fte since 2009 and she became acting administrator in july of this year. as stepi ideputy administrators

has played a key role of the implementations of the reforms. senator, would you like to make an opening statement? >> no, thank you, mr. chairman, i don't have an opening same to make. i understand we're going to do this on a voice vote. and we would be supportive of doing so. >> mr. chairman? >> yes. >> could i just have a statement included in the reported at there point? >> you may. >> in the interest of mainta maintaining a quorum, i ask other senators to withhold -- statements may also be entered into the record. without objection, we will now vote on the nominations of ms. ramirez to be assistant secretary of housing and urban development and ms. mcmillan to be the federal transit administrator at the u.s.

department of transportation. those in favor say aye. those opposed say they. the eyes have it. the results are here reported verbally to the full senate. >> director watt, thank you very much for your testimony, we will now begin asking questions of our witness. will the clerk please put five minutes on the clock for each member. director watts, first i would like to thank you for extending the comment for the federal home loan bank membership role. how many home loan bank members would not meet the ongoing mortgage participation requirements that have been

proposed? >> our review indicates preliminarily that less than 100 would be in that category. there are some that are close to the categories that we proposed, or the percentages that we proposed. and of course, we are still taking comments on that proposed rule and taking those comments into account to minimize any adverse consequences, and will continue to do that through the comment period and through the evaluation. overall, there are like approximately 7,500 member entities in the federal home loan bank system. so less than 100 would be a very small amount that would be adversely or could be adversely impacted, even if we adopted the

rule in its current form. >> what would be the interaction with and impact on the cost to powers of the proposed frame work and the proposed eligibility requirements? >> we're evaluating those. one of the reasons we ultimately ended up coordinating the comment period for the gc input and the mortgage insurance eligibility standards is because there is a very, very strong relationship between those. we're not trying to adversely affect the availability of credit by either one of those things, but we have spo responsibility to make sure that not only in normal

circumstances, but in distressed circumstances. mortgage insurers have enough capital to perform the role that they are in the system designed to play. and they were not able, some of them were not able to perform that role in the distress situation that we went through. we are also not trying to control overall the entire mortgage insurance industry, but these are counter parties to fannie mae and freddie mac and all of our counter parties need to be strong to make the testimony work effectively. and if they can't play the role that they are mandated to play, or called upon to play, or contractually obligated to play

in a distressed situation, then the system falls back on fannie and freddie and ultimately as fannie and freddie are now in conservatorsh conservatorship, it would fall back on the taxpayer. again, this is one of those areas that we are constantly walking a balance between not adversely affecting access to credit, but making sure that the players in the system are responsible and able to fulfill the responsibilities they have in the housing finance system. >> as i mentioned in my opening statement, the credit box continues to be extremeliary owe. what steps can fhfa take administratively to improve

access to credit without protecting current and future stability in the mortgage market? >> well, we are trying to normalize expectations of the parties who participate in this market. that's really what the representation and warranty clarifications have been about. because to the extent that there's uncertainty, lenders increase the cost of credit as a result of that uncertainty, and so as we have fried to smooth out and clarify the representation and warranty system, and give lenders greater certainty, we have asked them to go back and evaluate the credit overlays that they have imposed as a result of the uncertainty, as we move to a more certain system. so we have done that, we have

tried to make sure that the relationships that fannie and freddie and the federal home loan banks with small lenders, as effective and efficient and cost effective as they are with big lenders, so we have tried to smooth out that relationship. there are a number of steps that we have taken to try to bring certainty and clarity to the market because any time there is uncertainty and lack of clarity, lenders tech s tend to increase cost of credit to take that uncertainty into account. >> senator? >> thank you, mr. chairman, director watt, as i noted in my opening statement, i'm concerned

that collectively some of the steps that you have taken are creating a perception that a path is being charted toward a long-term return to the old failed status quo. and this may not necessarily be your intention. and i acknowledge that some simply wish for this to happen, they would like to see us have a situation permanently in which we have the federal government in conserve frship with fannie e and freddie mac. i have a concern that we not move in that direction and that we continue to recognize the need for reforming this housing market. with your position comes a great responsibility to make extraordinarily clear that through all of your words and actions, it's congress who will create the next housing finance system and the next housing

