menendez, first. >> all right. thank you both for your testimony which i read at length. i think we all agree we need to simplify the tax code and make it more economic lyally efficient, but i always think before we go about the task of comprehensive tax reform, we need to agree what is the end-goals we are trying to achieve so we can direct our focus. and i know some of my friends here argue that we should focus solely on corporate tax reform and stock market gains and i think i heard you both say you feed to do it all at the end of the day to make it effective. senator bradley, do you believe it is enough for tax reform to focus on increasing gdp on the stock market and corporate profits or should we also have

the goal of assuring economic growth as part of it, particularly as it is felt by as many americans as possible? is that the tile of goal we should be forcing? >> yeah, you want the economy to grow and you want everybody to benefit from that. and when we did this bill, as i said earlier, we had four principles, these are the things you should consider. that the market is a more efficient allocator of resources, the ways and means committee and finance figured out we should do this or that activity. second equal incomes should pay equal tax. it is not fair to have your neighbor pay less because they have a particular tax benefit. and third those who have more should pay more. the progressive principle. and fourth if you can simplify it, please simplify it.

to me those are the four principles. the economic issues and growth you would want people to move up and say to people at the top you have to pay a little bit more. so i think those are the principles that i would use going forward. >> you know, i think that it's -- my question suggests, at least i view it is that it is a neither-nor process but equity on the low reduce the burden on low and middle class is not just morally responsible but about two thirds of the economy is fueled by consumer spending and lower and middle class families have a higher percentage that they need and spend on goods and services. so in that respect i think it makes sense to be looking at how

we -- how the consequences of reform deal with them not just on corporate taxes as well because i think it will fuel spending that will help private sector profits. senator packwood, at the end of your testimonystatistic, in 1983, 1900 people who earned a million or more paid no federal tax and that fact was due to a myriad of special interest loopholes clogging the arteries of the tax code before '86. and as you noted in your testimony, the product that passed the finance committee 20-0 and would later become law raised the taxes significantly on corporations and rich individuals. they would pay more middle -- pay more and the middle income would pay less. and we have now a situation in which the average new jersey familiar that makes $65,000 per year pays a higher rate -- a

higher rate than the beijingiest 400 american -- the wealthiest families that make $200,000 a year and what is your perception on the tax treatment and would you agree that the loopholes that have allowed the wealthiest to reduce the tax rate over the last 30 years. >> there is no question that the public is aware of the inequality. in 1986 it wasn't in the issue of fairness, how do these people not pay any tax at all and how do companies making profit not pay back. and that was a driving inequality. and it is a much higher goal today than it was 30 years ago. what i'm hesitant about is not

do you want to fix that the longer i've been in life and in senate, the less confident i was that what we were going to do would necessarily get us to what we wanted. and that is why i agree with bill. the market is a better allocation. if you want to undo the inequality. i think that is legislatively doable if you can get both sides to agree, that is perfect. but it wasn't what drove us in 1986. >> thank you. i might say that -- >> i'm sorry. >> in terms of the middle class we need more good-paying jobs. and so that is tough to get at through the tax code. but not impossible. so i'll share with you one of my hobby horses. infrastructure investment desperately needed.

tough budget, you can't do it. and the size that we would like to do it. but there are people that have money. chinese, singapore koreans, in the persian gulf. large sovereign funds. i mean hundreds and hundreds of billions of dollars. and they have to decide what do they do with that money. and i any number of them why don't you invest in infrastructure in the united states in other words they play the role the british played in the 19th century, and they say there is one provision in the tax code, and it is 892 and it says if you are a foreign government and you invest in stocks or bonds you don't pay tax on that. very simple, extend that to

infrastructure and you could very well find a significant amount of money for infrastructure coming from sovereign funds. >> thank you. great. >> senator stone. >> thank you mr. chairman and thank you all very much for being here. i was a staffer back in '85 and '86 and when this was done last time and a great admirer of the hard work that went into it and the ultimate result and i'm embarrassed things are different and this is a different time and a different place and the one thing that i think you noted and made the difference is the active engagement in the process and i remember treasury one and two and how hard they worked to try to get that across the finish line and to me to do anything big and consequential in this town you need presidential leadership. i hope we get that. with regard to a couple of the

issues you batted around back at the time one had to do with whether lower rates or more favorable cost recovery revisions ought to be a focus on tax reform and which is better for economic growth and i think that was part of the debate. and my question is do you believe lower rates paired with longer depreciation schedules is that approach and how do you think we should approach that question today? >> don't know how you should approach it today. we felt lower rates was the most desirable thing we were doing. precipitation depreciation was a major sense when we went to congress. i won't advise you on what you ought to do. i just say lower rates and keep it revenue neutral but there might be something you can work on that but lower revenues.

>> how do you feel about cap gains rate and the lower income in your view when you look back on it, was that a good thing? >> yes, it was. and i remember bill talking a few moments ago about the hearings we had, and you had to have a differential f. it was 30%, you had to have 15% and if it was 20%, had it to be 10%. and i said if there was no income tax would you have to have a subsidy to invest because there is no deferential. and he never been asked that question and didn't know how to answer it. i think you could do well if you had a low rate, with capital gains being the same rate. >> okay. and this has been alluded to already but there is suggestions about the goals of tax reforms and one thing that separates us here which makes it hard is there are folks who look at this

as an exercise to raise revenue and that is something the president wants to do and a lot of us believe that can be done through growth and tax reform is how do we raise that income disparity issues mentioned before, so speak about growth as an objective or a goal of tax reform and how you think that plays into the deliberation that should occur here. >> well obviously everybody wants growth. i remember russell long, chairman of this committee for 16 or 17 years in one meeting saying i have been here for 30 years. he said, three times we have put the tax credit in three times and three times we've taken it out and when does it work out with the economy.

i think a lot of us don't know exactly what works. i know there are industries who want things who say this will work but i don't think we're necessarily smart enough to know. >> mr. bradley, you've talked about growth tell me your sort of views on that? >> well i think you can have growth and equity. i think growth, you get in part through the lower rates and also in part from clearing out the code of this under-brush that prevents the economy from growing because it subsidized one segment as opposed to another. i think that if you are going to deal with the equity question i think the way to do that is with the earned income tax credit and i think the president's proposal on second earning tax is something to look at and i think you can do stuff that is not

special interest that will allow you to deal with equity and at the same time you are lowering the over all rate. and to me that is the key. >> thank you. mr. chairman and senator bradley, you're a credit to basketball players everywhere. >> that is a big compliment from you, senator. >> thank you. senator. >> thank you for being here with us and insight from 1986 and how you brought together something that was thought to be impossible and telling you here as a new senator it is thought to be impossible again. and for a point of reference, this is treasury two and this is treasury one and during the years you guys found the will to make this happen and this is six years of the president's

proposals. my first question for both of you all is how do we find common ground when finding a serious partner towards real tax reform appears to be missing in the seriousness of the presentations and the proposals number one, and the second part of that is when we've heard from both our chairman senator hatch and senator thune just talked about revenue neutral position when you start the conversation as well talking about achieving several hundred billion dollars more of revenue versus a position of neutrality, how do you bridge that chasm? >> i don't think bill and i can tell you how to bridge that gap. if the bridges areir ref equable, that bridge cannot gapped. >> i agree.

