do more, and this gets into the arguments about boots on the ground or we have to accelerate or we have to persuade the sunni tribes in iraq to again switch sides as they did once before and turn against al qaeda. i'm not sure how much of a stomach there is on the part of the sunnis in iraq. there is some resistance movements now against isis, but, you know, i'm just not sure that how much of a strength of feeling there is on the part of the sunni tribes in iraq right now to take on the islamic state, especially on behalf of a government that although the government has changed, it's still not an inclusive government. it's still that shia thing in baghdad. >> we seem to be being sucked toward the view that the iraqis can't defeat them, so we need to

get the turks and the turks won't do it unless we go after assad. so are we getting sucked deeper and deeper, and back to the original question, what should we do, jim? >> well, i mean, i think there's no doubt that isis eventually will be driven out of the population centers in iraq or at least lose control of them. i mean, they may go underground but they will lose control because they're a minority of the sunni population which is a minority of the iraqi population, and so the kurds and the shia between them with whatever marginal help they get from the sunnis are eventually going to retake that territory with our assistance, and i don't think that means that you have to put american infantry on the ground. there are boots on the ground. there will be forward observers and advisers and some of them may get killed, but that's a different level of engagement. the real question is syria.

i mean, this group emerged out of syria. many of them are iraqis, but essentially emerged out of syria. it's the syrian civil war that's the hotbed from which much of this violence is coming, and the situation there is much more complicated because the sunnis are a majority there, not a minority. the government is a small -- represents a small ethnic minority, and that conflict is complicated by a great deal of international involvement on both sides with the russians and the iranians on one side and all the other sunni governments on the other side. i think the one -- >> and us trying to stay out. unless we're now trying to get in. >> we're doing both. i mean, we're bombing in syria, we're arming what we consider moderate factions of the syrians. we're seeking eventually to overthrow assad but not now. so it's a question of

sequencing. these regional conflagrations could eventually burn themselves out, but the question is how much damage they do and the quicker you can accelerate that the better. the one factor that may change this dynamic is if we succeed in getting an agreement with iran on their nuclear deal, we'll find that in iraq our interests are fairly coincident and we can begin not just operating in parallel lines without communicating with each other but actually communicate with each other, which would make our assistance to the iraqis much more effective and perhaps eventually being able to broker a -- some kind of peace agreement in syria which would require also cooperation with russia. i think that's ultimately what will happen. the question is how many years it takes, how many more people

get killed, and how many more people get radicalized. >> i want seth to answer and then we're going to go to your questions, but i think it's fair to say if there is an iranian deal of the form that is under discussion, while it may have the easing that you suggest, it's also going to outrage our sunni arab friends, especially my dear friends in saudi arabia. go ahead, seth. >> i just wanted to add two things. one is, you know, i do think we need to continue to ask not just what should we do, but what are our interests here? do we really have interests? and i would say the connection between what the west and weste westerners going and iraq and syria in particular makes this important to us. these are countries if their names don't get identified and

put on no-fly lists, for example, that through visa waiver programs can come to the united states. these are countries where we have visa waiver laws allowing them to come. so part of the issue is i think if we don't do anything and this area continues to attract westerners, the small numbers that brian is talking about of americans, but larger numbers of europeans, i do think this presents a problem, particularly when we have a small al qaeda contingent in syria that is plotting attacks in both europe and the united states. so i don't think we can afford to just stay out of this. i think we run into the same problem we had with afghanistan in the 2001 period. you can't expect that staying out makes you more secure. but i think then the issue is what do you do? and so one issue i would say we don't want to do, and i would strongly urge staying away from is the introduction of combat --

conventional combat forces in this area. as we saw both after 2003 in iraq in particular, levels of radicalization went way up with large-scale american forces moving in. so i would strongly stay away. we have a presence on the ground. it tends to be our clandestine intelligence and special operations units. the other thing i'd add, and this is i think where we do a very poor job of combatting this, is this really is, as all of us have noted, all four of us, this isn't a struggle of ideas, and we do a very bad job of pushing back. one of the things that's interesting in the early 2000s the saudis did effectively with defectors from al qaeda in the arabian peninsula is gave a forum to the defectors to speak about their time in al qaeda, tv interviews. we do have people -- i mean, i know this because i know their names and i know their locations