finance system is not the conservatorship of the fhfa, could you do that and make it crystal clear to the public as you said that the role of -- confirmation hearing and that it is for congress to determine the role for a housing market in the united states? >> i can certainly confirm that. and not only did i say it in my nomination hearings, i have said it consistently since that in every speech i have given. we have made it clear that conservatorship should not be a permanent state. and that it is the role of congress to define what the future state is. so i don't think there's any uncertainty of this being created as a result of my comments now. as you say, there are people who have different potentially have

different motivationleativation there. but i don't think there's any ambiguity in anything i have said. >> thank you for saying that and i believe that's the correct message to be sent. one action that has concerned me, your recent announced reduction in down payment from 5% to 3%. seemingly in recognition that this act is going to result in higher risk for both gses and ultimately the u.s. taxpayer, you have stated that these loans will need to carry additional risk mitt gants. i'm concerned that you would reduce borrower equity yet i'm even more concerned that there's been little by way of detail on which taxpayer protections you are going to require. could you elaborate on that. >> i can certainly, and i appreciate the question. the details will be coming out in the early.

december. we announced that there will be a plan because we were working on the plan, we're working on the details. and some people heard that we were just doing this in a willie nilly fashion and didn't hear the second part of the sentence which was there would be compensating factors taken into account. the raeality is that down paymet by itself is not a necessarily a reliable indicator of whether somebody will pay alone. it is a factor, but the best illustration i can give you is that they are probably 75%, 80% of the people whose mortgages

are under water now are still paying their mortgage. they have no equity. so down payment is not the most reliable indicator of whether a borrower will repay a loan. if they have good credit, if they have housing counseling, if they have ongoing housing counseling, post purchase housing counseling and know how to be responsible homeowners, those can mitigate the perceived increased krisk that -- >> but you are going to be establishing a set of mitigating factors? >> absolutely. >> would those include a higher guarantee fee to us at the risk of borrower equity? >> i don't know, we're working on the gc proposal, but

understand that any loan that the gses make, they're required less than a 20% down payment. also requires mortgage insurance, or some other compensating factor to mitigate against the increased risk. so that will be true of these loans also. so you can be assured that we are not making credit available to people that we cannot reasonably predict with a high-degree of certainty that they will be able and willing to pay the mortgage. that's not what we are in the business to do. >> my time is up, i will probably submit some additional questions to you. one of them will be to just follow up to see that we get the details on this risk mitigation activity. >> and we'll be happy to come over and brief you as soon as those details, but they'll be u out there pretty vigorously in

december. >> all right, thank you. >> senator? >> thank you, mr. chairman, and this being likely one of the last if not the last hearing, let me begin by thank you and the senator for your thoughtful, principled and bipartisan leadership, thank you both gentlemen, very, very much. director watt, the housing trust fund, the capital fund, payments out of the pses have been suspended and we have an affordable housing crisis, i don't have to tell you that. in june of this year, i joined 32 of my colleagues in writing a letter to you asking you to go ahead and begin payments back into the fund which i think would go a long way to rejuvenate or at least help a bit in the issue of housing. can you update us on that situation, what you intend to do, what you can do?

>> happy to do so, senator. i have indicated that before the end of this year, we will address that issue directly. i think not only did we get a letter from you and a number of senators on the side of funding the housing trust fund, we also got letters from a number of senators on the opposite side, which illustrates that the walking the line between safety and soundness and access to credit, that's the space in which question operate, so there's not decision that i make or that we make at fhfa where there's not that kind of balancing going on. and there's always a constituency on one side or the other. on the housing trust funding, there are specific statutory provisions that indicate when