>> senator if you can bridge that, then spend time doing something else. i think however that the question is can you put together a small group of people on this committee that have sufficient clout within the committee, as bob said earlier that you could actually spend the time to come up with something that was pretty good. i mean more taxes you have to figure out which taxes -- the trade-offs i offered with the consumption tax versus cutting the social security and employment taxes. that is not something we're going to decide. that is something you have to decide. and as i said earlier all i know is we didn't have room with seven people and you are making votes and doing things and effecting this part of the

economy and that part -- that is a lot of fun. if you are just coming in and having your two sides make your statements, that can't be too much fun. >> can't be too much fun is correct. looking for other things to do with our time sir, i thought about playing basketball but i'm too short and built for football. so good news is senator hatch on the other hand has taken an inventive approach to find some common ground and reaching across the aisle and put together some sweet spots that may be beneficial going forward. one of the areas i have great passion and interest as an entrepreneur over the last 15 years is why simplification of the tax code benefits all. and senator bradley, you said loopholes are ways politicians can spend money without going through the appropriations process and the more opportunities politicians have to spend money without the appropriations process, the more complicated and difficult the

tax codes comes. when i started my business i didn't think about loopholes to start a business. i thought about creating jobs and making a profit and changing the lives of family members and employees. i would love to hear you chat a little bit about the notion of simplification or either of you esteemed gentlemen talk about the simplification and the outcome of allowing money to find its best place through the private sector? >> um, you know when i was speaking about this every day for four years i went on the "david letterman show." and i took out a card and said you ought to be able to do income tax on this card. that is not quite true. but we do know that a vast number of americans have income

through income or dividends. and guess who has that information. the irs could do the return based on that send it to the people and the people could either sign it or say no i want to have another accountant do it. that would be a dramatic simplification. >> in 1986 i had a younger person on the joint tax committee who is gone, i can't remember who it was now. give me just a ballpark estimate and not spending time on running -- what you can do with a flat tax which is simple. and he said, at that time it took him a few days, you could have a flat tax, 11% and raise the same amount of money that we are now raising but that meant a widow with two kids would now pay 1100 in taxes. and i said what if you exempt all families under $11,000.

he said it slightly tilts toward the rich. and i was curious about slightly. and he said if you realize if you get rid of every deduction that mankind can conceivably has, you're talking about people of the rich and not the poor. sally who works out the mill who fills out a 1040-ez single-digit doesn't have any deductions is not adversely effected. but if 19% is the norm, you could keep the same progress and do it around 17% on the low end and 20% middle and 23% on the top. now this is a top of the head thought of his. but it is worth running if you want to see what you could do and then, senator, you have got a simple tax. how much did you earn? you are in the 20% tax bracket you don't get any deductions and that is simple. >> that is interesting. thank you. >> and senator white we've had

over 30 hearings on this over the last four years. >> i do want to tell this one quick story about bill because it was cute. >> sure. >> the president signed the bill. the signing ceremony is going to be on a wednesday. bill is in portland at a noontime luncheon fundraiser for a democrat candidate for governor and catch the plane back for the signing ceremony. my campaign manager is a tough woman and she said you are not up for re-election, but bill is going. well portland is socked in. and he called seattle, can i drive to seattle and get a plane out. can i get a charter plane in san francisco and nothing is flying out. and so he -- and i was having a press conference the next day at 7:30 and the president was going to call me after he finished signing and i said bill we have a press conference tomorrow morning if would you like to come and he said no i'm going to get out. early the next morning he calls

the next morning and said where is that press conference and he comes and the president talks to me and the local network affiliates are there and the president talks to me and i chat a bit and say by the way bill bradley is here and you know how valuable he was for us. and he comes on and he makes national television for appearing on the local affiliate in portland and i don't get covered nationwide. >> well the more relevant point is it was because of my respect for bob packwood that i decided in the middle of his campaign to join him in a press conference about tax reform. i think that is probably not happened a lot recently. >> that was well-done. >> well i have a lot of respect for both of you. you've been both great senators

and you have both done an awful lot for this country. and we are very proud of you. senator wyden has one more. >> i'm going to be very brief and thank you both for that simplicity discussion. because i've thought for a long time that this insanely complicated tax code plays right into the hands of the special interests and the lobbyists and it will be even more challenging today than it was in '86. and we talked about gucci gulch and wonderful descriptions in it about the lobbyists who would wait in line outside of the ways and means room for a phone booth. well today a lobbyist is going to sit in the back of the room and set in motion a tweet that is in effect probably going to go to millions or tweet directly to millions from the back of the room. so simplicity is going to be

hugely important and i think there are some contenders for how to do it and senator bradley mentioned one in his testimony with respect to the information that the irs, in effect, has in giving the citizen an option of in effect having the irs mail something, it wouldn't be required, just an option. the postcard concept, in effect, you can put a tax return on the back of a w-2 and that is something worth exploring. and i'm also interested in looking, we'll be following up with the two of you, on the idea that if you triple the standard deduction and a number of senators of both political parties are interested in a significant increase in the standard deduction, you don't have so many people itemize and that is another possibility. but we'll follow up with you on the simplicity issue. i want to wrap up with one last question and that is, is there

one thing you regret about what happened in '86 and you would counsel us in terms of what to do in the future? in other words, it is always easy to think about what is possible today in the abstract, but you two went through it. anything you regret and you would like us to change? i know that one thing i regret about '86 and i was june a junior junior congress person is senator bradley is right when he says no current congress can permanently bind a future congress from unraveling it but you can make it really hard. can you put people through multiple votes and the like. so i can think of some things, but you two went through it. anything you regret, one thing that you would tell us to be careful about? >> well i regret the deal i had to make with the oilies which is totally unjustified given to them and no other business got it but i needed their votes on the floor and what they wanted

didn't cost very much money. and the ira's were $24 billion. but do i wish i didn't have to put that in? you're right. but that is one of the decisions you make on the spur of the moment. i literally made it the night we were doing the votes and i didn't ask for it and i put it in and have them be mad rather than put it in and think i double crossed them. >> so even in this world of great equality among the senators and the group of seven that senator packwood talked about, there was still the chairman's prerogative and i think that is what that was. nobody -- nobody questioned that. because we've been through the whole process. do i regret anything? i regret that the bill lasted only a short period of time.

as i said, it was a humbling experience, sand castles at the edge of the ocean and only a commitment from members of this committee and from presidents -- succeeding presidents, president clinton had a totally different idea of taxes. he would like to spread through the tax code and that helped unravel the deferential capital gains came back and we didn't treat the deferential, rate went up to 39 and there were hiding places for little provisions. my favorite being the one that says if you rent your house for would weeks you pay no tax on that income. there was once a senator from georgia on this committee who had a lot of friends that had the master's golf tournament and big houses around the master's golf tournament, these things happen, but i don't regret

that -- that was before my time. but i do think that you have to find some way -- i regret that it didn't last. that is what i say. >> thank you to both of them. senator, you have one of your top staffers one i know, that was with you at the time. do you care to introduce? >> bill. bill bill stand up. >> if i can. >> he was the chief of staff of the finance committee at the time and i said if that bill wasn't my bill, it was our bill. he was critical in this and especially critical in dealing with the administration and with dick darwin. but it would not have passed but without him. >> i agree with that. >> i want to thank both of you. this means a lot of to me personally. and i've admired both of you as premier legislators and people

who care for people and who both are extremely intelligent. so this has meant a lot to me and i appreciate it and with that, we'll recess until further notice. >> thank you. because

. and you can watch this hearing any time on our website, cspan.org. more on the online article. the obama administration refusing to release 500 targets

on the irs refusing to release documents. the hill asked for e-mails and other correspondents between the irs and the treasury inspector general for tax information and sought e-mails from former irs official lois learner and treasury officials including secretary jack lieu. the inspector general opted not to release the documents covered by the request citing various exceptions in the law. the hill recently appealed that decision and the office denied the appeal. ashton carter was unanimously sent to the full senate today and testified at his confirmation hearing last week. that hearing available on our website at cspan.org. housing finance ministry mel watt talks about opening up access to spending for home buyers.

in late january he testified before the financial services committee, a committee he used to serve on before heading the finance agency. representative jeb hensarling chairs the committee. the committee will come to order without objection the chair is authorized to declare a recess of the committee at any time. today we need to hear from the director of the fhfa. no stranger to this committee, our former colleague and truly our friend mel watt who the senate confirmed to his current position in december of 2013.