now, we have people that have gone to syria and come back to the united states and are completely disillusioned. they believe that they were sold a bill of goods. this was a bad used car salesman deal. they got to go over and fight with jihadists. what they found they didn't like. that sufficient tuff is not com yet. >> why don't the tv networks -- >> i don't think our law enforcement agencies have been willing to identify those people -- >> but why don't these people go volunteer? are they afraid to? >> that's a good question. >> i suspect they may be afraid. >> they may be afraid but it sends out a counter message that all the propaganda we're hearing on the news is not reality. >> questions? >> hi. nancy novograd, i have a

question for seth and anyone else about the rise of radical islam in southeast asia. you mentioned -- started to talk about it i think. we were just in cambodia where i heard references to the presence of some islamic fundamentalism. of course, it exists in indonesia. that's part one. part two is what we've been reading about the repression of muslims in myanmar and in china. will that create a kind of radicalism? >> great questions. you know, it's interesting, since -- in some work we've done over the last couple months, we've looked at the numbers of sort of levels of jihadist activity.

between 2010 and 2013, there was a 58% increase in the number of jihadist groups. most of those tend to be the middle east, not southeast asia. there's a doubling of jihadist fighters during that same time period and a rough doubling in the number of attacks by these groups. most of that is happening, interestingly, in north africa and the levant, in syria and iraq. southeast asia has seen some swings back and forth over the past several years. philippines, for example, that have been weakened severely because of philippine efforts. one of the things i wanted to highlight, people here may have forgotten, the u.s. has been involved in a very significant struggle in the philippines since 9/11. it's just it's primarily special operations forces and intelligence units, not conventional. you don't see it in newspapers. it has decimated the jihadist

groups in the philippines right now. it's decimated abu sayyaf. it's decimated groups like the mlmf which have turned on other jihadist groups. so that area right now, we've seen a slight revival in the area of pakistan and india where ayman al zawahiri has created an additional affiliate, but i would say across that region there are some concerns about the growth of jihadist groups. i would just say across the board the levels are still lower than what we're seeing in the middle east and north africa and probably in south asia as well and, jim is in a better position than i am along these lines. the decisions about what the u.s. does in 2016 and after in south asia, in afghanistan, have

a lot of implications about the jihadist activity by 2017, 2018, 2019 and that has an impact on other areas. bangladesh, probably cambodia and other countries. >> and china does have a growing problem. >> yeah. china does. i don't know if brian had any more on -- >> just talking recently to some indonesian officials, they, again,underscored the fact that this islamic state idea does have pulpull. it has, again, awakened some sentiments that the indonesians thought they had pretty much under control. keep in mind when there was an original wave of activity in indonesia, there was both a crackdown and an attempt to deal with it through other means. the group that was responsible for much of this was a group

with the initials j.i., and j.i. ultimately backed away from violence, but the term they use was an interesting one. they disengaged, and it has a contingent quality about that, and so we -- >> meaning you could re-engage? >> you could re-engage. it's not turning off, ending, finishing, or anything like that. it has this ephemeral quality to it. >> can i ask you, jim, does someone else want to ask a question? >> a question here. >> sorry. go ahead. i'll get back to iran later. >> jonathan wong, my question is for brian. harding radicalization in european countries, what do you see are the possible solutions to that, ways forward for european governments, and what is the appetite of european

governments to handle this in a decisive way? >> the europeans have a much greater problem. when you say europeans, that's a huge generalization. there are large populations, immigrant-based populations, in a handful of countries. germany primary will from turkish workers, france primarily from north africa, the united kingdom primarily from south asia. there there are problems of assimilation of immigrant communities despite the fact that in the case of germany some of these communities have been there for multiple generations, true in france as well, but they are more marginalized. there is much more res tift and public opinion polls indicate

