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

preferred stock purchase agreements were entered into with treasury, that suspended the capital of fannie and freddie. if we were building up capital i understand exactly what you're saying. but those two criteriaen don't apply anymore because they are in conservatorship. every dime is going to the taxpayers if there's a profit. >> there's statutory language here that requires an end to the allocation. i think it's very straightforward. but i'll close with this. today, i along with many of my republican colleagues will re-introduce the payback the taxpayers act. and this bill will ensure that money coming in from the gses will go to the taxpayers, in other words, will go to address this issue instead of being diverted to the housing trust fund. but thank you, director. good to see you again. >> time of the gentleman has expired. chair now recognizes the

gentleman from missouri, mr. cleaver. >> thank you, mr. chairman. and ranking member, thank you for being here, mr. watt. there's been a lot of discussion about the 3% down. and i'm not sure if the suggestion is that 3% down is reckless. i was looking at a study, v.a. has a 0% down and a lower foreclosure rate than the prime lenders. is there any evidence that 3% is going to cause more foreclosures if 0% is not causing foreclosure? what is it about 0% to 3% that creates this problem? >> well, i think representative cleaver, the challenge is to look at lenders and make a

determination when the down payment is lower there's the potential that it could be a risk alone. but when you pair that with other compensating factors, which this product does, you offset that additional risk. and that's exactly what we've done. lending is about assessing the ability of people to pay. and what most people don't realize. even probably 90% of the people who are under water have no equity in their mortgage at this point are continuing to pay their mortgages. right? so that's not a criteria of whether somebody is going to pay whether you've got 3%, 10%. you know, it's about whether you want to have a home that you own, right? and so you assess those

criteria. and there's substantial studies that suggest that confirm housing counseling, home ownership counseling makes people better borrowers, more reliable borrowers. this program is -- that's one of the compensating factors. and if all else fails, you've got to have private mortgage insurance to bakck -- these are not the loans that had no documentation. no you know, resets after 90 days or three years. these are not risky loans. and we have made that assessment based on research.

not based on politics, based on research. we have made that assessment. and i stand behind this decision. that's why i was happy to have have -- come here and have the opportunity to talk about the prudential compensating factors that we have put around this thing to make sure that you all understand that my philosophy has not changed. if somebody can't pay a loan they shouldn't be given the loan. if you -- if you look down there and say this person can't pay this loan, it would be irresponsible for us to say that we should be making loans to those people or that fannie and freddie should be backing those loans. >> yeah. i think i heard you clearly. >> maybe i have time for a quick question. let's remove the sociological issues if people want to connect that to the loans.

the economy is not healing for for some people. we still have stagnant wages. in fact, hourly wages are actually ticking down in terms of keeping up with inflation. so if we are -- if we're having stagnant wages and we're trying to heal the economy and housing is a significant part of healing the economy, having a housing market that -- that's healthy, does it make sense then for us to put interest rates and down payments high when we're trying to get the housing industry healed. people who qualify, worthy credit worthy people. is there any other way to do it to get people to buy more houses without making it affordable.

>> congress has given us this mandate. due to lending back loans that are safe and sound and provide liquidity in the market. we are constantly balancing those two objectives. that's what we're in business to do. and that's what we're -- we plan to continue. >> time of the gentleman has expired. the chair recognizes the gentleman from michigan. >> thank you, mr. chairman. and welcome back to well, i guess this isn't quite home turf since we're visiting someone else's committee hearing room while ours is under much-needed repair. but almost two years ago i had a chance to ask your predecessor, mr. demarco about fhfa's intentions as it related to new regulations in the lender placed insurance market, the lpi market. i urged demarco to make sure regulations producing a fair and open marketplace for providers of lpi and for more importantly

even the consumers which in turn would produce potentially lower prices for these consumers. can you please provide the committee with any kind of update in this particular area that has gone on? i know at that time, he was looking at some rules. >> first of all, the acting director demarco is to be commended and fhfa is to be commended for getting into this space because there was a lot of abuse going on. there were virtually no controls controls. and fhfa addressed some of those inappropriate practices by directing the enterprises to prohibit servicers or service afaila affiliates from receiving compensation in the form of commissions for placing insurance because there was a

perverse financial incentive for placing insurance in the circumstances with affiliates or people who were paying commissions. we formed a working group. because this is an issue that is not only an fhfa issue, it impacts everybody who has a mortgage in this country. and we've set up a regulatory working group consisting of 14 state insurance regulators the national association of insurance commissioners and eight federal regulatory agency representatives to try to figure out how best to attack this problem. >> when was that formed? >> beg your pardon? >> when was that formed? >> that was formed in -- 2013. >> okay.

and is there a status update? >> they've had seven, eight, seven meetings. up to this point. and in the meantime, things have improved because of these interim requirements we imposed on fannie and freddie. but we're continuing to work on a set of guidelines that would apply across the whole -- >> do you have a time frame time line of when that will be completed? i think anything that's in limbo like that is probably needs to get ramped up. >> it's hard to set a time frame on a lot of these things as you have -- as you've noted. but we're going to do it as soon as they come out with a set of recommendations. we're evaluating those. and we are -- >> so they have not come out for

those recommendations as of yet? they have not come up with those recommendations as of yet? >> it's in the 2015 score cord. >> okay. >> and so we expect that to happen some time during this year. >> okay. all right. we'll follow up on that. and i'm going to ask you a question. i'm going to ask you a question that i asked mr. demarco, as well. is a 30-year mortgage necessary? and why? >> now you've got me into congressional territory. that's a decision more appropriately made. i can tell you that demographics are changing. people are a lot more mobile than they used to be. and a 30-year mortgage was bottomed on people staying in the same place for 30 years or that assumption.

and on the fact that it would get you a lower payment if it -- so there i mean there are a lot of factors that go into that. that's not really a decision that fhfa is going to make. that's a decision that i think is more appropriately made in the legislative context. >> personally i think it might be the private market space that is probably where most of that is. >> that's true also. >> i don't know if you're aware of this and i'm going to quote this. the me50-year home loan. that gets me very, very nervous when we are having these types of time frames out there. appreciate it. thank you, mr. chairman. >> we don't allow that fannie or freddie to back 50-year mortgages. 30 years is our limit. so just be clear on that. >> well, listening to your comments, it was one of the few times i agreed with you. i was about to yield you more time. but instead, we will turn to the

gentleman from texas recognized for five minutes. >> thank you, mr. chairman. i apologize for not being here earlier, but i was at another committee where we were re-organizing. i want to say good morning and thank you to my former colleague director watt for being here today to give the financial services committee an update on the changes to the housing finance system and fhfa's role going forward. i believe that fannie mae and freddie mac share very important goals such as ensuring liquidity in the mortgage market and promoting home ownership. however, due to the financial trouble in recent years we have seen attempts to not just reform them, but wind them down completely. and i don't agree with that. i would like to go right into the questions. president obama made remarks that he would like to see fannie mae and freddie mac wound down and replaced by

government-backed mortgage bond. do you think this will negatively or positively affect the home buying market? >> that's a legislative, congressional decision. and just to kind of put it in perspective. when i got the fhfa, i kind of took fhfa out of that discussion because we were sending mixed messages. it wasn't part of the statutory mission that fhfa has, which is to in the present guarantee liquidity and safety and soundness in the market.