a special welcome to the director. most of us know him well. he was the representative of north carolina's 12th district for 21 years. and i can say from both sides of the aisle, he is one who served on this committee with both honor and distinction. it was a pleasure to serve with mel and i always listened very carefully when he spoke. i rarely agreed with anything that he said. but he always commanded my respect. and i listened carefully because, again he was a thoughtful member of this committee. i certainly admire the fact that the director has chosen to continue his career in public service. i might remind my friend and colleague that when he was on this side of the witness table he's always demanded of the witnesses short, concise and

substantive answers so i have no doubt now that he is on the other side of the witness table that he will continue to demand the exact same from that side of the witness table and once this hearing is over i can't wait to ask my last question is, mr. director, which did you enjoy more being thein exquisitor or the in exquisitee. and now i wish to yield a brief moment to the ranking member for a special welcome as well. >> thank you very much, mr. chairman. i too would like to welcome director mel watt to this hearing today. i must admit, i was somewhat torn when mr. watt received this appointment. while i know and always knew he would do a great job at fhfa, i

knew i was going to miss him on this committee. not only because he was such a thoughtful, well-prepared member of the committee, i could count on him as the one person who had read every line of a bill. mel watt not only had read every line of a bill, he was the one that could come up with the question that no one else could come up with because he had spent so much time reading the bill. i also appreciate the fact that he served an important role, even when barney frank was the chair of this committee, when there was a need for tough negotiation, barney frank turned to mel watt and would ask him to work with the opposite side of the aisle to work out the differences and he did that on any number of occasions.

barney frank could never trust me with that. and i understand why and everybody else understands why. but mel watt certainly did serve in that role for all of us. so we are so pleased again that you are over at fhfa and we think that despite the fact i mourn you're not being with us here on this committee, we know you are the right person for that position and we are very pleased that you were able to hit the ground running because you knew and you know the issues so well. so welcome mel watt. we look forward to hearing from you today and don't worry if anybody on the opposite side of the aisle tries anything with you, i'll take them on, okay. thank you. >> you're going to be busy. [ laughter ] >> the purpose again of today's hearing is to take testimony

from the director of the fhfa to learn about the conservativeship of the gfe's and i now recognize myself for three minutes as an opening statement. as yogi berra said, it is deja vu all over again. memories are short among the opening class because they caused the 2008 financial crisis in the first place. contrary to what was told by the root level, it was not deregulation but dumb regulation. regulations that incentive or lended money to people to buy homes they could not keep. 70% of all troubled mortgages were backstopped by fannie and freddie and other agencies. in contrary to the fable of the left it wasn't wall street

greed. of course there is greed on wall street. when hasn't there been. but there is washington greed. greed for power to command great swaths of our economy. greed to allocate credit within our society as opposed to wee the people in a free and competitive transparent innovative market. the mentality of this washington greed is best summed up by obama architect gruber who stated the american people are too stupid to know the difference. i doubt the american people collectively would have been foolish enough to roll the dice on taxpayer packed sub prime and people lost their homes and the economy was brought this their needs and the taxpayers had to pay for the mother of all bailouts. and washington is rolling the dice all again. within the last 12 months fhfa has announced three different

policies that are harmless to transitioning us to a sustainable house finance system that protects homeowners and taxpayers. first by suspending a previously scheduled increase to fees fannie and freddie charge for the loan guarantees, fhfa is leveraging the taxpayer balance sheet, one that is clearly a wash in red ink to lock in a monopoly. and next in the race with the fha to become the nation's sub prime lender. fhfa is allowing people to buy mortgages with less than 3% down. and prudent under writing standars are again being thrown out the window. the data is overwhelming that there is a correlation between delinquencies on one hand and low down payments on the other. and finally fhfa has announced it begin siphoning taxpayer funds from fannie and freddie to

fill government housing slush funds and fannie and feddy remain ridiculously leveraged and hurt taxpayers. the best affordable housing program is a healthy economy not a doubling down on failed obama-economics and certainly not more risky housing schemes from washington. it is time to grow our economy from main street up, not from washington down. it is time to get off the boom-bust bailout cycle and it is time that the middle class families have the opportunity to achieve financial independence and buy a -- to buy a home they can keep. and we now recognize our assistant chief. >> thank you. mr. watt, you have taken important steps to assure our

housing market is affordable and works for everyone. with fannie mae and freddie mac having paid the government $225 billion, which is $38 billion more than the treasury invested during the crisis, i think it is fair to say that our actions to prevent a total collapse of our housing market have been a resounding success. if we close the gsc's without putting in place a viable alternative as my republican colleagues would do, we would likely re-enter a recession. in fact i think it is in our economy's best act that the path act lost whatever momentum it would have had and director watt your actions show you are fulfilling your mandate to restore a liquid and competitive and national housing market. similarly the fhfa has finally abided by another statutory mandate to fund the affordable

housing trust fund. this one action will help improve especially in districts like mine, the availability and affordability of rental housing. there are 7.1 million american households for whom safe and decent housing is nor affordable nor available. a situation made worse due to republican attacks on public housing and voucher programs. but by complying with u.s. statutory allocation a tiny amount of fannie mae and freddie mac funds we have the chance to improve families and children and those with disabilities and elderly. i applaud your efforts to expand the availability of homeowner ownership for all americans, including americans who are qualified borrowers but not fortunate to come from wealthy families. when fhfa demanded safeguards to

protect the taxpayer with eligible credit for borrowers. moving forward i encourage the fhfa to think outside of the box when it comes to credit scores to make sure all credit-worthy borrowers have the chance at the american dream. thank you mr. watt and i yield back my time. >> and we recognize the gentleman from jersey, mr. garrett, for two minutes. >> thank you mr. chairman for convening today's very important hearing. thank you dr. watt also for being here and your testimony as well. i would like to begin today's hearing by commending chairman hen seng ling and the gsc were at the heart and center of the testimony crisis and the

political issues to overcome are immense and i do believe that reforming the broken market place must remain a priority of this committee in the 114th congress so i'm heartened by the engagement on both sides of the aisle with a number of specific legislative proposaled by the chairman, the ranking member and mr. lany as well. the proposals in the bipartisan bills provide a foundation in which do continue negotiations in congress and hopefully reach bipartisan consensus on a package. dr. watt you have been quoted saying that the gsc should be left up to congress and the fhfa should not interfere. and i appreciate your loyalty to the body you once served but any changes you make as director will impact, positively or negatively, there is no way to change that.

and i hope your decisions would error on the side of helping reform and not acting as an impediment to it. so lowering down payments and preventing risk-pay guarantee and funding of the housing trust fund, those things will make it harder to reform the entities and lead us down the path of another multi-billion dollar taxpayer payout. this brings to mind the old saying, those who don't learn from history are doomed to repeat it. so sub par lending and encouraging people to buy homes they can't afford, they were the main causes of the last crisis so i would ask the director, please don't let these decisions lead to the next one. with that, i yield back. >> and the chairman recognizes the ranking member from new york, miss maloney, for two minutes. >> i thank the chairman and ranking member for calling this important meeting and it is a

pleasure to welcome our former friend -- our former colleague and good friend mel watt. you are missed on this committee. director watt has been on the job for 386 days and he has proven to be a thoughtful deliberate and conscientious leader of this tremendously important agency. he has focused on maintaining the liquidity of markets and increasing access for credit for credit-worthy borrowers. his first act as director of fhfa was to increase the fannie and freddie fees which would have raised the fees in states with stronger consumer protections such as the one i represent. it was never a sound basis, there was never -- there was never a sound basis for penalizing states that have strong consumer protections in foreclosure and i applaud director watt for this.

states with stronger consumer protections should be awarded and not penalized. and in addition, he halted the cuts to businesses and created an exception for small and affordable housing. this is hugely important for my district where multi-family housing is our single family business. he has also allowed fannie and freddie to buy certain mortgages with a 3% down payment which allows borrowers with strong credit histories but not stockpiles of extra cash to get a mortgage. i think that decision is tremendously important and he was guided by the data which clearly demonstrates that the size of the down payment is not the most important factor in predicting default rates. finally he recently made the decision to start funding the national housing trust fund and the capital magnet fund which will provide hundreds of millions of dollars for affordable housing programs.