the contributions to the housing trust fund can be suspended. those statutory provisions have not changed. they're the same statutory provisions, that doesn't mean that circumstances that triggered the termination may not have changed, and that's what we're evaluating at this point. and we're doing it responsibly, we're going through the process. but you can expect an announcement of some kind or another on one side or the other of that issue before the end of the year. >> well, i'm confident of your skill and agility of balancing all of these things and reaching the right side of the chasm. so good luck, but i think a

decision sooner rather than later. i would also point out that there was a further indication of support for the housing trust fund. so i think the concept is something that we agree and if you can find a way to fund it it would be practically be helpful to thousands and thousands of people. let's turn to another issue which is the neighborhood stati stabilization initiative. in my state, we have a significant number of foreclosures and an unemployment situation after years and years of recession. and as you look at the pilot programs of the nsi, would you be willing to factor in unemployment to give states, not just rhode island, but other states that are suffering not just from housing problems but from employment problems? >> we'll certainly look at it,

senator, but unemployment is kind of beyond the control of the space in which we operate. and the way we arrive that the target areas in which we would do the pilot programs, is we actually went to the map and identified the places that had -- that were basically the hardest hit in terms of home valuation declines. the places that had the most houses still under water, and we have tried to craft a program, the neighborhood stabilization initiative, to address those hardest hit areas, do it carefully, test some things in those areas and then try to replicate the things that work

in those areas. so we started, obviously, detroit, probably the hardest hit place in the world, now unemployment was a component of that, obviously. but it was really what was driving our decision about putting them at the top was the number of loans and houses that were under water there. and that's something we can map, i mean we put it up on our website, every community now knows the number of distressed houses, the number of loans that are substantially behind in payment. so those are the factors that are more related to housing that we have taken into account to this point. they tan general shully relation to unemployment and we recognize

that your state is among the highest unemployment situations. so we will try to figure out -- everybody now wants us to bring neighborhood stabilization initiative to their city, their county, their state because it's a very popular thing. it has more flexibility in the way we deal with borrowers and so i can understand why people want it. but we still have to do it responsibly and with the balance that i've talked about. >> i would unfortunately note that our housing statistics are just as unfortunate as our unemployment statistics. my sense is when rhode island app applies, you could find -- >> we will certainly look carefully at it. >> senator? >> thank you mr. chairman, and i

too want to again thank both of you for your leadership and look forward to what the future holds for you and i'm pretty certain i know what the future holds for the senator. but thank you, and to our staff. and to the staffs, i just want to thank all of you, i know the election creates uncertainties and some of you will stay with us and some of you will move on, but i really appreciate the way the two staffs work so hard together to master housing finance and produce a product that had a lot of bipartisan support. so thank you. to jack reed, my former staffer, michael bright needs to get a life. he just e-mailed me to make sure that i knew that the housing -- was part of a compromise. so in any event, director watt, thank you for being here and i

appreciate the genuine time we have had the our offices to talk about fhaf and the two entities that you oversee along with other responsibilities. and i know we talked about the kmorn securitization platform and i know you're moving fwards creating that. one of the concerns we expressed in meeting in our office was to ensure that as this platform was being created, it was something that was useful for any entity that it wasn't designed as part of some proprietary arrangement where only freddie and fannie benefitted from it. i think you maybe brought in a ceo to head that up. and i just wondered if you could give us assurances as to making sure that this common securitization platform is one

that will be you can bick wit tus. >> at the time to have designed a common securitization platform for the future state, without knowing what that future state was going to be, would have been an extremely risky and costly venture. and so our feeling is that if we can design a system that works for the current, it will also work for the future. and we know what the current circumstances are.