that is a congressional decision, not an fhfa -- >> i respect your answer, but i want to commend you because since fhfa's conservatorship of fannie mae and freddie mac, we have seen a stark change in the finances of gses for the better and thank you for your leadership and being able to make those improvements i especially like the $38 billion in extra funds that you gave our nation's treasury. i have another question, late last year, fannie mae and freddie mac announced new lending guidelines designed to help more low income and first-time buyers afford homes, including a reduction of the minimum down payment from 5% to 3%. what other proposals is fhfa looking to encourage first-time home buyers and how is the agency making people aware of

these initiatives i have mentioned? >> well, we have a number of things that already on the books. i don't know that we're looking at any new proposals that i would indicate to you. but we have homeowner modification programs. we have the h.a.r.p. program for people who are underwater but have been regularly paying their mortgage. and the 97% loan product, you know, i think what we've tasked fannie and freddie to do is to to -- is to in this space evaluate how we can make credit

available available. and the interest of liquidity in the market. >> i want to make my last question what steps if any, is fhfa taking to ensure that private capital is reentering the market because, i can see some months where the numbers -- people are buying new homes or used homes has been going up and suddenly they went down. so this is important to be on the private capital reentering the market.

>> well, the major way is we are doing aggressive risk transferring to the private sector. we're not holding on to these loans, we're transferring that risk back into the private sector. and we've tripled quadrupled really, the risk transfers since i've been there. >> thank you mr. chairman. >> time of the gentleman has expired. recognizes the gentleman from wisconsin. mr. duffy, chair of the oversight and investigations subcommittee. >> thank you, mr. chairman. over the course of your testimony, you ipd indicate you're following the law and following the statute which we appreciate that because we always don't think that laws and statutes are followed. i want to follow up on mr. royce's line of questioning. in regard to the funding of the trust fund housing.

you're obviously aware of section 1337. and basically, we have a discussion about whether the gses are well capitalized. and if they're under capitalized, you really can't fund the housing trust fund. would you agree with that? >> yes. >> kind of? >> not undercapitalized, but if they're not making a profit, i absolutely agree with you. capital is a whole different issue that basically when the fannie and freddie were put into conservatorship, the capital considerations went away because basically we don't have any capital at this point. >> one of the drawbacks of statutes is you don't get to split hairs. the language is usually pretty clear. and you'd agree that the language in the statute requires that the gses are well capitalized, not undercapitalized, correct?

before you can fund the housing trust fund, you have to find that the gses are not undercapitalized, correct? >> no, i don't think that's the case. it says i can't make a decision that causes or would cause the enterprises to be classified as undercapitalized but the decision about capital was not on my plate. that was in the letter i wrote that reinstated the contributions i specifically said that provision nor the third provision was applicable anymore because they were in conservatorship. it was only the first provision that was applicable to my decision. >> can you direct me to the section of the statute that says unless the gses are in conservatorship? >> there's nothing in there that

says unless they're in conservatorship. >> where did he come up with that? >> the conservatorship statute tells us what authorities we have in conservatorship. it wouldn't be in the housing trust fund statutes. >> i think the preferred stock purchase agreements trump yes. >> you're saying to be clear, that 1337b doesn't really apply and you have the authority to fund the housing trust fund? >> that's correct. yes, if i hadn't concluded that i wouldn't have done it. >> would you mind sending me the legal analysis on that? the statute seems pretty clear. and wanting to follow the statute. if you would help me on how you've reasoned. >> i would be happy to do that. >> that would be wonderful. just quickly, in regard to the housing trust fund, how is that going to be funded? how is it going to be funded?

>> how is it going to be funded? out of the profits of fannie and freddie. >> is there any kind of a surcharge or tax or assessment? >> no in fact, the statute specifically says there cannot be a surcharge to fund the housing trust fund. and we have -- we have put out a rule that ensures that does not happen. >> will it increase the cost, do you think, to the end home purchaser? >> no. >> in the form -- >> no, because the statute says we're not allowed to increase the cost to the borrower. >> i know statutes say a lot of things, but sometimes applicable and sometimes not. >> well, sometimes, all the time we try to follow the statute, though. >> i appreciate that. i want to just mr. garrett and i sent you a letter in regard to the gse's lobbying. and you, this was sent on december 11th. and we haven't received a response from you yet, did you

receive that letter? >> yes, we did. >> can we expect a response? >> yes you can. you might have gotten it yesterday, but i thought y'all would say we were doing it just in response to the hearing. >> we probably would've. >> we're -- we take every inquiry we get seriously. and we try to go and get to the bottom of what, whatever charges -- >> are you going to continue the ban on gse lobbying? >> beg your pardon? >> are you going to continue the ban on gse lobbying? >> yes absolutely, we're continuing the ban on gse lobbying. >> yield back. >> the chair now recognizes the gentleman from missouri, mr. clay, ranking member of the financial institution subcommittee. >> thank you mr. chairman. and welcome back, director watt. how is the family? >> the family is good. >> good. good. thank you. >> thank you for being here.

although there are operational costs involved in requiring the gses to update the credit scoring model that they use in their seller service guidelines the gses are using the fico classic model in their seller servicer guidelines despite the fact that newer versions of fico including fico '08 and fico '09 are currently available in the marketplace. how concerned are you that the failure to compel the gses to use their most updated credit score models and their seller servicer guidelines may not be giving the gses the best available assessment of whether a borrower is a good credit risk and may be unnecessarily restricted credit eligible borrowers. >> well, it -- your question illustrates the difficulty of this. because to move from fico

classic to fico eight or nine, is the same challenge that we have to move from fico classic to vantage or some other credit scoring model. we've instructed fan eded fannie and freddie to evaluate both the feasibility and the operational complexity challenges related to using updated or alternative scoring models. now, feasibility is are these, are these credit scoring models better than the ones that then fico classic. we think they are. but we have to document that. and then operational feasibility relates to what would it take to

change not only fannie and freddie, but the industry. >> true. >> to using alternative credit scoring models because you know turning that ship is a major task. right. >> so have the credit scoring agencies, have they been receptive? or have they pushed these new aversions? >> yes, they have. both fico has updated its credit scoring model and vantage and others, we're regularly talking to them about this process. >> i see. let's move over to h.a.r.p. director watt, fhfa recently launched an interactive map showing that there are more than 722,000 eligible households nationwide that could still