this was a critically important decision because this is one of the only dedicated sources of funding for affordable housing that we have. thank you very much. we're delighted to have you back here before the committee. >> director lady yields back. and director welcome back to that side of the table and you are now recognized for your opening statement. >> chairman hens ling thank you for inviting me to discuss the work we're doing at the federal housing finance agency and for providing my first opportunity to return to this committee since i left congress. this might be the first time since i left that i have the sense that i might be better off on that side of the table. fhfa is mandated by a statute to

ensure the safety and sounding of the federal home loan banks, fannie mae and freddie mac and to ensure they provide liquidity and the national housing finance market. fhfa works to balance these obligations across all of our activities. because fannie mae and freddie mac are also in conservatorship, we are also mandated by statute to preserve and conserve their assets. earlier this month, fhfa issued a new score card that outlines our conservatorship expectations for the enterprises in 2015. fhfa's conservatorship strategic plan we issued in 2014 and the score cards we issued in 2014

and 2015 are centered around three strategic goals that are fully aligned with fhfa's statutory mandates. the first goal is to maintain the credit availability and foreclosure prevention activities supported by the enterprises and to do so in a safe and sound way. during 2014 in support of this goal, fhfa made considerable progress with the enterprises to clarify their representation and warranty framework to encourage responsible lending to credit-worthy borrowers and to enhance the enterprises out reach and provision of service to small and rural lenders. in 2015 the enterprises will continue their work on these and other priorities such as

analyzing the potential benefits and feasibility of using updated or alternative credit score models. the second goal is to reduce taxpayer risk. the primary way we do this is by increasing the role of private capital in the mortgage market. in 2014 fhfa tripled the enterprises credit risk transfer requirement and the enterprises executed transfers on single family mortgages with a combined unpaid principal balance of over $300 billion last year. in 2015, the enterprises will continue to use the models that have already proven successful to transfer credit risk and they

will explore other ways of transferring and reducing risk to taxpayers. our third goal is to build a new infrastructure for use by the enterprises and adaptable for use in the future mortgage market whatever that might be. last year we defined the government structure of the common securitization platform and the enterprises announced a ceo for this joint venture. we also made significant progress toward our multiyear goal of developing common securitization platform technology and a single security. our strategic plan and the 2015 score card also have affordable rental housing priorities for the enterprises.

the focus here is not to compete where there is adequate private sector coverage of the multifamily market, but to ensure that affordable housing is available and that the housing needs of people in rural and other underserved areas are met, including areas that rely heavily on manufactured housing. fhfa is also focused on regulating the federal home loan banks. as part of our responsibility to ensure that the banks fulfill their statutory mission, and support housing finance in a safe and sound manner, we propose they rule last year concerning the bank's membership requirements. our comment period ended earlier in january, and we received

approximately 1300 comments. i want to emphasize that getting and evaluating input from stake holders is a crucial part of our policymaking process. we will carefully consider comments made by members of this committee and the public in determining our final rule on the bank membership standards. we are also actively considering input we have received on guaranty fees, single security, and the enterprise housing goals. i've covered a lot more areas and provided a lot more details in my written statement and i look forward to responding to your questions. again, thank you for the opportunity to testify. i'm happy to be back, especially since i know that i'm free to leave after the hearing is over.

>> the chair now yields himself five minutes for questions. again, thank you director watt. i wish to echo the comments of the chair of the capital markets gse subcommittee. i fear director watt you have reversed policies of your predecessor, which will make it more difficult to have a sustainable housing finance system. i want to first focus on what you have done when authorizing the gses to back stop 3% down loans. you have previously testified before the senate quote, we know that the size of a down payment by itself is not the most reliable indicator of whether a borrower will repay a loan. all things being equal because i've looked -- i cannot find your thoughts on the subject, but all things being equal, is a 3% down loan riskier to the

taxpayer than a 10% down loan? >> i would say, mr. chairman, that that is generally true, but when you pair the down payment with other compensating factors, which is part of the sentence that people missed when i announced this you can make a 3% down payment loan as secure -- >> i understand there are other factors. okay. i understand there are other factors, mr. director, but also ability to repay, surely it is an indication of whether or not a home buyer can save if they can only afford 3% down. do you believe that 3% down is riskier to the home purchaser than 10% down? >> again the same considerations would apply to the borrower as would apply to

the lender. if you carefully look at other considerations, and take them into account in deciding whether to extend that credit or in fannie and freddie's case whether to back that credit, then you can -- you can ensure that a 3% loan is just as safe as a 10% down payment loan. >> let's explore some information that has come out of your agency previously. can i have the chart from the federal register, please? your agency, frankly, along with treasury, the fed, fdic, sec and hud, i know like most charts it is somewhat difficult to read, but on the horizontal axis, this is loan to value ratio, on the vertical axis is default rate. and to the far right-hand corner you see a precipitous rise in

default rates when you go from 90% loan to value. and particularly an incredible slope from 95% as we reach no down payment whatsoever. again, this is information that is coming from your agency along with just about every other prudential banking and housing regulator. so doesn't that seem to indicate that, again, a 3% down payment, not only is it not too good for the taxpayer you're putting people into homes that they can't afford to keep. and you have previously testified when you were on this side of the witness table during the dodd frank proceedings, quote, so i've always believed you cannot make a loan to somebody who cannot afford to repay it. that's unsustainable. this is data from your agency and others. so why is it sustainable? >> mr. chairman i haven't

changed my position on that. and i want to assure this committee that i have not changed my position. you should never make a loan to somebody that you cannot anticipate would pay it. if you couple -- >> this is data. this is data from your agency. >> -- and make a loan as safe, which is exactly what we have done with this 97% product, compensating factors, including housing, counseling, including higher fica scores -- >> director, let's not just look -- let's not just look at -- you do recall i get to control, director watt. let me quote -- let me quote from the same document quote, default rates increased no visibly among loans used to purchase homes. there is substantial data indicating loans with ltv ratios of 80% or less perform noticeably better than those with ltv ratios above 80%.

so notwithstanding, mr. director, with all due respect, i understand what you're saying. but i fear what you are doing is, again, repeating the exact same mistakes that brought us here in the first place, and now you're in a contest with fha to see who can be the nation's largest subprime lender. i fear we're going in the complete wrong direction with your policy. and i now recognize the ranking member for five minutes. >> thank you very much. mel watt, i really want to spend my time on affordable housing trust fund. but i must step in here to basically ask when we take a look at those that we would lend to with the 3% down are we not talking about people who have shown that they pay their bills every month they have basically good credit, they have not defaulted, they don't have any

bankruptcies, they just are not able to save up a 10% to 20% as some more wealthier people are able to do but these are good, hard working taxpayers. are these the kind of people you're talking about? >> that's exactly the kind of people that we would be looking for, and we would pair that with strong credit scores lower debt to income ratios housing counseling and private mortgage insurance, all of which would put together compensate for the fact that you are making a loan to somebody with a lower down payment. and we have no interest in going back to irresponsible lending. and as part of our statutory mandate to make sure that doesn't happen. >> thank you, i think that even though i don't have the data or

the information that a large part of our society fits into that category. and they deserve to be homeowners, if in fact, they're hard working citizens who pay their bills, who have not had any problems, a 3% down payment should not cause us any problems at all. let me get to the affordable housing trust fund. i would like to commend you on your recent decision to file the requirements set forth in the housing and economic recovery act of 2008. and lift the suspension on fannie mae and freddie mac's obligation to fund the national housing trust fund and capital magnate fund. as you're well aware, we're in the worst rental housing crisis in this nation that has ever been seen. and the richest country in the world, it is unconscionable that there are 7.1 million american households for whom safe and decent housing is neither affordable, nor available. in my own district alone there is a shortage of nearly 43,000 affordable and available rental

units for extremely and very low income households. these critical new funds will not only add to the supply of affordable rental housing but will also help to address homelessness and poverty across the country. please talk to us about what factors you considered in coming to your decision to end the suspension of contributions to the fund. >> ranking member waters, i simply followed the statute. the statute tells us the exact circumstances or the criteria to be applied on the suspension of the contributions to the housing trust fund, and it tells us the criteria that -- to be applied under normal circumstances for funding. and that's whether they are contributing, whether the contributions to these funds would contribute or are contributing to the financial instability of the enterprises