extremely high levels of support for these ideas. so it is a much greater problem there. our challenge here is identifying specific individuals who go for very individual reasons. there it is much more a matter of dealing with communities in so far as how they deal with them. the europeans are having debates among themselves how to deal with the latest group that has gone to syria. some of them are taking a law enforcement approach, and that is passing new legislation that will prohibit going abroad to join these groups, pick up passports, make it a crime. others are taking a position that we must welcome these people back, monitor them, and rehabilitate them back into society. it's a typical european kind

of -- >> that was the saudi way of dealing with it. first put them in prison, if you will, and then rehabilitate them -- >> rehabilitate them in prison though. >> yes, in prison. and then get them a wife and a car and a house and let them live happily ever after. >> we have a question here in the front. >> i'm a member of the polizzi cycle here. rather like ebola, isis or isil seems to have appeared in the last three months at least for the general public. wasn't any awareness of it before, and i was wondering, you mentioned the syrian connection. where have they all come from? were any of them working, you know, with al qaeda? how does al qaeda get on with isil? are they the first ones who have come up with the idea of an islamic state? and what's the sort of local politics with all these jihadi groups? >> well, i think the reason isis has suddenly appeared so

prominently on our horizon is not so much that we didn't notice they were there before. i think the government and others knew it was there. it was the collapse of the iraqi army and it's suddenly overrunning most of sunni iraq. that's what was new. otherwise it was just another radical group in syria of which there are a number. it's when it moved into iraq and the iraqi army collapsed. so what was surprising was the surprising collapse of the iraqi army, not the existence of isis. >> brian or one of you can address the relationship between al qaeda and i.s. >> let seth do that. i want to come back to the ebola -- >> this is a really good question. this group has its history that the real brief hit of this group is afghanistan in the 1980s in the west, abu mossad al zahar

ri. they then went to iraq around 2002, and zarqawi became affiliated and pledged this organization to al qaeda. they changed their name to al qaeda in iraq and became an affiliate. by december of 2004 at which point they fought the americans and the iraqi government for the rest of the u.s. incursion. u.s. leaves in 2011. what happens real briefly at this point is as the syrian insurgency starts, they then send cells into syria to start getting involved, which becomes what we now all the news ra organization. al qaeda in iraq then wants both syria and iraq in its area. it wants control of operations there. >> this is like a feud between an inner city gang. >> in early 2014 the head of al

qaeda, ayman al zawahiri, adjudicates a growing dispute between individuals in syria from nusra and al qaeda in iraq on control of areas. so zawahiri comes down and says al qaeda in iraq should keep iraq, and that al nusra keep syria. these are two separate organizations. al qaeda in iraq says we don't authorize, we don't agree with this decision, so they are kicked out, they're kicked out. there's actually a really funny jon stewart episode because jon stewart says actually, there's some truth here, al qaeda in iraq has become so bad, so difficult to deal with, that al qaeda in and of itself felt that they were too bloody, to violent, and how bad do you have to be for al qaeda leaders to kick you out of their organization? so this is the origin of isis.

it claims that it's got the whole region, and so what we've seen is some tension, clearly tension, between al qaeda and isis over the past ten months particularly in north africa, in south asia, competing for a range of different jihadist groups. they fought on the ground in syria against each other. so i'd say we have now two competing major global jihadist -- or regional jihadist movements, one led by al qaeda, one led by isis, but isis has a long history. any american marine or army officer, intelligence officer, that fought in anbar fought against the predecessor organization in anbar province of iraq. we know this group well. >> you wanted to respond? >> you know, it's interesting how often metaphors from the field of epidemiology and public health come into our security

realm, and, you know, and ebola one of the debates was, gee, should we really try to intervene there in africa and stamp this out there before it becomes a pandemic and then creates bigger problems for us in the future here? or the idea that we can somehow quarantine ourselves, and that is we will cut off flights and we will do all sorts of things to insulate ourselves? same kind of debate going on with regard to isil or the is m islamic state. that is, gee, do we really try to revise our visa waiver program, identify these carriers before they come back, stop it at our frontiers or are we obliged to go there and try to stamp this thing out before it becomes something more serious that will be a continuing