benefit from h.a.r.p., a program that allows certain homeowners with gse backed loans to refinance in the mortgages with lower interest rates. thereby reducing the payments by as much as 200 per month. likelihood to default on their mortgages. what are you -- what is your agency doing to ensure that households are aware of this refinancing program? >> well, first of all, we are very proud of that map because it it gets you to the people who are eligible for h.a.r.p. refinancing. 3.2, 3.3 million people have already taken advantage of h.a.r.p. there are over 700,000 who would still be eligible for it. that would get an advantage of taking advantage of it. and we're trying to get to those

people. now, let me just emphasize that these are people every single one of them, all 3.3 million of them have no equity in their home. their homes are underwater. and they have been continuing to pay their mortgage despite the fact that they are under water. that takes us back. this notion that you've got to have a down payment you've got to have equity in a house for people to continue to be reliable homeowners and borrowers. is just in the face of all of that. we're trying to get to those people. we've done a series of meetings around the country and the highest concentrations where those people are. and trying to get them to take advantage of the h.a.r.p. refinancing program. >> time of the gentleman has expired. chair recognizes the gentleman from south carolina, mr.

molvani. >> thank you for coming back. i also appreciate your dedication to following the law and following the statutes. i hope it's an example you can set for the rest of the administration. regarding the statutes, i think we've talked a little bit about today about the statute regarding the suspension. what statute did you rely on in ending the suspensions? >> the affordable housing allocations. it was reauthorized by congress. >> correct. oh, i misunderstood what you were saying. but that's the statute that says when to suspend, correct? there is no statutory guidance for you on how to end a suspension, is there? >> it says the director shall temporarily suspend i would assume that the word temporarily has an inverse that says you can unsuspend. you know, technically, you may be right there's no statute that

specifically says if you unsuspend but apply the same criteria to suspend and unsuspend, that's what we did. >> i think that's fair. but by the same token, the mandate to suspend is not there's no discretion there. you shall suspend if you find one of these three conditions, correct? >> yeah. and i interpret that the same way. you shall unsuspend if you find these three things don't apply. >> let's walk through them. it says they contribute to the financial instability of the enterprise, causing, would cause the enterprise to be classified as undercapitalized or preventing them from their restoration plan. but i heard you say something to mr. duffy earlier that was new. which is a reference to making a profit. that's not in the statute. not one of the factors to consider in making a decision to suspend or end a suspension is it? >> well, number one says are contributing or would contribute to the financial instability of

the enterprises. if you're evaluating the financial stability or instability of the enterprises -- >> is fannie stable. >> you're looking at whether they're making money or not right? >> really whether a bank is making money is the only issue we look at as to whether or not they are stable? is that what you're saying? therefore they must be stable? >> i don't make decisions about bank of america. i'm following the statute that was written and applies -- >> and i'm trying to press you on that. is fannie stable? >> we think it is. and we built into the decision to reverse the suspension prudent, reasonable safeguards in the event that they go back in the other direction. >> again, i read that in the letter and says if you have to go back to the treasury, we'll suspend the payments, i get that. not in the statute, is it? the protection you supposedly put in the letter is not part of the statutory consideration. i hear what you're saying, mr.

watt, it's not statutory. you can't take the position. you're following the statute. and really what we're considering is profitability. and don't worry because we put something in the letter that says if we have to go back to treasury, we'll stop the suspension. you're re-writing a law, aren't you? >> following the conservatorship statute there, representative. >> come with me to number two regarding the undercapitalized. i think you've taken the position several times that your agreement with the treasury moots this section. is that fair? >> yes. >> my understanding, and again i'm new to this, your agreement with treasury's an agreement, right? >> that's correct. >> how does an agreement trump the law? >> well, i think the law got trumped when they went into conservatorship and the taxpayers had to ante up $187 billion, and they had -- and so an agreement was made.

that was before i got there. i didn't negotiate the agreement. >> you would agree -- >> the agreement was in place when i became the director of this -- >> typically, an agreement between one agency and another department or government cannot trump the law. you can't get around the law. >> i absolutely agree with that. >> so if the conservatorship statute doesn't explicitly repeal section b2, then section b2 is still valid law. >> i don't agree with that. but, i mean, i understand what you're saying. >> why don't you agree with it? >> i disagree with you. >> if the statute doesn't speak to b2 why is b2 still not good law? >> well, it just doesn't apply. i don't -- i'm not sure -- >> what's -- >> we're engaging in a legal argument here that. >> that's what we're supposed to do. >> you have the authority to stop the housing funding of the housing trust fund.

>> and we exercise that authority. >> don't expect me to disregard the law and do it for you. if you want to do that, i mean, that's what's in congressional authority -- >> we did just that. we said, look, under these certain circumstances, we don't think we should be funding the trust fund. all we're asking to do is for you to follow the law. and if you believe it is undercapitalized or unstable you should stop the payments. i yield back. >> gentleman yields back. the chair now recognizes the gentleman from california mr. sherman for five minutes. >> mr. chairman, do you think we could take a two-minute break? >> the chair declares a five-minute recess. >> committee will come to order.

members will please take their seat. chair now recognizes gentleman from california, mr. sherman for five minutes. >> well, welcome back. only thing that would be better than seeing you at a distance would be having you close at hand. but i've been -- i've taken your advice on so many issues involving financial services. i'm sure to get some more -- i look forward to your input over the next five minutes. good move on the housing trust fund. i want to commend our colleague, mr. ellison for organizing the letter. and unless he objects, i'd like to put that in the record of these hearings. and so i request unanimous consent to put this fine letter in the hearings. >> without objection. >> and to commend mr. watt for his actions.

first, a kind of a technical question the hud one is being faze phased out by the disclosure form that combines the tila respa forms and intended to give consumers a better understanding of all itemized line item costs of the home closing. i wonder if you're focused on this rule and what steps if any fhfa has taken on this rule to make sure consumers are fully informed. >> i believe that is under the consumer financial protection bureau's jurisdiction. we haven't been actively involved in it. i do meet regularly with the director of the consumer financial protection bureau to make sure that we are not at

odds and we are also members of the fsoc committee together, which allows us to exchange ideas at that level. but we're not directly involved in that. >> i'm sure that you're focused more on real estate lending than some of the more general folks involved. and they'd benefit from your input. your predecessor pushed for a lower conforming loan limit. you demonstrated your wisdom in going in a different direction. an action that has done more than anything else to impress me with your wisdom. do you see that ugly proposal rearing its head again any time soon? >> well, it has to because tach

statutorily, it has to be reviewed regularly. so we're almost constantly in the process of reviewing conforming loan limits and so, yes, it will raise its head again. >> i look forward to continued wisdom on your part. and i yield back. >> gentleman yields back. the chair recognizes the gentleman from new mexico, mr. pierce for five minutes. >> thank you, mr. chairman. thank you, director. i know we haven't always agreed but i've always admired your plain language just straightforward responses and find myself admiring that today. as we look back, i have found that fannie began and everyone began to expand the number of loans to given to people who