at the same time, every one of the modules that we are working on has a future component to it also. but understand that the taxpayers have at risk now about $5 trillion between fannie and freddie. that when the securitization platform is there will have to be dealt with in some way. and our objective is to roll those things into a single security so that they will be marketable, right? >> i don't want to raun out of time and i thank you for saying that, i just want you to reassure us that what is not happening is a securitization

process that's going to be proprietary to fannie and freddie. >> i can assure you of that. >> and just moving on to the single tba market, which again i think is a very constructive step. as i understand it, you're working with sefma to create a single product, which again would work very well with a product, if you l that came out of this committee from the stand point of again allowing all types of garanors to be able to use this market. >> we are working closely with sefma, they are the most important player in the tba market, and without close consultation with them i think would be irresponsible. >> as you look into the future, you're dealing with the responsibilities that you've been given. you're always really clear, i think much of it coming from your background that you're

going to carry out your operations in keeping with the laws that congress produces. what is the big elson risk that you see into the future if congress doesn't take action on housing finance and deal with the current status that we now have? what's the biggest risk to us? as a nation, as taxpayers, as people who oversee the integrity of government. >> i think at times uncertainty about the future will more and more have greater and greater cost to us. and i think really bringing certainty to the future of housing finance in this country is critically important because as i indicated in the answers to some of the earlier questions,

uncertainty in this area causes costs to go up and those costs result in costs to borrowers. and that has an impact on the economy, because it slows down borrowers willingness to participate. and that's true whether it's a home buyer or a renter seeking affordable rental housing. >> listen, thank you for your testimony, and mr. chairman, thank you for the extra time. >> thank you, senator menendez. >> thank you, chairman, thank you director watt and i appreciate your service and i'm not surprised the type of commitment you have and the way in which you execute your responsibilities from our time in the house together. so i'm proud of what you're doing. i sent a later from other affected states commending you for your decision to reconsider

the guaranty fae surcharge that -- in my state of nvj as well as others, a surcharge that would have penalized mortgage borrowers in states where foreclosures are taking longer even though that might be because of stronger consumer protections or overloaded courts. and that raised a lot of concerns that it would increase costs for new borrowers and would addition insentivize states from strong consumer protections, which we have seen a strong need in recent years for protection from foreclosure abuses and i think there's more structured and targeted ways to address the issue on backlogs. i know this is in the process. can you give me an update on the status of your review? >> the comment period on both gfes and mortgage insurance has

expired. and we are now in the process of evaluating both of those things. they are connected to each other in some ways that is not always obvious to the public. and we're trying to sort through those connections and i would expect probably in the -- hopefully in the first quarter of next year, we'll bring greater clarity to that area. >> okay, well, i hope that clarity doesn't come at the cast of consumer protections, in terms there are better ways to deal with foreclosure backlog and we would be happy to share our views with you in that regard. >> i should say from my perspective, those costs would

not be about consumer protarrant countiati countiation -- protections, they are cause to longer foreclosure timelines. >> what i'm saying is some of those longer foreclosure timelines because they are --- >> so we're trying to sort through what's related to consumer and what really exposes us to greater risk, not as a result of consumers. >> move to mortgage principal deductid deductions for homeowners who are distressed or under water. in the after math of our financial crisis, consumer debt burtds has been one of the biggest factors holding back our economy. and causing homeowners to cut back on other spending which has led investors to create fewer

jobs. not with stafbding that, consumers have worked hard to reduce their debt, often at a great cost, but there are still 5 million homes that are still under water with under water mortgages, including in my state of new jersey. and despite the clear economic benefits, as exemplified by the fact that the private sector was doing this your predecessor refused to allow mortgage principal reduction by the gse as a policy response. and while certainly principal deduction would have had a greater impact if it would have been allowed to be done yearly, there are certain benefits to be gained by allowing it. with the benefits pretty clear to me, it's hard to understand why it was not allowed, especially in case where is the modification offers a positive net present value over the alternative of a foreclosure. so do you intend to to revisit

your predecessor's policy on principle mortgage reduction and what's your views on that? >> we have not taken responsible reduction off the table as an option. we continue to look at whether there are ways to do it responsibly. but even with the private ones, it is seldom been done across the board. as i indicated in response to an earlier question mortgage we're trying to find a way that we can get to the net present value as you indicated, to be at least

and i think we are getting closer to figure out what that connection is and i would tell you that this has perhaps been the most difficult issue that i have faced as director of the agents. >> two final comments. i appreciate how you're coming at it, i also would say that to the extent that this is going to have any value to try to keep homeowner's responsible homeown homeowner's in their homes, that time is of the essence. so i look forward to the calculus and what operational costs f any, you're calculating in that regard. finally, i just want to make a case, i think my colleague