problem for the world for the foreseeable future? >> very good analogy. it makes the case well for go there. >> here on the right. >> someone else? >> panel's left. >> tolley bessen. the american policy currently is to withdraw all american combat forces from afghanistan in 2016. would you please comment on that? is that a good policy? >> no, i'll let -- >> that's a jim question. >> no, and i think it will probably be reviewed, if not by this administration, by the next. after all, what happens in 2017 is the next president's decision, and i would guess it will be debated in the campaign leading up to it. i think that the decision to withdraw entirely by the end of 2016 was made a few weeks before the emergence of isis and the

object lesson that that provided of the costs of having left iraq prematurely. now, it was a mistake to go into iraq in the first place, but having gone in, it was a mistake to leave i think is now generally accepted. it's pretty much the common wisdom. i think the afghan government -- the new afghan government, which has a much better relationship with washington and with the u.s. congress, will probably at some point ask the president to reconsider that decision. if things are going well, it will be pretty easy to say yes. if things are going badly in afghanistan, it will be somewhat harder to say yes. so ironically if they don't need us, we'll stay. and if they do need us, we'll have a harder time deciding whether to stay. but -- and, again, i don't think it necessarily means staying in large numbers, but i think even the drawdown at the end of 2014 may be too large.

so i think we'll have to see how 2015 goes with only 9,800 troops there. how much pressure the afghan armed forces are put under. it could be quite considerable, and i'll hope that before the end of the year there will be some consideration as to whether the next level of 5,500 in 2016 is actually feasible or not, and, again, as i said, i think that the decision to leave entirely at the end of 2016 will probably be reviewed. >> we have a question here to your right. >> jim oates. what about the neighbors? what is the relationship of the neighborhood with turkey and the kurds and all the other kinds of pieces? this is not necessarily good for their world. why are they allowing this to settle into an extended long period of conflict in the environment? >> well, i think we have to

understand as karen said at the beginning, while we are focused to isis and to a degree the civil war in syria, these all countries are fighting at least six conflicts. they're involved in the arab/israeli conflict, the sunni/shia conflict, the ar arab/persia conflict. they're involved in the state versus kurd conflict and the authoritarian governments don't even like democratic islamists. so all of these governments are constantly recalibrating their policy depending on what their top threat is at the moment, and as soon as that threat recreede just a little bit, they go on to the next conflict. they're being jerked in several different directions at the same time by their equities in all of these conflicts. it's kind of a six dimensional

chess that each one of these gochts is playing. that's why all the coalitions are temporary. all the commitments are conditional, and all of the coalitions will tend to fade as they begin marginally to have some success. >> but, you know, look, the default decision on the part of many of these governments is we get the americans to do this. so if 300,000 iraqi soldiers are insufficient to contain isis, which has 20,000 to 30,000 fighters, the americans can come and do this with their air power or with forces on the ground. there are -- i mean, one of the good things about the coalition is to get some of these people to at least step up closer to the plate. there are, if we take saudi's

air force, jordan's air force, turkey's, the emirates', there are, oh, 600 to 800 advanced combat aircraft parked around the area, but it's the united states that's leading the campaign. and we have to take care that we don't take on imperial missions here. a hypothetical young boy today age 13, this country has been at war for his entire life, and maybe that war hasn't affected that young boy in a direct way unless he's a member of a military family, but we're talking about conflicts here that are still going to be going on when he finishes university and goes on to post-graduate school -- >> when he has a 13-year-old. >> and he has a 13-year-old boy.

now, that is something we have to consider very, very carefully. what our level of commitment is going to be to contests that have been going on in some form or another for centuries and could well put us in a situation of open-ended warfare. what does that mean for our society. >> seth wanted to add? >> just to briefly pick up on one of the countries you mentioned which is turkey. it's in a very, very fragile position, more so than many -- many may not quite understand. during the 2003, '04, '05, '06 war in iraq, the primary front movement of foreign fighters into iraq was through damascus and syria and then into iraq. that was the pipeline. when syria begins to implode, that pipeline reverses from iraq

into syria. from iraq into syria, which is the part of the problem now. virtually every major jihadist coming into this region right now is coming through turkey. by land usually, also by air. it is the primary area that our department of homeland security has been monitoring air flights into, although they're going into europe now and traveling by land, but it's turkey. the point here is this country now, which is a nato ally, is now bringing not the government, but we see so many foreign fighter pitlifight er pipelines coming through turkey. if there was a decision to start striking against our embassy there, against the government, we have a very, very serious problem on our hands. i think the turks are clearly concerned about the direction their country is going in. >> the people or the government? >> well, the government, yeah. i'm talking about the government.