probably should've not been given them. and found in 2012 that fannie, fhfa was somehow -- somewhat responsible because they overlooked the fact that fannie was beginning to relax its underriding guidelines. beginning to buy loans they said they wouldn't buy and they didn't diminish that with a change in law. and i guess my question is what are you all doing to see that the agency doesn't go around the rules again and -- they were being pushed not by the white house. you said before you're independent from the white house, i wonder if you're independent from us. it's members of this congress and this body who are pushing for those relaxing -- the relaxing of those standards so that people could get loans. and i hear some of the same language today. so what are we doing to make sure this doesn't occur again? >> well, first of all at that

point they were not in conservatorship, and so the regulatory role was a lot looser than the conservatorship role we are playing now. we're involved in virtually every decision that fannie and freddie makes. and we take very seriously our statutory mandate. both to do things safely and soundly. and to do things in a way that will provide liquidity in the housing finance market. and that's why i said in my opening statement, we are constantly walking that balance so we would be as responsible for those decisions now as fannie and freddie would be because they are in conservatorship and part of our -- >> i understand, but some day they would be out of

conservatorship. it was them that facilitated if fannie had not bought those mortgages they were never going to pay off. and people knew they would never pay off, but they didn't care, they were able to get rid of them off of the -- out of the banks and send them on to someone else and let them worry about it. and so as we go through into the future, i worry that the same thing. i wonder, also, so fannie and freddie are making a profit. and so, i guess you were talking about the models that you all have done. have you got models that tell you what rate of growth that we're going to start experiencing troubles in should we increase our surveillance. what rate of growth would that be? >> well, we don't do it. at what rate of growth. >> we do it on a loan by loan basis and set prudential standards that apply to loans. so we make sure we never get to determining where you fall off that cliff or don't fall off that cliff. we're nowhere close to the level

of risk that was being assumed -- >> reclaim my time. having run a business with 50 employees, i find it beyond imagination that you can take $1 trillion portfolio and look loan by loan with all respect. i appreciate your saying it but i find that really hard to believe. >> i apologize. that probably was an overstatement. >> okay. >> but we set prudential standards that have to apply to loan by loan by loan. >> those standards existed before. and under the table or wherever, people who are getting tremendous bonuses at that period of time began to cheat the system. began to rig it to where they could get bigger bonuses. and until you reevaluate human nature, the last point i think i want to make is that another great pressure in the system was the low interest rates. and so at some point, the federal reserve whether they

like it or not will have to go up on interest rates. and that's going to put more pressure in the housing market. and i see if we don't have our ship really right when it goes into the troubled waters of lower growth rates higher interest rates, we're going to have exactly the same thing the same problems with an agency that's way undercapitalized. you have to admit that they're in shaky financial shape as we move forward and get into troubled waters with that idea, yield back my time. >> gentleman yields back. the chair recognizes gentle lady from wisconsin, ranking member of the monetary policy subcommittee. >> thank you so much, mr. chairman. and ranking member and it is so good to see the honorable director watt here with us. he is here in really good form. just the facts. and really it's a relief to have you around and that you haven't just rode off into the sunset.

i would like to start out just by sort of making a comment before i engage the director in a question. because much has been said today about the credit worthiness of borrowers with the 3% down. and there has been much intimation that lower income borrowers were the cause of the financial crisis in 2008. and so, i just would like mr. chairman to ask unanimous consent to put into the record a report done by manuel adelino. >> without objection. >> thank you. and felipe from dartmouth and a seminar participant from harvard business school. >> if the gentlelady will suspend, we seem to have a

little audio problem with the gentlelady's microphone. maybe hit it once or twice. >> try again. >> thank you. this is a 42-page report, mr. director, and mr. chairman. its conclusions are that the higher default rates can be attributed to loans made to middle and upper income folk and not low-income folk. i just wanted to clarify for the one millionth time that the lower-income borrowers were not the primary reason for the financial meltdown. i don't know if you have any comment about that research. but i would like to enter that into the record. >> i'm glad i don't have to participate in that debate anymore. >> okay. >> i was looking through your prepared testimony and you talked about mortgage servicing.

and i guess i didn't -- it wasn't really clear to me through your testimony what was the product of the -- there hasn't been changes in the compensation structure better aligning of servicers incentives with the enterprises and i was wondering how that translated into better mortgage servicing for the customers. >> that's a very difficult subject because it's massive. what essentially happened over time is the result of the meltdown is servicing went from just collecting money on mortgages on a much, much more difficult process of dealing

with people who were in default. and so that whole industry has evolved. and most of it was done originally by lenders themselves, in-house and much of it now has gone to outside people who specialize in servicing. and that is created a set of issues that we've had to deal with. some of them even though they may not have been better servicers were not necessarily as financially sound for the long-term. so we've had to deal with that. there's a wonderful study that was put out by the urban institute that talks about that evolution and the costs that have been associated with

servicing that where you could service a loan for like 50 cent a loan and now it's up $50 fee to a servicer. now, it's up over to well over $2,000 as a result of the increase responsibilities. it's a very difficult area and we internally at fhfa have had difficulty because this whole meltdown has put stresses on the servicing industry. i made a speech over at brookings where i said it was easy to service when all you had to do was collect money. it was very difficult servicing mortgage now when people are in -- >> reclaiming my time. i would assume that, well, i have another question -- >> the gentlelady may have another question, she's just simply out of time.

so she could submit the question for the record and the witness can respond as possible. time of the gentlelady has expired. the chair now recognizes the gentleman from north carolina, mr. pittinger. >> thank you, mr. chairman. mr. watt good to see my friend from charlotte. >> good to see you. >> you seem to be relishing your new job. and we wish you well. >> thank you. >> frank,ly lyfrankly, we want you to be successful. and as noted by our comments today, we share or have a concern that of the -- what would come out of the current policies of easy credit was we believe complicit in the housing crisis that we've just previously experienced. now, as you know former acting director demarco he proposed these increases for the guaranteed fees for the gses

would charge the lenders. and under your leadership, you suspended the implementation of those increases. this last december the cbo made a public statement or report report that suggested how we should attract new capital into the secondary mortgages. and i could quote them. they stated policymakers should continue to increase the two gses guaranteed fees, to attract new private capital to the secondary market. and even a small increase in guaranteed fees for under present level would allow private firms to immediately compete for the highest quality loans. you've also stated that you want to find ways to bring additional private capital into the system in order to reduce taxpayer risk. now, for your own decision you have chosen to go against the former director and you've chosen against the thinking of the cbo.