senator reed raised it, but the affordable housing trust fund, you received to receive revenues as a result of the law, it was temp rayly suspended and the reality is that now we now gses generating positive profits to the point they paid more to the treasury than they received, we don't see the allocation going back. and this is going to be critical, especially when i think about some of the gse reform that i'm hearing about and looked at and how do we still meet the mandate of opportunity, you know, and duty to serve. the affordable trust fund is clearly an important part of that. >> senator -- >> thank you, mr. chairman and thank you directly watt. i want to say that i share a

concern that was first raised by senator crapo about the danger that we slide back into some variation of the status quo prior to the financial crisis. i'm concerned about the current overwhelming dominance of the mortgage market by the gses. i know that fhfa has addressed this as recently as earlier this year in both the conservatorship strategic plan and the conservatorship score card, one of the three strategic goals that's mentioned in both is to reduce taxpayer risk through increasing the role of private capital in the mortgage market, quite rightly so in my view. in its 2013 annual report, the fsock said -- and i quote, higher guarantee fees are expected to help facilitate increased participation by the private sector in mortgage

markets. the council recommends they continue these efforts in order to help bring more private capital back into the mortgage finance, end quote. almost immediately upon being sworn into office, you suspended the planned increases. i guess my question is, do you disagree with the fsock's opinion that higher g-fees would help to bring private capital into the market? >> i'm not sure i disagree with it, but i can't tell you that i believe that that is the most important factor about bringing private capital into the market. we're trying to bring capital into the market through risk transfers, through providing certainty and we are looking at

setting out a transparent and rational basis for setting g-fees. which is part of our on going process. so, all of those things have a role in this process and we're trying to look at every single one of them in a responsible, deliberative way, but to say that one, you know, raising g-fees is going to bring private capital flocking back into this space i think is probably a gross exaggeration. >> that does seem to be what the fsock says. fsock has recommended that for exactly that purpose and it seems to me that while there are definitely other steps that are important, i agree necessary to bring private capital in, if the

government guaranteed piece is systematically underprice, no matter what else you do, you're not going to get private capital to come in in that context. so i think the g-fee piece is an important part of it. >> i think we're saying different things. i agree that it is one factor and i agree with fsock that sit a factor, but to elevate that above some of the other things we're doing and to approach that in a way that is different than the way we have approached other things i think would be inconsistent. we're looking at the impact that increase in g-fees will have on bringing back private capital. we're looking at providing certainty through the representation and warranties frame work. we're looking at all kinds of options that hopefully will

bring private capital into the process, but to say that we should without a thorough analysis just increase g-fees without having evaluated i think would have -- was inconsistent with my responsibilities. so we're getting to it. we're going to get there. >> that's my followup question. i have to say, i don't believe that the fsock was suggesting that this be the only mechanism and that all other options be ignored. i think the fsock is very well aware of some other steps that need to be taken. in any case, it's been almost a full year since you suspended the planned -- the increases that were planned by your predecessor. so how much longer is it going to take to do this analysis? when do you expect to come to a conclusion? >> as i indicated in response to an earlier question, we expect

to provide a framework and the rational for it sometime during the first quarter of this coming year. >> first quarter of next year we'll have -- >> 2015. >> yeah. okay. thank you, mr. chairman. >> senator brown. >> thank you, mr. chairman. it's been a real honor to serve on this committee with you and thank you for the public service for the last three decades to the people of south dakota and to our country. mr. watt, nice to see you. i echo the words of my colleague senator me men december that came to the house the same time and thank you for the work you're doing at fhfa. let me talk to you about putbacks. you announced the third round of changes negotiated with the mortgage industry to further restrict fhfa's ability to put back defaulted loans to the lenders that improperly certified they had complied with fanny and freddie guidelines.