>> well -- >> people may -- >> will erdogan think about doing something? >> that would help. >> he seems to think he will somehow benefit from the creation of the islamic state and the revival of of the ottoman empire. one of our trustees suggested it's a way to stabilize the middle east 10 or 15 years ago. it may not be so stable as it comes back. unfortunately, can we take one more question from here? no? no. all right. we're finished. thank you very much for your attention, and thank you, guys. [ applause ]

businessman donald trump is speaking at the economic club of washington tonight. he's expected to talk about his political aspirations and entrance into the city's business community. the trumps are rehabbing d.c.'s old pennsylvania avenue post office. they're planning to turn it into a high-end hotel and shopping area. you'll be able to see his comments live starting at 7:00 eastern on our companion network c-span. and at 8:00 eastern here on c-span3, a house veterans affair subcommittee looks into military cemetery operation was a close look at expanding the national cemetery system and improving assistance to families. that's at 8:00 p.m. eastern here on c-span3. this week on "q & a," katy pavlich on what she sees as the hypocrisy of liberals. >> it goes back to the id-- whe

the idea of this book came from, the dnc convention when they showed a tribute video to him because he had passed away and portraying him a women rights champion when he left a young woman to drown in his car and if he had not gone back for nine hours and tried to save his own behind, she would have probably survived, and you can't do an entire video at a convention claiming to be preaching and fighting about the war on women and glorify someone like that while not including that part of his life in a video about his women's rights record. >> sunday night at 8:00 eastern and pacific on c-span's "q & a." and now remarks from the director of the federal housing and finance agency mel watt as he updates congress on freddie

mac and fannie mae in remarks. he said his agency would announce a new framework for mortgage guarantee fees. this is about an hour and a half. i call this hearing to order. welcome back to the committee. to director watt. since this is likely my last hearing regarding gses i would like to urge my colleagues to continue our hard work, to move past the housing crisis. for the past three years, we and our staffs have spent countless hours wrestling with the possible solutions and pitfalls.

some options are not practical while others are too ideological, but we still need to find a solution. the enterprises remain trapped in conservatorship today. fhfa continues to perform the dual role of both regulating and running the 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 watt's guidance has taken steps to provide more certainty to the market and expand access for borrowers. these initiatives include expanding the loan to value requirements from 95 ltv to 97 ltv, updating warrants frameworks and devolving neighborhood civilization initiatives. i applaud director watt and his

team at the fh fa for taking steps to stabilize the enterprises and the household market. focusing 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, more certain path forward, i urge you director watt to engage the treasury department in talks to end the conservatorship. before i finish, i want to thank my colleagues and this committee as well as their staffs and my staff for all their hard work on housing finance reform. especially want to thank ranking member crapo and his staff for their partnership. with that i turn to senator crapo for his opening statement. >> thank you very much, mr. chairman. i appreciate those kind words and i also appreciate the tenor of your remarks. today is an important hearing. it's 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 we have had as the chairman and the ranking member during this congress but also in the capacities that you and i have held over the years. i have truly appreciated our friendship and our working relationship. i have especially enjoyed working with you and your staff this congress to develop legislation to address housing finance reform, fha reform, improving the terrorism risk insurance program, and other important topics. we've had a productive collaboration over these years, and i wish you the best and thank you for being a great partner. turning back to the task at hand in the hearing, as director watt's primary roles are conservator of fannie mae and freddie mac and regulator of the federal home loan bank system, that's where i want to focus today. these are two separate and