if you are not willing to increase the guaranteed fees, what additional steps would you recommend to increase the role of private capital? and to decrease the role of exposure of fannie and freddie and, frankly, the american taxpayer? >> let me just put in perspective one thing. i've never done anything in opposition to the former acting director. i have the greatest amount of respect for acting director demarco. >> contrary to his -- >> -- and his decisions. i just want to be on record as making that clear. and i've taken some abuse for saying that, but i just have to say it. the primary means that we are using is to -- is to test different risk-sharing models. and they've been very successful. we have tripled, quadrupled the

amount of risk-sharing we've done in the one year that i've been there. the enterprises had a goal of $30 billion in 2013. we increased it in the scorecard to $90 billion and shot right past it before the third quarter was over of 2014. we've increased it again in the 2015 score card. we're encouraging them to look at different -- different e inging alternative models to do it. not just the ones that have already proven successful. we've encouraged them to look at whether it is practical to even go back and risk-share some of the legacy book of loans. all of this risk-sharing we've done essentially has been with new loans. the more pristine loans. so we are very active in that

space. we're also looking at the gfee question. the conclusion you reached that we are not going to change or are going to change, i think is premature. we just don't know yet whether we're going to change it or not. and we're taking into account the study that was done, our own stud y the input we got to a series of very cogent questions about how g-fees should be set. what factors should be set in setting guarantee fees. when we come out with our report hopefully bit end of this quarter, i think we'll add a lot of information. in fact, even in the requests for input we put a lot of information out there that people had never known about how g-fees were set. >> quickly, may i ask, you have suggested -- or you have stated

one of your policy changes is that you would allow these down payments to be as little as 3%. you stated well there was other offsetting measures you would implement. would you give more clarity to what those are? >> homeownership -- >> given we believe that easy credit is -- we saw the chart earlier -- was a major factor in the current demise. >> very brief answer please. >> honey ownership counseling, mortgage insurance private mortgage insurance, higher fico scores. there are a number of factors we are taking into account that would offset the lower down payment. >> the time of the gentleman has expired. the chair now royces the gentleman from minnesota, mr. ellison. >> thank you, mr. chairman and ranking member. my colleague beat me to it but putting the letter we sent to

you into the record. but i was glad to see we had 61 members of congress including every -- half of this -- almost half of this committee, agree that your action to end the temporary suspension of contributions to fannie and freddie to the housing trust fund was the right thing to do. and so very happy about it. and it's already in the record so i don't need to enter it in. i just want to make note of that. i also want to comment, too, that it's true that you have to face a lot of questions from folks who believe that the real problem of the crisis of 2008 was the gses and borrowers. but it's also true that you have to contend with people who think you ought to be moving faster in the other direction. i know that because i've had constituents of mine say well, why doesn't director watt do this and do that and move quicker, things like that.

i think one of the other things that your office has done after taking a lot of care, a lot of time, a lot of research is decided to review the process of the arm's-length transaction and not doing any arm's-length transactions in reviewing that policy. could you talk about some of the thinking that you -- that you entertained as you were reviewing that policy and and why it is you came out the way did you? >> there was a concern if you allowed a borrower to default and then turn around and buy a piece of property at a lower rate, that you would be incentivizing that kind of negative behavior. and that had kind of taken hold and was wagging the dog. there probably are one1, 2, 3% of

the people in the world who could think that far ahead that they would default on a loan and then after foreclosure go back and buy it at a lower price and come out better. but we thought the moral hazard, we could minimize that by putting some prudential factors around that decision. and so that's what we did. it's not automatic that somebody can do that, go back and buy the home back for a lower price and we put a time period on it so that we could test it going forward to make sure we didn't do something that was irresponsible.

but it was a slow evaluative research process as every one of these things. you kind of put your finger on something. what i found in this position is there's nothing generally as simple as i thought it was, right? all of these decisions are very difficult and require good research and that's what we try to bring to every decision. >> i want to say, you've been available to talk to everybody who wants to talk to you. you've met with ordinary homeowners. you've met with policy makers. you've done exhaustive thing. and i want to commend your staff. have you a pretty good staff member carrie johnson, she used to work in my office. i'm glad she's landed in the right place over there. could you just talk about why you think it's important to do all the outreach you've done and consult everybody you've

consulted and do all this research you've done? >> well, i think one of the members over here pointed out that -- they appreciate plain talk. there's a lot of misinformation in this -- in it territory. i think the more you can kind of break things down and explain them in terms that borrowers can understand, that the public can understand demystify this whole process, the better off we are. much of the outreach we have done has been about specific things that would benefit borrowers, such as the h.a.r.p. program or the neighborhood stabilization initiative in detroit. i've kept a very, very low profile. i have no interest in being in front of a camera.

>> the gentleman's time has expired. we have a different approach to it. >> thank you. mr. watt. >> the chair recognizes fourr five minutes, mr. rothliss. >> thank you, mr. chairman. welcome back to the committee for a couple hours anyway. i want to talk about the 3% down payment program. fannie mae that it filed with the s.e.c. in third quarter 2014 mentioned the program. here's what they said. we also plan to offer a 97% ltv ratio product to all customers in 2015. to the extent we're able to encourage lenders to increase access to mortgage credit, we may acquire a greater number of single family loans with higher

risk characteristics than we have acquired in recent periods. however, we believe our single family acquisitions will continue to have a strong overall credit risk profile given our current underwriting and product design. it seems to me that fannie mae in its filing with the securities and exchange commission has admitted the program is going to result in loans with a higher risk. would you agree with that assessment from fannie mae? >> i've admitted that today, too, that that possibility exists if you're not careful, which is exactly why we're being careful. that was a third quarter analysis and you notice they didn't announce this until december because we were putting all of these constraints around them to make sure we minimized that risk. >> so, if you looked at -- when they file a 10-q for the quarter

we're in right now i would not expect to see something like that? >> you may see something similar to that, yeah, because, you know, 10-qs as you know, are designed to give the public and people out there the worst possible case that you could present to them. >> the administration in 2011 released its so-called white paper reforming american finance market. fha should return to precrisis role for low and moderate income americans and three, fha mortgage insurance should be increased. moreover administration recommends coordination to help insure the private market, not fha fills the market created by

market reform. do you believe the recent possibly market by hud to lower insurance premiums will affect the return of private capital to the markets? >> i don't have an opinion on that representative, because hud is not under -- fha is not under my jurisdictions and hud is a part of the administration. we're an independent regulatory bodies. >> how many homeowners did you anticipate with the 90% ltv program? >> pardon me? >> it is a very, very small percentage of the overall portfolio -- will be a very small -- we anticipate it will be a very small percentage of the portfolio of both fannie and freddie. we have those numbers. i'm not sure i can access them quick enough to give them to

you. >> we'll follow up with you here. >> but we'll be happy to provide them to you. >> we talk about the 3% downpayment. you've been talking about the creditworthiness of people paying back their mortgage they're able to pay back. but we do have an issue out there with people who are under water. one of the concerns i have is when you have institutions such as fannie and freddie, the scale they're able to influence the market, coming up with a program like this -- i read an article just this weekend and you may have seen it in the"the washington post" about a family in prince george's county where they have a $560,000 mortgage but the home is worth $480,000. while that family may continue to pay on that mortgage there's really another issue here. it's families who do not feel as though they're getting ahead. families who may feel trapped in their house. when we have a program that hans a chance to encourage this. we saw significant increase in mortgages that were under water.

following the crisis. what would you say to a family like that who buys into a program? >> they're in aa very difficult situation. i've been with in rooms with them and had discussions with them. all you can do is tell them you regret they're in a situation and we're trying to make sure that future borrowers don't get themselves in that same situation. >> the gentleman's time is expired. the chair now royces fourr five minutes the gentleman from delaware, mr. kearney. you want to try the one next to you, mr. carney?