these changes are intended to give a greater certainty to mortgage lenders at least in theory they'll facilitate loans to credit worthy borrowers. some contend it lets irresponsible lenders off the hook, leaving borrowers and taxpayers with the tab. since the crisis fanny and freddie put back billions of defaulted mortgages that lenders tried to pass off as eligible for purchases as gfes, under these new putback policies, do you, does fhfa still have the tools it needs to hold lenders accountable if they don't follow the rules? >> yes. we've been very careful about retaining authority to put back when there's fraud or misrepresentation.

but some of these elements were so uncertain about the conditions, it was paralyzing the lender community and that was stifling the availability of credit and it was increasing the cost of credit because they were imposing credit overlays to take into account that uncertainty. so, what we tried to do is move some of the review of the loans that fanny and freddy guarantee, move more of that up to the front end. don't wait until there is a default and then put it back. if we know we're getting good loans and we've done our due diligence at the front end, then we can -- we've got more control over that process. but i can assure you that when

there's fraud or misrepresentation in the process, we will retain the ability to put back loans throughout the life of the loan. >> i hope that means you're vigilant that the tendency here could be that this gives banks the benefit of the doubt that homeowner's don't get, but i know your values and i know what you're doing in that job and i know you'll be vigilant about that. speaking of potential fraudulent activity that you mentioned a second ago. "the new york times" highlighted fanny and freddie's use of debt collectors to pursue families who lose their homes to foreclosure for any debt that wasn't covered by the value of their home as it was under water. homeowner's just starting to get back on their feet for a year or two years or even longer can find themselves with tens of thousands of dollars of new debt, depending on their state's laus for collecting these

deficiency judgments. simply, your agency has the duty to protect taxpayers but demanding payment from borrowers who already documented they can't repay seems both expensive for fhfa, who must pay the collectors and obviously harmful to the borrowers who can't escape debt on a home they don't even now own. how do you ensure that deficiency judgment cases are only brought when borrowers can truly repay? >> well, we are in the middle of a thorough review of fanny and freddie's practices and policies related to deficiency judgments. there may be as a result of that analysis an indication that we were spending more on that process than we were getting out of it. and that there will need to be a different criteria, but we

haven't reached that conclusion yet, but we are evaluating it carefully and we're doing it as we do with every other decision based on actual information and research and documentation that we have access to. it's a more recent evaluation that's not something that i started in january or may. we became aware of the problem or the concern that was being raised actually before the article came out recently. >> so what does that mean you're doing for -- to make sure third-party collectors are following state and federal law in these situations? >> well, we always expect our counterparties to follow state and federal law. that's part of the contract and we're enforcing that contract.

so, we're always doing that. that's a given. but i'm talking about a deeper analysis whether and to what extent there is value in pursuing a deficiency judgment in various kinds of cases. we've already eliminated borrower's age 65 or older, active military bar rowers, bankrupt borrowers, borrowers pursuing short sales, deeds in lieu of foreclosure and we're looking at the value of what's left. are we really doing more -- getting more benefit or doing more harm out of pursuing deficiency judgments in the states that allow it. i mean a lot of states don't allow it in the first place.

>> thank you. >> senator warner. >> thank you, mr. chairman. let me add my voice to the colleagues thanking you for your service and also thanking ranking member crapo for your great work on housing financial form. i would remind my colleagues that those who raised the trust form, the bipartisan we had advanced moved forward, that would have generated three to five billion dollars a year that would be extraordinarily valuable on a project and a program that is we all advocate but has zero money in it at this point. director watt, thank you for your service. i have a number of questions. i want to make one quick comment on the front end. as somebody who believes we do need housing financial reform and senator warren and i wrote you a letter on a series of points. i'll raise a couple. hopefully you'll be able to get back to me. fannie mae is in the process of entering into a long-term lease on what appears to be very

expensive real estate. we've tried to press for some level of cost benefit analysis. we have not gotten it. they're acting as a private entity but they're under your control. i question the entity's move. they seem to act as if the status quo will be 30 years going forward and i think that is a, at best, an uncertain assumption and one that i'm not sure the taxpayer is getting the full value on that. i hope you look into that and will get back to me. >> we are regularly in consultation with them and actually our expectation is that it will provide much, much greater flexibility for them to -- >> we've gotten nothing -- >> i thought we provided a number of things to your staff, but if we have not, i will