whether they are causing or would cause the enterprises to be classified as under capitalized, or whether they are preventing or would prevent the enterprises from successfully completing a capital restoration plan. those are the statutory provisions. they're the same provisions that mr. dimarco applied appropriately in my opinion at the time that they were applied to suspend contributions to the trust fund. they are the same criteria that i applied appropriately in my opinion to reinstate them because circumstances have changed in that interim. so i simply followed the statute. that's all i did. >> thank you very much, that's very important to know because there are those some of my friends on the opposite side of the aisle, would have us believe that you have done something outside of the statutory

requirements, or mandates and so i'm very pleased that you're able to clarify that. and i think it is going to be -- if we can get this implemented, it is going to be very good for this country. i yield back the balance of my time. >> gentle lady yields back. the chair recognizes the gentleman from new jersey, he's recognized for five minutes. >> i'll follow up on your question with regard to the down payment. so obviously we're seeing a return to loose underwriting standards at the agencies. i'm sure, director, you've read one of the largest banks in the country publicly statemented a 3% down payment loan is too risky for them to originate. and yet here on the other hand, you have agencies you're instructing them to take on more risk than the largest two big to fail banks. every day we read in the paper how wall street banks are greedy and risk taking but it would

appear that in this situation that you're doing just the exact opposite of what they're doing they're being more prudential and you're saying, as someone else once said, let's roll the dice, but the difference here is we're rolling the dice once again with the taxpayer money as opposed to private investors. is that wise to do. to be riskier than the -- >> let me clarify i haven't instructed any bank to make any loans that they think -- >> not the banks, you're instructing your agency to -- >> i've instructed that fannie and freddie that they can guarantee loans that are made responsibly that fit our criteria. the bank you're talking about, i think, is the same one that made the decision to acquire countrywide and following their experience i can understand why they might be a little bit reticent to go back into that

business, but that shouldn't control the entire mortgage market -- >> reclaiming my time, they're doing that on behalf of their investors, and i guess i'm speaking on behalf of the american taxpayers that we're concerned where the taxpayer dollars are going to potentially be as we return to these very loose underwriting standards. another point that we read in the paper is how after the last crisis, a lot of people felt they did everything right and still they got burned at the end of the day from this crisis. and it seems to me that with the handling you do with the g fees, that's exactly the same thing you're doing now. with regard to loan level price adjustments, there is, as you know, a fair amount of cross subsy dags that occurs on the pricing here. that means you have good borrowers with high down payments and better credit scores, they're being told they have to pay the exact same fees as borrowers with low down payments and have worse credit scores. can you explain to me why it is -- why you consider it fair

to tell people who have done everything right saved their money, acted in a prudential way, they have to pay the same fees and have the cross subsization there. why is that fair? >> i think your question illustrates the complexity of this issue, senator -- representative garrett. and all i did was suspend it suspend the increase in guarantee fees until we had a chance to evaluate all of the implications of it. and when we announced the guarantee fees which we will do hopefully by the end of this quarter, we well might take into account some of the things that you're talking about. but doing that without a thorough evaluation, and consideration of all of the aspects of it as you suggest we

should do, i think would have been irresponsible. >> only suspended the decreases, i understand. it seems to be pretty fair -- plain on its face that those who did good are being penalized for those that did poorly and yet here we are a year later and we're still in the situation of rewarding bad behavior and unfairly treating those who did good behavior. moving over to some other items i don't have a clock on here, the securitization platform, i mentioned earlier there is bipartisan support as far as moving forward. one of those areas is the securitization platform. all parties seem to agree we should be having this. and yet we see that industry seems to be cut out of some of the development of this securitization platform. they're not really allowed in at the ground floor of the creation of it and the governance of this. why are we -- we have a bipartisan initiative here, when we have both sides of the aisle

and both chambers looking at it in the same manner why are you cutting out industry? is this another attempt by the gses to try to continue what they did before, to control the marketplace, to manipulate the going allow the players in the future to have a say in it? >> we're not cutting out private industry in our consultations. we're in regular consultation with private industry on the securitization platform. but the more important point really is the one i made to the chair when i discussed it with him. what i did was exactly what i thought republicans really support is derisk this whole process by not trying to form a common securitization platform for a future that you all have not yet defined. >> the time of the gentleman has expired. members probably don't need to be reminded that we are not in our usual hearing room. obviously we are lacking the

individual clocks. so to gauge your time you need to look at the little color wheel, if you will, at the witness table. and i think you otherwise know the drill. the chair now recognizes the gentle lady from new york, miss maloney. >> i thank you for yielding. director watt i was pleased last year when you delayed your predecessor's decision to raise g fees. as you know your predecessor wanted to raise g fees even more in four states, one of which was new york. and new york and the other four have particularly strong consumer protections for foreclosures. and this would have needlessly harmed new york's economy and would have discouraged states from enacting stronger consumer protections. i think this was an important decision. we should be rewarding states

that put strong consumer protections in, not penalizing. now, of course what i'm hearing the markets are telling me, or some of them they anticipate a possible decrease in the g fees rather than an increase. so can you just give an update on your review of the g fees in general and do you anticipate that they'll be going down and not going up? that's what i was told. >> i don't know where the -- where that information would come from. we're still in the process of evaluating the input that we got in response to a request for input from the public on this issue. and we anticipate making a decision, hopefully by the end of this quarter. it may slip into next quarter, but we're going to mack a decision and then we'll talk -- we'll justify and outline the reasons for that decision.

i don't think i have any information about whether they're going down, going up risk based, might have some adverse impact on some of the states that you're talking about, but at this point i think it would be premature to talk about what that result will be because i don't even know what it will be when the process of evaluating it. >> well, in your deliberations i hope that strong consumer protections for foreclosure are considered a plus. something the state should be rewarded for. i have another question director watt, we heard a lot about the housing trust fund and the capital magnate fund. some of which has been critical. but, of course we know that the facts are that the capital magnate fund has already had one successful round of funding in 20 10 and it was a huge success through a public/private partnership model. 80 million in funding from the

capital magnate fund was turned into $1 billion for affordable housing. and i congratulate this effort. now with your decision to start funding, for both the housing trust fund and the capital magnate fund there will be hundreds of millions of dollars for affordable housing every year. can you talk a little bit about the impact that you expect this funding to have on the affordable housing crisis that our country is facing, and can you talk a little bit about the public/private partnership that emerged to help magnify the money and are you looking at more public/private partnerships in general where this program is going for affordable housing? >> representative maloney, to be quite honest, i didn't take any of that into account. those are policy decisions that i think legislative decisions congressional decisions, and we don't have any control over at fhfa -- over the use of these

funds. those decisions actually made at treasury and hud. our decision related only to whether to fund it or not and applying the statutory criteria to determine whether it should be funded or should not be funded. and so we didn't look at the use of these funds we didn't look at the history of -- i'm not even sure i knew that there had been -- >> thank you for clarifying. thank you for clarifying. i would like to ask you about the risk retention rule. as you know the final rule inadvertently failed to exempt the securities even though it exempt the multifamily securities. i understand that fhfa is working on a possible solution for this already. can you give us an update on these efforts? >> the risk retention rule was not done by fhfa.

that was -- that was a combined -- that was a joint rule-making process. so i'm not sure that we're looking at anything that is going to -- >> but the fact that it failed to exempt freddie mac's securities even though it exempted fannie's they should be treated the same. that's a -- >> i would hope that whatever rule comes out would treat both fannie and freddie securities the same. that's what we're trying to work our way towards under -- in the single security. >> thank you. my time has expired. thank you. >> the time of the gentle lady expired. the chair recognizes the gentleman from north carolina, mr. mchenry, vice chairman of the committee. >> director watt, thank you. good to see you again. and always good to see on the plane coming back and forth from your former district in charlotte. >> congratulations on that beautiful baby.