>> there we go. we've got a live one. >> me or the snik. >> both of you. >> i hope this doesn't mean i have to sound as smart as mr. foster. mr. chairman, ranking members, thank you for the opportunity to answer a few questions. mr. director welcome back to the committee. we certainly miss your common sense and straight talk here. and personally i miss your north carolina drawl over my right shoulder during the hearings. you have said several times you're not going to comment on the specifics of gse reform. that's a legislative responsibility. you have made public comments on whether it's necessary or not. could you comment for us now about the sustainability of the current situation what we should be concerned about and your thoughts on that without going into specifics about what we should do?

>> well, there's nothing worse i have found in this area of the market than uncertainty and and the longer this drags out, the more uncertainty there is so you have that risk and imperative for congress to do something. and that's not about what they do. it's about providing more certainty. we have challenges at fannie and freddie maintaining an employee base in this environment. because they don't know what the future of fannie and freddie is. i mean, there are multiple implications that follow from the failure to do gse -- >> would you say it should be a

high priority for us, for the congress and administration to get that done? when i first came here the former chairman was criticizing the administration for not doing anything on gse reform. ranking member, mr. frank, was criticizing republicans for not doing anything. there have been a lot of proposals. i'm part of a team that have come up with a proposal that i would like to talk to you about. you think it's time for that to get done? >> i would say there are implications for not doing it. for me to put a priority on it -- fair enough. >> -- i think is an inappropriate role for me because there are a lot of things congress deals with that are priorities and that's just not my role to set those. >> one of the things our legislation does is invite -- require private capital to be in a first loss position over an explicit federal guarantee. in some ways, similar to the

white paper that treasury presented here in this cham per when you were a member of the panel four years ago. you've done some of that in terms of -- my question is what is the appetite for private capital to enter into this space and do you have any sense as to what that premium might be for that first loss position? >> well private capital there is an appetite. i don't know that i can assess the magnitude of the appetite. i mean, i think they're playing an important role in the availability of housing finance in this country. private capital, that is. and we're rig to fa-- trying to

facilitate that under which fannie and freddie were founded in the first place. and we're facilitating it through transferring risks back to the private sector. that still does not negate the importance of providing certainty in the future by doing gse reform. >> thank you. a number of us, as i said, are working on thap we've had discussions with members of the senate, with democrats and republicans, on this committee and hopefully there will be an opportunity in this congress to move something forward that basically contains a federal guarantee that i happen to believe the question was asked you earlier about the importance of a 30-year fixed mortgage. and had you some observations about that. i happen to believe it's important from an affordability perspective. the only way to sustain that is through some government

guarantee. let me just close by thinking you. i was one of the members who signed congressman ellison's letter requesting you end the suspension of the fee to fund the -- those two housing trust fund and capital market fund. appreciate your decision to do that. good luck to you. >> thank you. >> the gentleman's time expired. the chath chair now royces the gentleman from arizona for five minutes. >> thank you, chairman. is it chairman duffy for you? director watt, actually you said something i truly appreciated and i wish everyone had sort of embraced. your current position is substantially risk management. i'm not sure a lot of folks appreciate that really is the core of your job at this moment. but i have a handful of things i wanted to run through. there's never enough time for all the questions. you had an interesting question to servicing.

i accept a lot of servicing can be fairly complicated but a couple mechanics. for low-cost server, great. the ability to transfer in paired paper that may need additional love and touches to a specialty servicer that deals with impartment issues. how is that harmonization of servicing standards that i believe your folks have been working on? do you know where progress is? >> we're making progress. you know, we encountered a different set of circumstances after the meltdown. we went from a situation where lenders were primarily doing their only servicing to a situation where they wanted to get out of the services business because it was either too complicated or because they had to have higher capital requirements if they stayed in it. various and sundayry reasons.

a lot of the servicing rights got transferred and that imposed upon fhfa and fannie and freddie the responsibility to look closer at not only the ability to service a loan but what are the longer term implications of that. are you capitalized well enough to be in this business for the long haul if things go south? >> my great hope, as you work on that harmonization -- >> we are definitely doing that. >> -- for paper or loan that has difficulties, to be able to be moved easily, efficiently, low cost wise to servicers that will actually do that reach out to both protect the skaurtization over here and also work with those homeowners. second -- >> can i just make a point?

i think you would be happy with the most recent set of things we've been working on in that area to try to encourage loans to servicers, transfer of loans to servicers who have a history in working well with borrowers and staying out of foreclosure as opposed to going to foreclosure. >> the only obligation is simple efficient low cost ability to move paper back and forth when necessary. second one this is more just from -- from being from the west, and i know you said you're working on it, you're working on sort of the risk pricing models and you saw it pop up. for those out in the west, we're deeded trust states. would he efficient very low cost in the ability to do sometimes what's difficult. some states are mortgage states that have put on lots and lots of consumer protections but have raised the costs. and it is only appropriate only

fair that those different cost structures be priced into the product because for those particularly out west we often feel like in our pricing f you have universal natural pricing on that risk that we are subsidizing states that have made it much more difficult to move through that foreclosure process. just something that's there. it's math. hopefully you'll treat it this way. it was last week you did the stacker deal? >> yes. well, we're regularly doing stacker deals. >> the first one, lost piece, that was transferred out, which is fascinating to me because in that sort of model you're creating a securitization where the gse ultimately is a catastrophic coverage.