follow up. >> very dissatisfied with what we've gotten. i'll ask you to be fairly brief. i have three o r four areas. we are concerned access to credit. in effect, we've become fico scores have become the de facto standard, particularly first-time home buyers and these challenging times particularly when you're looking at folks with student loans and others becomes a real hurdle. have you thought at all about looking at standards other than fico and how we might bring a little more competition into this space? >> we are thinking of it on an on going basis, not only whether it would be advantageous to have competition in the credit score area but whether fannie and freddie could evaluate credit

worthiness. and they do, using things other than credit scores. so, it's a part of our regular process and it's a daily part -- it's an hourly part of our regular process because if you can't accurately evaluate the ability of a borrower or prospective borrower to repay, we have real trouble. >> i would love to get an update on that. the other is -- and i think a number of us have probably dealt with this, and this is kind of the first-look program. how do we make sure that owner occupied that may be in challenging financial straits really are going to get a fair shake? it's tough for them to go against these outside purchasers that will come in and buy up areas and the owner occupied individual, bit more flexibility to keep that owner in that home

on ability to dig their way out. we have enormous problems with this in prince william counties that was one of the hardest hit areas with the financial crisis. i hope you'll take a look at that as well. >> we are. on an on going basis. and -- i got the letter that you and senator warren sent yesterday afternoon, and we will respond to it and be available to meet with you on each one of these specific issues that you raised. >> that would be great. let me move to another area. this is the other end of the spectrum. that is, our mortgage insurance rules. obviously a lot of us raised concerns that when the financial crisis happened that a lot of the mortgage insurers weren't there and we do have to get the capital standards right and i

applaud you on moving forward on that area. but one of the areas that i think bares some consideration, in terms of considering within the mortgage insurance industry, premiums that have been paid and in the process of being paid, at least applying those within the capital standards. that is revenue stream i believe ought to be counted, do you want to make -- i know my time has run out, but could you make a comment on that? >> it is something that we're looking at very carefully because a number of people have said that our proposed rule does not take it into account and that it should take it into account. it's a difficult issue because capital and having the capital to survive in a stressed

situation income generally is not considered capital. right? it would be like the gses having capital but then allowing the g-fee income that they get to produce income be considered as part of the capital. right? so, there are arguments on both sides of this issue and it's a very complicated issue. and interestingly enough, i have people internally who have different perspectives on it, which is why i think we'll get to the best possible result. >> i appreciate that. my time has expired. and we do need to make sure that in the event of another crisis the mortgage insurers have backing. this is an area at least on my

review that merits some further scrutiny. thank you, mr. chairman. >> senator warren. >> thank you, mr. chairman. again, thank you for our service. it has been a real privilege to serve with you and with ranking member crapo. thank you for being here, chairman watt. i want to return to an issue that senator menendes raised. 5 million families lost their homes during the financial crisis and millions more are still struggling. according to the latest data, a leading housing market research firm, another 5.3 million homeowners remain under water on their homes. and people are continuing to lose their homes everyday in foreclosure. now, we talk a little bit about the law here. one of your duties under the law is to preserve and conserve the assets at fannie and freddie.

another duty -- i'm reading from the law here -- implement a plan that seeks to maximize assistance for home owners and take advantage of available programs to minimize foreclosure. congress included reduction of loan principle as an option for your agency to pursue. principle reduction is often a win/win that both helps fannie and freddie and helps the family. 2013 cbo study, for example, found that even a modest principle reduction plan for fannie and freddie mortgages could help 1.2 million underwater homeowners prevent 43,000 defaults and save fannie and freddie about $2.8 billion. the treasury department has found that principle reductions could save fannie and freddie nearly $4 billion and help half