distinct tasks that are incredibly complex and important. in his role as conservator, director wot isable ga oge gate conserve the assets of freddie mac and fannie mae. i wish we were sitting here today to hear director watt describe his plan for the implementation of the phase into 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 watt's job in preserving the assets of these important companies becomes even more important. since taking over as director -- ors a conservator, director watt has been active. he's announced many actions such as a change of the strategic plans of fannie and freddie's

conservatorship. a shift in the focus of the common securitization platform to focus on fannie and freddie. and expanding fannie and freddie's business by reducing required borrower home equity. in addition to these changes, hud secretary castro is now making public statements that the fhfa will soon direct fannie and freddie to start setting aside money for trust funds. keep in mind if were this to occur it would happen despite the fact these companies have little to no capital and thus the american tax pay ser completely on the hook for any losses. while i have serious concerns with some of these ideas individually, perhaps my largest concern is that collectively they appear to feed a perception that the old failed status quo is slow lly beginning to take hd again. over the course of the last two years this committee held a

series of in-depth hearings that examined the failures of our brogeen housing market and approaches to reforming it. while there was spirited discussion on the best path forward, one of the areas of consensus was that the status quo had failed us and that we should not return to that in the future. we cannot allow the return of fannie and freddie back to toxic mortgages with little or more capital. instead, our path forward should be one based on sustainable home ownership, facilitated by a strongly capitalized private sector. while i understand that some individuals and entities have been pressuring director watt to institute changes they favor via the conservatorship, we all understand that that is not the proper role of the conservator. as director watt noted during his confirmation hearing in addressing this committee, the conservator's role is to build a solid bridge from where we are now to wherever you, congress, decide the future housing

finance system will be. i look forward to hearing from director watt on how he plans to prepare for that bridge and work through the preservation of the assets of these two huge taxpayer investments. i also look forward to him hopefully dispelling any notion that fannie and freddie are somehow being re-established as the long-term secondary market solution. in doing so, he should focus on how his policies as conservator will address their dominance in the market, renounce any demands or outside pressures to divert the revenue of fannie and freddie to any sources other than the taxpayer and maintain sustainable, safe underwriting at these institutions. thank you for joining us today, director watt, and thank you, mr. chairman, again, for holding this hearing. >> thank you, senator crapo. are there any other members who 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 witness, the honorable melvin 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 crapo, and members of the committee, thank you for inviting me to discuss the work we are doing at the federal housing finance agency. it's a privilege to participate in chairman johnson's last hearing and all of us at fhfa

appreciate his hard work and accomplishment on housing issues. i also want to share my personal west wishes as you enter the new role of full-time grandparent. fhfa's statutory mandates require us to ensure the safety and soundness of the federal home loan banks, fannie mae and freddie mac, and to ensure that they provide liquidity in the national housing finance market. fhfa works to balance these obligations across all of our activities. because fannie mae and freddie mac are in conservatorship, we are also mandated by statute to preserve and conserve their assets. in may fhfa issued a strategic plan and score koord that

outlined three strategic goals for the conservatorships of fannie mae and freddie mac. each of these strategic goals is fully aligned with fhfa's statutory mandates and fully aligned with the commitments i made to this committee during my confirmation hearing. the first goal is to maintain the credit availability and foreclosure prevention activities supported by the enterprises and to do so in a safe and sound way. we have worked with the enterprises to update and clarify their representation and warranty framework, to encourage responsible lending to 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 them to triple -- and they have already succeeded this goal by substantial margins. our third goal is to build a new securitization infrastructure for use by the enterprises and adaptable for use in the future mortgage market, whatever that might be. we have defined the structure of the common securitization

platform, the enterprises recently announced a ceo for their joint venture, and we are making much progress toward our multi-year goal of developing a single security. our strategic plan and scorecard also have affordable rental housing priorities for the en r enterpris enterprises. the focus is not to compete where there is private sector coverage of the multifamily market but to ensure that affordable housing is available and the housing needs in rural and underserved areas are met, including area that is rely heavily on manufactured housing. fhfa has also focused on regulating the federal home loan banks and our effort include a proposed rule that would clarify their membership requirements.