help me understand in the remaining seconds how that works and in some ways how that may help us drive toward gse reform. >> when we started doing risk transfers, we started by having the gses fannie and freddie, remain the first loss, transferring risk on some -- some subsequent loss and then coming back in with the gses retaining catastrophic loss. we are now experimenting and looking at the process of having -- transferring the first loss position -- >> director watt, i'll have to ask you in writing. >> the time has expired. the chair now recognizes mr. kildee from michigan for five minutes. >> thank you mr. chairman. at the risk of redundancy, i only got to serve a year with you, but in the year you've been

gone, i've becoming the second ranking member on the democratic side. at least for the moment. i would like to submit for the record regarding strengthening of the u.s. housing finance system through provision of housing counseling services. we talked about credit score and down payment related risk mitigation factors and as you have stated, there are other factors to be considered. we had a panel here some months ago, probably after you left. you probably had similar panels where we had members of the mortgage industry talk to us about mortgage lend sxgt ricks associated with mortgage lenning. we happened to have an individual from an organization that does a lot of affordable housing work. some lenders referenced that if they used the same process,

which included a heavy impsz on homeownership counseling, they would have default rates that were lower. could you quickly comment on that particular point? mr. chairman i would like to have these comments entered into the record and then i have a couple other questions. >> without objection. >> i don't think there's any question that somebody who gets good homeownership counseling preownership or in some cases post ownership, it makes them a better borrower. capital just be any counseling. has to be good homeownership counseling. but it really has an impact because especially first-time homeowners have little appreciation for the responsibilities that go with homeownership that are different than being a renter. >> i hopeswise we move forward on whatever process we engage n we make sure to consider those packages. i would like to move to a

related question. it has to do with access not to just credit even for creditworthiy individuals in markets, such as markets i represent. i represent flint michigan, where the average home price is $45,700. for many legitimately, legitimate borrowers with decent credit, for many banks, many mortgage lenders, mortgages of that size they say just don't make economic sense. i wonder if there is anything you are working on or could refer to us in the work of fhfa in those markets we still have opportunity for homeownership owners we're basically consigning those communities to rent.

it's also -- the percentage of homeownership of those occupied properties has a similar effect. i wonder if you could comment on that particular point. >> we put in 2015 score card on obligation of enterprises to work with community smaller banks and state housing finance agencies to try to get to those lower and underserved areas underserved areas. i think we're going to make some progress on that this year. >> i obviously listened as you answered questions about -- confess particularly related to

downpayment thresholds. we should all agree, if we decided a 20% downpayment standard would be enacted, we would have a father lower default rate. if you had to have $1 million in net assets if your own personal portfolio, you might have a lower default rate. the question s how do we balance these interests so americans have the understanding there are many many ways to mitigate ricks associated with people who are in a financial condition that does not allow them because they're dealing with other ectionex exexxon i goes in their life every day. it's an area of some concern for me because in some ways by limiting membership standards we might cut off another source of revenue that can be directed to direct these community-based

organizations that are working on ownership. >> the gentleman's time has expired. the chair now recognizes mr. barr from kentucky for five minutes. >> director watt welcome back to the committee. >> thank you. >> congratulations on your confirmation as you know consumer protection financial bureau finalized its ability to repay qualified mortgage rule and the purpose of that rule is to encourage safe and sound mortgage loans, but recent survey of mortgage lenders showed that about two-thirds of responders would restrict lending because of -- directly because of the qualified mortgage rule as defined by the regulators under dodd/frank and about 80% of those respondents requested them to reduce credit availability. obviously given your agency's

fhfa's recent moves recent policy changes, you appear to share the concern about credit availability and affordable -- access to affordable mortgage credit. the changes to guarantee fees, the guidelines allowing gses to buy loans with ultralow 3% down payments. all of this appears to conflict with the bureau's qualified mortgage rule. so my question is is fhfa pursuing a policy of encouraging mortgage lenders to originate non-qm loans that the bureau would deem risk? >> no, we are not. we're -- not without prudent compensating factors to take whatever that increased risk might be into account.

>> well wouldn't it make sense that a borrower that can only afford 3% down is likely to run into the debt to income ratio limitations imposed by the qm rule? >> yes. >> okay. so, i guess -- again, i just -- i'm just curious to understand how the american public is to interpret what the federal government is doing sending mixed signals of encouraging more credit availability on the one hand, your policy changes versus what the burrow appears to be restricting, access to mortgage credit? >> i think a judgment has been made that because fannie and freddie under conservatorship during the period they're in conservatorship, we could make

those judgments without being subject to the qualified mortgage rules for a period of time. >> if i may -- >> i don't know that that will sustain itself forever but that's where we are at this moment. >> i've introduced legislation i'll be reintroducing that legislation. it has some bipartisan interests in it. it's motivated by the same concern you have, about access to mortgage credit for responsible borrowers. and the idea would be to modify the gm rule to allow lenders to retain the risk which was a primary motivating policy in the dodd/frank law retain the risk, portfolio those loans to get the same safe harbor that other qm loans would get. and my question is, wouldn't that be a more sensible approach to dealing with these 3% loans so the risk is on the shareholders of the bank and not on the taxpayer? >> i think that's a judgment for congress to make.

it wouldn't be a judgment for me to make if. if you've introduced the legislation, then i'm sure congress will evaluate it. >> well, thank you. let me just quickly follow-up on some of the questions that congressman duffy was asking you about the housing trust fund. with roush by $3.3 trillion in's assets, fannie mae is leveraged at 341 to 1 and featured a leveraged capital rash of 1.29%. fannie mae has roughly 2 trillion in assets and and has a lef leveraged capital ratio. the typical bank i understand to be 10 to 1. i heard your testimony to be earlier that you believe that fannie and freddie are adequately capital idzed and you're just following the statute, is that right? given those ratios, is that

true? >> i don't think i expressed any opinion about the adequacy of the capital. what i said is that we're operating under a preferred stock purchase agreement that has basically taken capital out of the equation during the period of the conservatorships. >> my time has expired. i would suggest if they are adequately capitalized, i would wonder why they're still in conservatorship. >> the gentleman's time has expired. >> chairman duffy, could i bother you for mother two-minute break? >> no problem. the chair will resesz for five minutes. the committee now reconvenes. the chair recognizes the gentle lady from ohio for five minutes. >> thank you very much, mr. chairman. let me just say to director watt

what a pleasure it is to be here. i noticed you looked at me and you saw this big book and list of questions. in full disclosure director watt was my mentor, and i recall him always saying to me, read everything and always have good questions. with that said let me say on a is he serious note how much i appreciate you and your team to protect my constituents and constituents across the country with housing and those regulations. today i would like to lend my voice to one of the questions we've heard from both sides. senator round member shinn into federal home loan bank related to the september fh-issued ruling revising the membership requirement of fhlbs. well, of those 1300 and some comments you received, my

district was not silent there. so, on behalf of my district the ohio capital finance corporation, which serves thousands of households raised concerns expressed by other community development financial institutions, they hold dealer the affordable housing program as one. most important sources of funding nonprofit housing communities. so the question is regarding the requirements to meet one in two ratio tests of mortgages to total assets and what they want to know is, since they don't hold mother-in-laws they being the ohio capital fund that that range from 1% to 10% depends on the type or asset size. when that goes into effect, it would cause them to terminate their membership with a federal

home loan bank in cincinnati because it doesn't hold mortgages. so you or your team give any consideration of doing an evaluation on the impact of the burden to community development financial institution of a less severe remedy than loss of membership? >> we -- look every aspect of this, we've got, as i indicated before approximately 1300 comments and response to the proposed rule. and we're going through them. our preliminary analysis indicates that despite the fact that they are 7,500 members of the federal home loan bank system now, only 50 to 100 of them would be adversely affected by the rule.