>> thank you. thank you, mel. i appreciate it. i appreciate your kindness and friendship over the years. we have been able to have conversations even when we disagree about issues. and so i just want to ask you a few questions. but, you know, you know me fairly well. i figured at some point you'll cut me off here. so it seems that we have some conflicting actions you've taken. one is you suspend the g fees, right? and you move away from risk based pricing. at the same time you start up holding reserves to the housing trust fund and allocating capital housing trust fund. one respect you're conserving capital for an assessment, and the other you're moving capital away from the enterprise. how do you reconcile that? >> representative mchenry, all i'm doing is following the statutes that were written by congress and passed by congress. and we're trying to do it as

judiciously and prudently as we can. i am not even trying to connect those two things, the housing trust fund funding was an independent decision that was based on the statute. the g fee decision was a prudence decision to give us an opportunity to study the issue thoroughly and we're doing that. and we don't know where we're going to get to on that. so i think judging where that might go at this point would be premature. >> under the statute you have no choice, you have to allocate capital for the housing trust fund? >> well, if the statute -- if the statutory standards are met, the contributions to the trust fund can be suspended. they were suspended in 2008 by the acting director at that

time. and we applied the same principles under changed circumstances to reinstate them. that's all we did. but the housing trust fund was not created by fhfa. housing trust fund was created by congress. and the decision to fund it or not fund it is based on statutory criteria. >> but most of us look at this and think that -- so look at freddie being leveraged 156-1 fannie leveraged at 134-1, and think that the conditions are not right. because, you know the requirement to suspend the allocation of capital of the housing trust fund is -- shouldn't be justified under the circumstances with this type of leverage -- of these institutions. >> that's not one of the

statutory criteria that congress set for evaluating whether to fund the housing trust fund or not fund the housing trust fund. >> is this an odd circumstance? you're outspoken about subprime lending in the private sector leading up to the crisis. i heard you in debates here. i heard you on tv at home that you said that these really high ltv loans were problematic, that this was deeply concerning especially for those that didn't have savings that a small fluctuation of the marketplace could cause problems. do you have that similar concern? because in their respects, you're making substantial decisions. no. you're making huge decisions. and so the consequences of these actions are real. i know you know that. but, you know is there that conflict looking back at what you said about the private

sector versus the actions you're taking right now? >> i don't think there is any conflict between what i said then and what i'm doing now. you need to make responsible loans, and this decision was surrounded by a bunch of compensating factors for every borrower that would make their loan as reliable a loan as a 10% down payment loan 20% down payment loan. and that's our responsibility. and i would hope that you all would -- would rely on the same things that i said in advocating for reform in this area, to know that we are going to apply those principles and not sanction loans backed by fannie and freddie and the taxpayers that are not reliably expected to be

paid. >> time of the gentleman has expired. the chair now recognizes the gentle lady from new york miss velazquez. >> thank you mr. chairman. welcome esteemed colleague, director watt. i just would like to revisit again the question that was made by congresswoman carol maloney regarding the national housing trust fund. i heard you when you said that it will be hard on treasury, the one making the decision as to which projects to fund. my question to you is when will that money make it out there? have you had any discussion with those two agencies? >> i have not had discussions with them about the application of the funding. that's their decision to make. treasury makes the decisions about the capital fund. hud makes the decisions about the housing trust fund side of

it. so those are their decisions to make. >> but do you have any idea when this money will start? >> i can tell you that. the process that we followed directs fannie and freddie to start setting aside the funds in january of 2015 and at the end of 2015, if circumstances don't reverse, then the monies would be allocated into the trust fund and the capital magnate fund and could be used. they won't be any use of those funds during 2015. it would be 2016 at the earliest before the funds would be available. >> thank you. director watt, as part of the public mission fannie mae and freddie mac maintain a duty to

serve the entire housing market, and support affordable housing preservation. in 2008, congress asked fhfa to issue a rule to implement this duty to serve requirement. but while the proposed rule was issued in 2010, a final rule has not been promulgated as today. when do you plan to issue a final rule? >> we are in the process of looking at that. and you're right, a proposed rule was issued in 2008 2009. never was finalized because of whatever reasons i don't know. we haven't tried to evaluate that. but we are going to have a duty to serve rule finalized, hopefully in the year 2015.

>> thank you. in august, fhfa proposed a new housing rule category for small multifamily properties that have units affordable to low income families. this effort, of course, is very important for places like new york city where these properties are an important part of the housing stock. while your agency has said low initial benchmarks in an effort to take an approach explain how this goal will be evaluated so that more ambitious targets can be set in the future. >> we're evaluated on the same terms that we evaluate everything. first of all, make sure that the loans are safe and sound. and second of all, that they achieve the purpose of serving a group -- a category of people who have been underserved which

is why we encouraged directed fannie and freddie to look at how to incentivize small developments because generally smaller developments have more than orientation toward middle and lower income people. so that's included in the 2015 score card for fannie and freddie to continue to work, to encourage those kinds of loans, and we will have in place an evaluation mechanism that makes sure that's effective or we will -- we will revise the expectations in the future based on experience, which is something that we do quite regularly. >> thank you. thank you, mr. chairman. >> chair now recognizes the gentleman from oklahoma, mr.

lucas. >> thank you, mr. chairman. my old colleague director watt i'd like to address the federal home loan housing finances proposed rule-making regarding membership requirements for federal home loan banks. and i'm concerned that the proposed rule would unnecessarily harm a significant number of community financial institutions in oklahoma and across the country by limiting membership in the federal home loan bank system. in recent years it has been increasingly difficult for the institutions to provide mortgage financing needed in the communities, and the federal home loan banks have served a very critical role as a source of liquidity during the challenging times. i guess my question, mel, is why propose such regulation at a time when community banks and credit unions are in need of every credit resource available to them to serve the communities. or as congress watt would have said, what is the problem you're trying to fix of this rule? >> well there are some

potential problems that we're trying to fix to make sure that the federal home loan banks meet the statutory purposes that have been set. first of all you don't want anybody to be a member of the federal home loan bank system, and get the benefits of it unless they meet the criteria that congress has set. and we were concerned that some of the members of federal home loan banks were not meeting those criteria. so, i mean, i can go into more detail. i can give you a complete outline of the rational, but we're trying also to do this in a way that does not have the adverse impact that you are talking about. >> as i understand it, director, under the present system, once an institution meets the requirement to participate they still have all the obligations and all the standards that have to be met by any home loan bank

or institution. there is just some concern out there in the country side and perhaps in the hallways of congress that there is more to this than just an ongoing set of standards that perhaps since the administration's not really been able to legislate much in the last four plus years that this is another effort to change how the system works by rule and not by law. since i don't think this institution would pass a bill to do this. so i guess my question is, is this an effort by the administration to be able to channel and steer how these institutions use this resource. >> first of all, let me be clear with you as i've been with the administration, i'm not part of the administration, the federal housing finance agency is an independent regulatory agency. we don't play out the administration's policy. we follow the statute and that's what we're doing in this case. >> but once again, to paraphrase congressman watt the folks what brung you are the folks that

keep you there ie the question still goes back to is this an effort to try through the rule process to determine how these resources are used and in effect to put the institutions that are part of the home loan bank system on a rather short leash? >> we have no agenda other than making sure that they -- that members of federal home loan banks meet the criteria that congress has established for membership. the one that -- and i know this is a controversial issue because we put out the rule, we got 1300 comments. i mean, that's almost unprecedented. we're going to go through every one of those comments and evaluate every single one of them. and most of them to be quite -- i would say probably 90% of them appear to be against the proposed rule. so that obviously we touched a

nerve, but we're going to apply the statute and try not to have the adverse impact that people are contemplating might be a result of this rule. >> you've always been a man of the word. i take you as a man of your word, but we're in an environment where a lot of things are going on in interesting ways and i would note that i would hope the committee would be sensitive about doing anything to a model that has worked really well and is working well in the particularly tough set of times for the institutions. >> i agree with you. >> i appreciate our friendship and many of the underclassmen weren't here when we worked to help whoever the ranking chairman was at any given time over two decades almost. so as we helped leadership i'm going to try to help you, sir. >> thank you so much. great to see you again. >> yield back mr. chairman. >> gentleman yields back. the chairman recognizes the gentleman from massachusetts,