a million homeowners stay in their home. it's been six years since congress created fhfa and in all that time, your agency has never, not once, permitted a family to reduce its principle mortgage through fannie or freddie. i've asked about this repeatedly and you said you would look into allowing fanny and freddy engage in principle reduction. you said it again today. you've been in office for nearly a year now and you haven't helped a single family, not even one, by agreeing to a principle reduction. so i want to know why this has not been a priority for you. the data are there. >> it's probably an overstatement, senator warren, to say it's not been a priority. it has been a priority. it's just a very difficult issue. the reason it's difficult is

because we are looking for exactly what you said, which is a win/win situation. >> forgive me, though -- >> so, we have to do this in a way that is responsible. otherwise we just reduce principle for everybody across the board is not what anybody, i think, is advocating for. so then we have to decide, okay, what is a responsible -- >> chairman watt, you have had a year to do that. you've known for five years before that what the problem was. we have two studies coming out showing that fannie and freddie could make money by doing this. one from the treasury department and one from the cbo. i'm not talking about all the private studies on this. in the meantime, during this year, you've done the reps and warranties policy, the buy-back policy, private mortgage insurance rules. you've done a whole list of

really tough technical things and aapplaud you for doing that but people have lost their homes in the last year. and everyday that you delay, more families lose their homes. there are 5.4 million families out there under water. so i want to know, when are you going to have an answer on this one? >> we're going to have the answer sooner. it won't be as long as it has been. let me put it that way. you know -- >> how many more people have to lose their homes -- >> i can't take responsibility for what decisions were made in the first five years. i can take responsibility for what decisions were made in the last year. and, it's not a year yet, but i think we're getting closer to -- and we are doing some things that really may not call themselves principle reduction, but we are giving a lot more flexibility through the neighborhood stabilization

initiative. >> but they are not principle reduction. so let's just be -- >> they are. they are principle reduction. if we facilitate the transfer of loans to other entities that do principle reduction and allow them to do principle reduction, that is principle reduction. it is not across the board principle reduction -- >> indeed, how many families has it affected? >> it's affected a number of -- >> we have 5.4 million families outstanding with under water loans. and we've got two principle studies now showing what would happen if fanny and freddy would engage in principle reduction. i want to add one more point before we quit here. i want to follow up on senator browns concerns about pursuing people for deficiency judgments when they can't pay. and you've said this is something you're looking at, again, i'm glad to hear that. but there's already been a study on this. according to an fhfa inspector's

report from october of 2012, in 2011, fanny and freddy pursued about 35,000 borrowers who collectively had an unpaid balance of $2.1 billion. do you know how much they recovered? do you know? >> i know what the inspector general says, but i think you're not looking at the bottom line of what the inspector general said. the inspector general says we should be pursuing more of these rather than less. >> well, what he says -- >> that's the dilemma we're in. we're trying to figure out which ones make sense and which ones don't make sense. and that's the evaluation that we're doing. >> well, let's look at his numbers. his numbers are out of that 2.1 billion, you managed to collect $4.7 million. that's less than one quarter of one percent of the amount you went after families and hammered on them for. and that's before you account

for the expenses of the collection. this is not a program that is producing money for fanny and freddy, but it is certainly imposing a lot of pain on families that have already lost their homes that families that have already been caught in bad mortgages, caught with robo signing. this looks like a program to me that you don't need to spend another year on. it's a program that needs to be severely cut back. thank you, mr. chairman. sorry for going over. >> thank you, mr. chairman. thank you for your service as chairman of this banking committee. it's been a pleasure to serve on it. and i wish you well in the next chapter of your life. director watt, the fico score system that is used by fanny and freddy now using the 2004 classic model and it weighs medical debt in a way that doesn't accurately reflect the

role of medical debt on risk, because it's kind of a special category because it often takes folks a lot of time to figure out what they actually owe in our complicated medical system. fico has recognized this in their modelling. they have produced fico 8 and 9 which more fairly treat consumers in this regard. why do the seller/service guidelines still require the 2004 model? >> because the cost of changing from one fico model to another fico model or from fico to an alternative credit scoring model are heavy. and the systems that have to be