we proposed this rule because fhfa has a responsibility to ensure that the banks fulfill their statutory mission to support housing finance in a safe and sound manner. i want to emphasize that getting feedback from stakeholders is a crucial part of our policymaking process. we will strongly consider comments made by members of this committee and the public in determining our final rule on the bank membership standards as well as our other proposals, including guarantee fees, single security, and enterprise housing goals. i thank you and i look forward to answering your questions. >> excuse me, director watt, but we have a quorum present, so i move the committee to executive session to vote on the

nominations of miss castro ramirez to be an assistant secretary of housing and urban development and miss teresa mcmillen to be the federal transit administrator at the u.s. department of transportation. miss castro ramirez has been nominated to lead hud's office of public and indian housing. she is currently the president and ceo of san antonio housing authority and would bring nearly 20 years of experience managing affordable housing and community development programs to this position. miss mcmillen has been nominated to serve as administrator at fta. she has served as deputy

administrator at fd a since twooi 2009, and she became acting administrator in july of this year. as deputy administrator she has played a direct role in implementation. senator crapo, would you like to make an opening statement? >> no, thank you, mr. chairman. i don't have an opening statement to make. i understand we're going to do this on a voice vote. >> yeah. >> and would be supportive of doing so. >> mr. chairman? >> yes. >> could i just have a statement included in the record at this point? >> you may. without objection. >> in the interests of maintaining a quorum, i ask other senators to withhold comments on the nominations until after the vote. statements may also be entered into the record. without objection, we will now vote on the nominations of miss castro ramirez to be assistant secretary of housing and urban

development and miss teresa mcmillen to be the federal transit administrator at the u.s. department of

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 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 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 tend to increase the 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 conservership with fannie mae 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 motivations outs 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 misgants. 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 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 reality is that down payment 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 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 tangentially relate to unemployment and we recognize that your state is among the highest unemployment situations. so we will try to figure out -- everybody now wants us to bring 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 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 ubiquitous. >> 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 run 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 guarantors 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's the biggest risk to us as taxpayers? 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 letter 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 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 deductions for homeowners who are distressed or under water. in the after math of our financial crisis, consumer debt burdens have been one of the biggest factors holding back our economy. high levels of mortgage and other debt have caused

homeowners to cut back on other spending which has led businesses to reduce investments and create fewer jobs which feeds the cycle that's slowed our recovery. notwithstanding 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 revisit your predecessor's policy on principal mortgage reduction and what's your views on that? it's hard to understand why it

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 not a loss. but a gain. 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 homeowner's in their homes, that time is of the essence.

so i look forward to the calculus and what operational costs, if 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, used to receive funding from the revenues as a result of the law. it was temporarily suspended. 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 toome. >> 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 menendez 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 fannie 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 fannie 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 fannie and freddie 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 fannie 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 laws 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 fannie and freddie's practices and policies related to deficiency judgments. there may be as a result of that analysis an indication that we were spending more on that process than we were getting out of it. and that there 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. 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 or 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 havu people internally who have bf8b

different perspectives on it, which is why i think we'll get to the best possible result. 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 oh 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 homeowners 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 fannie and freddie 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 i applaud 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 fannie and freddie 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, fannie and freddie pursued about 35,000 borrowers who collectively had an unpaid balance of $2.1 billion. do you know how much they recovered? do you know? >> i know what the inspector general says, but i think you'rj not looking at the bottom line of what the inspector general

said. this is not a program that is producing money for fannie and freddie, but it is certainly imposing a lot of pain on families that have already lost their homes 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 fannie

and freddie 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? that doesn't take into account this improvement in analyzing medical debt? >> 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 adjusted are complicated. so what we're trying to do now is get through an analysis of not only fico 8 and 9 but an alternative scoring credit scoring model and try to come up with a system that is a better system and then adjust the operational things that it would take to -- >> let me cut you off there. i only have a little bit of time. i encourage you to put pedal to the metal in that regard. >> we have pedal to the metal,

we are at it. i guarantee you. >> i'm not quite persuaded of that, but thank you for pursuing it because a lot of people would be more fairly treated with an appropriate credit model. i wanted to turn to first place insurance. there's been reports from npr and ap recently but these issues go back a long ways. it's something i've been pointing out for a long time. the kick backs that go to mortgage insurance often drive people into foreclosure and of course that has an impact on your agency. i understand that in june you all did issue a requirement that these kickbacks end, whether they're in financial or in discounted services. and i applaud you for that. can you comment a little bit about these recent articles that team to indicate this still is a big and challenging issue in how you're taking it on?