mr. lynch, for five minutes. >> thank you, mr. chairman. i want to welcome back director watt. good to see you again. and as you see, some things have not changed yet. in terms of how we might view affordable housing and the way fhfa works. it was a great article yesterday in the new york times by sirsy. it talks about how the class is beginning to shrink. more people are being squeezed into the bottom of income earners. that's putting a lot of pressure on affordable housing. and which is where you come in. according to the national low income housing coalition we need about 7 million more homes nationwide that are affordable and available to extremely low income households and those with incomes at 30% or less of the area median income. i know that in my home state of

massachusetts, there is a short fall of about 175,000 affordable units, and in my district, it is about, let's see, 16000 units. there are a couple of tools that you have. and i am happy to see they are beginning to be used. the housing trust fund, and the capital magnate fund. i think they can be part of the solution. i know that you're following statutory directive in terms of the magnate fund, but can you talk a little bit more broadly about how your affordable housing goals are consistent with the reality that we're seeing out there? i know the situation seems to be getting worse for that tier of people that would benefit from access to affordable rental housing. the 3% down payment on purchasing housing, but just that -- there are folks that are

i think are -- have resigned themselves they are not home purchasers, they are renters now. and how does your affordable housing goal -- how does that help those people? >> well first of all, we haven't finalized affordable housing goals yet. the rule is in process and we evaluate comments. >> how do you anticipate your goals? once you figure them out? >> so here is the way i -- we think of this. first of all, we want to make on the ownership side people who can afford to pay a mortgage make it available to them. on the rental side, we want to make sure that affordable housing is available in the marketplace. there is a -- actually a very robust multifamily market on the

high end but not so much on the affordable end which is why when we wrote the score card criteria, we exempted from the $30 billion whatever the figure was, i can't even remember what it was cap affordable housing developments to try to encourage fannie and freddie to -- to be more involved and active in getting into that space which is underserved by the private sector. so that's what we have done and the rule itself will try to build on that and incentivize that. you are right, there are a lot more people renting now than had

been historically renting. the rental market is robust. and there are not enough units to serve that market. >> okay. my time is just about expired. i yield back. and i thank you. >> gentleman yields back. the chair now recognizes the gentleman from texas. >> director watt good to see you again. you mentioned a couple of times i want to talk about g fees first, that you all are -- you're currently studying the g fee issue and willmake make a determination. it was my understanding that a study was done prior to the prev director issuing a directive to increase the g fee to 10%. i guess the first question is, if we've already studied it, why are we studying it again? >> well, i don't think we should

ever stop evaluating issues. i was not a party to the study that was done before. we obviously are taking that study and any conclusions that it reached into account and reaching our conclusion, but we've been very transparent in seeking input about how these g fees should be set, what criteria should be applied in setting the g fees. should it be just about protecting against the risk that we are -- that fannie and freddie are assuming, should it be about capital formation, should it be about attracting private capital? the process has been very transparent, and -- >> so you decided to study it again. >> yes. >> the process that the gentleman from new jersey brought is an issue i'm

interested in as well. in fact, i had conversations with your predecessor in that there are some states that have very, very stringent foreclosure procedures that in many cases keep the people that loan the money in good faith, gets them not much for the property, sometimes years. that is a higher risk to those entities and those foreclosure rules are very consumer oriented. i'm not opposed to those states deciding that, i think that's their right. but i think what they have to also understand is when you make it so consumer oriented in that you penalize the people that are loaning the money and causing losses. what we've seen in many of those states where it's very difficult to get your property back, those properties were stripped of windows and sinks.

so i just want to say to you that i think pricing your g fees on risk is important. now, one of the things that you were -- what you allude to in your report -- i mean, your written testimony and you brought it up as well is you've been doing some risk transferring. so i guess the question is, if you're not taking a risk, you don't have to transfer it. but i wondered if you could give the committee some idea of how many basis points it's costing to transfer that risk? what is the pricing on those transactions that you're doing that would -- if you could give us some idea of what it's costing to reinsure those risks. >> i can't tell you in basis points, but i can tell you that one of the criteria that is always applied is that a risk transfer must be done in a commercially reasonable manner,

and it can't be just giving away assets because that would be inconsistent with our conserve and preserve mandate under the conservative aspect. >> what i'm trying to get to is in the current situation where fannie and freddie, they need to make a profit, but there is really no market, forces in place there to determine what the value of these entities are. and so the question is, if you are transferring that risk, it would be helpful for us to know that, because that should also influence what your g fee pricing is going to be. >> we have that information. i don't mean to suggest that we don't have that information, we have the information on every risk transfer transaction that has been undertaken, because what the model says the value was, what fannie and freddie

made on the transactions, we have that information, but you're asking me what are the number of basis points. that's information i wouldn't have off the top of my head, but we can provide more information to you if that's what you need. >> i would like that. final point i would make is that on the down payment, i think it's kind of ironic -- maybe erroneous, too, but it's ironic na we made fha increase their down payment to 5%. and the two of you seem to be wanting to see how much market share you can get, so you have fha going to 3% down payment when they have a 3.5% down payment. >> first of all, we are not in competition with fha. >> sure, you are. >> we're not. the market is going to go to whoever gives them the best deal, we know that, but we're not competing with fha, we're

trying to provide liquidity in the market, which is what our mandate says we're supposed to do. >> the time for the gentlemen has expired. the chair now recognizes the gentleman from georgia, mr. scott. >> thank you, mr. chairman, and welcome. i feel good and i feel proud to see you sitting where you're sitting and doing what you're doing for the people of this nation. congratulations. i think you're doing a great job. i would like to talk first about the national housing trust fund. i'd like to clear up some things so that folks will understand. first of all, both you and i were here sitting on this committee when none other than president george w. bush authorized. he authorized the housing trust fund. and if you recall, when he

authorized it, he said that this is perhaps the best tool that we could use to help get housing for our most vulnerable population. so i want to set the record straight that this is both a democratic and a republican initiative. and secondly, you have moved to reinstate the payment largely following the orders of us in congress. because we -- during the economic recovery, we put three criteria in for spending it. those criteria now no longer

exist for the gses, so you are operating on this trust fund within the authority, first of all, that president george bush gave you, and secondly, what the congress of the united states reinforced. i just want to make sure that is clear. now i want to talk about one other thing because i think it's very important, and that is principal reduction. that is really at the core of helping people, and all the evidence is in that that is the case. recently, you went to -- and that's another thing i want to commend you for, because you go out where the problems are. you've been out in the nation. you've been to atlanta, and we certainly appreciate that you're there with the heart program. but you went to detroit where

this problem is very pronounced. and i think you articulated there your concern about being able to use the necessary tools for principal reduction. i think that that is the core of it. would you mind addressing that within the light of what you said and how important principal reduction is? >> well, allow me to go back to a point i made with representative neugebauer. this is one of those issues i've received a lot of second guessing about, because there was a study done about principal reduction before i got to fhfa also. i haven't done principal reductions, either. we're still studying that issue, just like we're still studying the g fee issue. what we're trying to do on

principal reduction is find a place where it is beneficial to borrowers and not negatively net presence value to fannie and freddie, all right? and there are some instances in which that is the case. it's beneficial to borrowers and not negative to fannie and freddie, and when we find that niche, that's when we're going to make a decision about this. now, in detroit, we are under the neighborhood stabilization initiative testing some things there to see where that sweet

spot is because if you have a whole neighborhood that's sitting there with vacant properties, half of the properties vacant, it pulls down the value of the other properties in that neighborhood. so we're trying to find something that will work for the enterprises and for the borrowers. >> the time for the gentlemen has expired. the chair now recognizes the gentleman from missouri. chairman of our housing and insurance committee. >> thank you for being here. we're glad you're here today. to follow up on a couple comments with regards to the capital that you have in your gses and the ability to provide

stability. you know, one of the things i'm looking at here as i read through this is, you know, your past dues in fannie mae and freddie mac right now is less than 2% for both of them, so that's good. is my microphone not on? >> i hear you, but i'm having a little trouble picking up all of you. >> i'll hold the microphone closer. i apologize. your past dues for fannie and freddie is a little under 2% right now, which is very good, but your capital is at .4%. you're supposed to be at 2. so i guess my question is -- in your testimony you say enterprise does not have the ability to build capital internally and maintain a conservatorship. how do we solve the problem of additional bad debts popping up and i guess another question to go with that do you have any lawsuits pending that can bring in cash to add to your capital count or when a lawsuit is filed and you win it, does it go to a

treasurer or to you? how do you solve the problem of having enough capital to absorb the losses is my question. >> we can't build up capital because we are operating under a preferred stock purchase agreement with treasury in conservatorship that sweeps all the profits fannie and freddie make to the taxpayers. that was the quid pro quo for -- >> if that's the case -- >> -- keeping them from going fannie and freddie from going into bankruptcy. >> when bad debt losses occur, where do you take those losses? do you eventually go to the treasurer and ask them to write a check? >> that's what would happen under the preferred stock purchase agreement. basically the taxpayers are backing fannie and freddie, and

they will be until gse reform, is done and we can't do that -- we don't do gtse reform. that's why it is so important that -- >> in my income figures, i assume part of that is also the settlement of lawsuits from different entities? >> what's pending now, there are two more lawsuits pending -- >> when you win those lawsuits, will the dollars go to the capital account or to the treasury? >> they will go into freddie and fannie's account, and if at the end of the year, there are profits, they will be swept to treasury, yes. >> very good. one of the concerns that i have also is with regards to the way that you're pricing things and the way that you are changing some of your rules and regulations. having been loaning money for 35 years, i can tell you there are certain tenets of lending you

can't get away from no matter how much you want to do it. certain things have to happen. if you don't, you lose. it's a risk, just that simple. people can say, i can tweak here, tweak there. i'm sorry, it doesn't work. after 35 years stumbling over there, there are certain tenets that have to be there, that's it. my concern is when we change these things and we loosen rules up, as you've seen over the last six years, fannie and freddie have had a resurgence. they are actually now turning a profit. so why in the world do you go back now? and want to change those to loosen it up and head down the same path you were on before. >> you're absolutely right. we are in the risk business and there is no way to get away from risk. you can make any loan at some point can become risky.

so what you do on every loan that you -- that we back, we try to assess, what are the risks associated with this loan, and we try to minimize those risks? try to minimize those risks. now, you can't eliminate risk. >> with respect, i've got one more question. i see my time is about up here. with regards to -- in your testimony, you also want to try and move a lot of stuff to the private sector. and i think that that's a thing we need to be doing. my concern is though, that if you continue to compete with the private sector by lowering guarantee fees, lessening lending standards makes it more difficult for the private sector to step in and do that. would you agree with that statement? >> yeah, i agree with it, generally. but at the same time our responsibility is to -- is to assure a liquid housing finance market in the interim until you all do gse reforms. so we're balancing risk and

availability of housing finance which is what i said in my opening statement. >> you're competing. >> chair now recognizes gentleman from texas, mr. green, ranking member of oversight investigation subcommittee. >> thank you mr. chairman. i thank the ranking member as well, and director watt. it was a pre-eminent privilege to serve with you in congress. you were always the voice of reason and i see you continue to be that voice of reason. i'd like to talk to you about the fico score that the gses are required to adhere to. under this current fico standard, we have a circumstance that allows bad credit for utilities and rental payments to be utilized when ascertaining a score. but the good credit that one has for these very same utilities

and rental payments is not utilized. and i'm mentioning this to you because i think we need a more inclusive model. i'm not talking about doing anything that would in any way impair or prevent a good fico score from being developed. i think it's fair we've used this term fairness this morning, fair play. it seems fair to me that if you're going to use the adverse information that we should use that information in a positive way when it is available forto score. these fico scores are important, it's everything when it comes to getting a loan. can you give me a bit of intelligence on this in terms of how we might work with your office to try to expand and have a more inclusive credit scoring model?

>> is your microphone on? >> 30 seconds? >> some things don't change in this committee. so there are alternative credit scoring models that are beginning to be out there. fico is updating credit scoring model. advantage has a credit scoring model model, instructed fannie and freddie to evaluate these credit scores, these alternative credit scoring models to see if we can get to a better place in this area.

not a race to the bottom. we don't want credit -- >> exactly. >> scores that, that get more people the ability to get loans and are not reliable. so we ask them to evaluate the reliability of it. we ask them to evaluate the operational challenges that go, that would go with implementing alternative credit scoring models. so this is an area that we're working aggressively on this year. we started last year in response, well, not in response, but a number of people on this committee have written to me about the alternative credit scoring models, both on the republican side and the democratic side. it's not a partisan issue. we're trying to figure out how we can do this but do it in a reliable way and in a way that

operationally doesn't create angst in the entire market. because what we do in the space could have significant implications. >> well, thank you for exploring the possibilities because i concur with you there. alternative models that seem to indicate that we have some opportunities. let me move quickly to the housing trust fund because i think it's important for us to explain that when we developed a formula, if you will, we put a trigger in. and that trigger was placed there to prechtvent a person who might be in your position who might have opinions that would vary from what we thought the law would require. the trigger required that we not fund because of circumstances and then requires we do fund because of circumstances. it allows circumstances to dictate the actions of the

director as opposed to the will of the director. i think it was a pretty good idea then seems like a pretty good idea now to take the director to the extent that you can out of play. and this is no disrespect to you. it's just that we were trying to protect the process that could help people i was sent here to represent. a good many of whom don't have as much in assets and liquidity as others. >> very brief answer, please. >> i'm happy to follow the statute that was written and that's exactly what we've done. and i standby that decision. >> time of the gentleman has expired. the chair recognizes the gentleman from california, mr. royce. >> good to see you again. >> thank you, good to see you again. >> as you know my concerns have always gone to these issues of moral hazard and overleverage. whether it was a republican administration or a democratic administration.

but i think until 2007 we probably could've considered some of my concerns hypothetical or philosophical. but after '07, i think that over leverage issue sort of proved a point. and looking at the headlines, the headlines read, government keeps pushing mortgage guarantees as risk index rises. here's another headline. fhfa orders gses to start supporting affordable housing trust funds. now, surprisingly, the year here here is not 2005. it's 2015. and so we find the fha today engaged in this race with fannie and freddie to see who can more swiftly crowd out the private sector, who can assume more risk on behalf of the american taxpayer. and i would just point out that this was a frightening race here because in my view, we've seen it before.

the fhfa has joined sort of a moral hazard problem here. and in december, you announced that the gses should begin to put more money through the housing trust fund established under the housing and economic recovery act. and you made this move despite the fact that fannie and freddie have yet to repay a lot of the money due to the american people. we can argue about whether it's 200 billion, but there was a lot of money lost at the end of the day because of overleverage. so it is difficult to see how you can argue that as it is required by law the gses are financially stable enough to begin the transfer of money to housing groups. let me show you the ratios here and i think this was pointed out

earlier. fannie mae leveraged at 341-1. now, that's a capital ratio of .29%. freddie mac, 153-1. and an equally concerning leverage ratio of .65%. you remember a decade ago, i was arguing about 100-1 leverage ratios. this is excessive of that. and you said earlier in this hearing that the leverage ratio was not something the statute requires you to look at when suspending allocations. i've got a different reading of that statute i'll share with you. what the statute requires is that you shall suspend allocations, not may. the statute reads shall suspend allocations if they would contribute to the financial instability of the enterprise or would cause the enterprise to be classified as under capitalized. so in reality, the statistics cited earlier you know do come

into play, so director, how can the enterprises be in this state with these leverage ratios? in one case -- and not be deemed financially and under capitalized? that's my question. >> so first of all, we put in place prudential stops if circumstances go back in the other direction if we ever have a draw on on the treasury, that would automatically stop funding of the housing trust fund. >> it's already under capitalized is the point i'm making here. >> well, we don't have -- when fannie and freddie were put into conservatorship and the