>> well, first place insurance in and of itself is a big and challenging issue. and we've taken some of the abuses out of it by issuing guidelines. but i don't think i could represent to you that we've taken every concern that we have about how it's done out of the process. and we're continuing to work on methods of trying to improve the way we handle forced place insurance. by definition, if somebody is in default or if somebody is already moved out of the house, they've put insurers into a different situation. and so -- there's really no good

effective market out there yet that takes that into account. >> let's -- >> we're looking at it aggressively and trying to continue to improve it. but it's a tough area. >> so both fannie and freddie at various points have looked at directly contracting for replacement insurance so it would be at the market rate, which is fundamentally fair to the homeowner that would eliminate the middlemen and the kickbacks. and are you willing to aggressively pursue a model which would be fundamentally fair to homeowners? >> i'm willing to pursue a model that's fundamentally fair to homeowners, but i'm not sure that you would want fannie and freddie to be in the insurance business themselves. >> no, they would be contracting. and that's what has been proposed. >> when you say fair market value, then the risk associated with vacant properties are higher than the risk associated

with -- >> these are often not vacant properties. >> but you have to make those differentials. >> are we providing a list of excuses here? or are we going to get -- >> no. i'm just explaining the reality of the difficulty of the problem that we're facing, senator. i'm not providing excuses. these are difficult issues and we try to deal with them and give them the kind of consideration that -- >> okay. well, i would like you to keep dealing with it. i'm not satisfied yet that homeowners have gotten the fair shake which we've been through this time and time again and homeowners are still being saddled with insurance that is two to three times on average by various studies, some cases four to ten times the market rate. that's predatory practice. you're in a position to stop it. i'm asking you to do so. >> i think you and i have exactly the same objective. we're moving in the direction that you would like us to do. >> thank you very much.

>> probably not at the pace you want us to do it. >> senator? >> thank you, mr. chairman. if i may thank you for your leadership on this committee, your time spent, i do appreciate it as i do most members of this committee do. i want to thank also the ranking member, in fact, director watt, i would like to continue with some of the questioning that he had beginning earlier. but thank you very much for being here, for taking time and being here available to answer some of our questions. you're probably well aware, there's quite a few members here on this committee that are pretty passionate about housing finance reform. i'm included in that group. i think most have recognized that the current models of fannie and freddie mac cannot remain and we must reduce the risk that currently american taxpayers face.

just recently i heard from the hud secretary castro when he was calling for housing finance reform. but i haven't heard anything on this subject from you. in fact, when we had the committee vote on the johnson crapo housing bill, we didn't hear any word from you. i guess my question for you today is, given your position and of course the importance of this issue, are you going to continue your hands-off approach when it comes to housing finance reform or will you start engaging with congress and work with us to end this current fannie and freddie model? >> i'm going to continue to say that it is -- that our role at fhfa is in the here and the now

of -- and that's what the statute gives us. it is congress' role to tell what you say the future of gse reform is and we have cooperated fully in terms of being a resource to the committees. all proposals, both the house and the senate, but if the committee is expecting me to have a position on what the future of housing gse reform should be, they will be sorely disappointed. i will not be -- and, you know, when i left congress, i know this is counterintuitive, but i left that role behind. if i get embroiled in what is good and what is bad in the future of gse reform, it's going

to make it more difficult to do the job in the present. >> so what you're saying, don't ask for your opinion? >> beg your pardon? >> don't ask for your opinion on gse reform? is that what you're saying? >> i expressed my opinion before i became the director, but i don't have an independent opinion now because any time i express an opinion now, people take it as the fhfa opinion. >> let me ask you for your opinion. you support eliminating fannie and freddie as they are today? >> i don't have an opinion on whether there is a fannie and freddie. i think they are roles that somebody will have to play in the process.