and that's not to minimize the value of that 50 to 100, but, we -- but that's definitely one of the factors we will take into account. >> thank you for that. >> mr. chairman, may i ask unanimous consent to have letter from ohio capital finance corp entered into the record? >> without objection. >> the second question i have goes to anway. maxine waters asked me to chair that committee. you certainly know through your organization, having amwy prior to dodd/frank there are certain regulations to dodd/frank. they have the whole issue of transparency reporting back to the public on the numbers. diversity is very important to me for a whole host of reasons

but can you briefly share with us what you're doing since you came under the recovery act of how you are being transparent and sharing the diversity? >> the statutory reporting requirements. we obviously are complying with those, but more importantly, what we've done is try to take a look at how to make the amwy office an important greenltingredient of our organization. not just keeping numbers but imbed them in decisions that are being made. and in the selections of our director of the amwe office we found somebody who had transactional background. not just amwe background, so that we could -- we could get that person involved in the kinds of decision-making that would have some impact on

diversity. >> thank you. >> the gentle lady's time has expired. the chair now -- >> unanimous consent to enter into the record an article that ran in the washington potion on the disparity and wealth between blacks and whites. >> without objection. >> the chair now recognizes mr. tipton from colorado for five minutes. >> i would like to follow up actually o a comments that ms. beatty was just making in regard to our federal home loan banks. you made a comment earlier in our conversation here to my colleague from on oklahoma, mr. lucas that we're following statute in regards to establishing some new rules, establishing membership in the federal home loan banks. i would like to follow up with you on that. looking through the bank act, it does not address a minimum

amount of mortgage loans. that is not cited. i guess my concern over this issue is, ms. beatty and ms. lucas both spoke to these issues, my particular state of colorado we have over 200 banks, credit unions and insurance agencies, members of the federal home loan bank. these financial institutions they do responsibly utilize the liquidity utilized in order to deploy credit in support of housing, finance, alt agriculture production community development and they do this in compliance with the federal home loan bank act and congressional intent, as i read it and through the existing programs. under this proposed rule issued on september 12th has a potential to be able to decrease federal home loan banking system membership. have you quantified the potential impact that that may have on rural america right now? because while we may have pockets of prosperity in the

country, rural america is not feeling it. >> as i said in response to representative beatty, our preliminary analysis indicates that only 50 to 100 of the 7,500 members would be adversely affected by either the 1% requirement or the 10% requirement. there is a statutory requirement. the question is it's only applied when a member becomes a member of the bank or whether it will be applied on an ongoing basis. that's really what the rule addresses. the statute clearly says that you'll have 1% of assets in mortgage mortgage loans. that has been in the past only at the time of becoming a member, not on a continuing basis, right?

so we're looking at whether that undermines the purpose not to require it on an ongoing basis not just a one-time basis. >> what i would like to be able to express, i guess, i've been in washington a smaller amount is often trivialized. in some of the small communities i represent i have 54,000 square miles of colorado. if one of those banks happen to be in that 50 to 100, that would then be shut down it would be a reasonable assumption, obviously, we weren't going to be able to extend credit in that local community because it's going to be a small community. >> we'll certainly -- we will certainly take that into account. >> that's going to be critically important, i think, for us because our communities truly are struggling under those -- what we feel are overregulation coming in out of the federal government.

thank you on that. with that i yield back, mr. chairman. >> do you want to yield to the chair? >> mr. watt, i want to follow up on some questions i had for you for the next minute. is it fair to say the g-fee is based on risk? it's risk-based, right? the g-fee is risk-based? >> an element of it is risk-based. the question is what rule did -- >> microphone. >> will it be only risk? will it be accumulation of capital? will it be -- >> today is it -- >> but one element is definitely risk. >> so, you're charging more than the risk for the g-fee? someone argued in our assessment if you have a credit score of 740 and you put, you know 40% down, you might be paying a little more.

and if your credit score is you know, 650 and you only put 3% down, you get a little subsidy based on the risk of the g-fee. this is actually from your data. do you disagree with your data? >> no, i'm not arguing with the data. i'm trying to put it in a frame here that -- >> i have to gavel myself down in a second. so i guess maybe you could think about this and maybe we'll have a chance to come back to it. are you charnlging ingcharging more in the g-fee than the risk? are you undercharging for the risk? or are you hitting it just right? >> one of the things that a lot of people on this committee have been advocating is that we charge more than risk so that we can attract our private capital. >> and i -- >> you kind of meet yourself in these arguments going and coming. >> i don't to want abuse the gavel. maybe we can come back to it later.

the chair recognizes the gentleman from texas mr. williams, for five minutes. >> thank you mr. chairman. thank you, director, for being here today. we've covered a lot of ground. appreciate your service. i'm a private sector guy, own businesses in texas. i'm one that believes the private sector is the answer, not the federal government, to a lot of the issues we have. i do want to say one thing. you mentioned earlier that you had a hard time with your employees, with fannie mae and freddie mac, because of the fact we're unsure what their future might be. i heard you say that. i would just say, welcome to the private sector. that's the private sector going through that every single day, wondering what their future is as small business owners moms and dads, so forth. so, that feeling is not alone with your group of folks. it's all over our country because of government regulations. my first question would be this -- what is the treasury doing with the money they get from the gses every quarter? if the treasury spends the money

now, they get from fannie mae and freddie mac, won't they have to borrow more or tax more in order to meet the normal losses that could be coming in? >> i can't answer that representative williams, because i'm not a treasury. we sweep the money to treasury. it gets applied to the deficit. it gets applied to government operations. you know i gets argument is, should it be doing that or building up a reserve or capital reserve of some kind? that's just -- that's not a decision i can make. >> i think the concern is we've got such a big deficit and it's going in the hands of the federal government, where is it going? also just to help me understand a little bit, like i say, we've covered a lot of ground today. what's the average credit score to a 3% customer? >> i don't know if i can tell

you that off the top of my head representative williams. >> okay. we may have covered -- i heard a figure earlier of 2% but what's the foreclosure rate in your portfolio? percent to the total. i heard a figure, i thought, of 2%. would that be right? >> i can tell you that if you'll let me get to -- >> while you're looking at, that when do you decide to foreclose? i mean, how far behind payment? how far past due are homeowners before you say we need to foreclose on this piece of property? >> well, there's no fixed answer to that. i mean, we get concern if somebody gets 30 days behind payment. we get more concerned if they get 60 days. we get more concerned at what point you quit working with a borrower to try to get them back

current or alternative -- alternatively make a decision to go to foreclosure is a very complex set of determinations. so, i don't know that i could give you a rule that would apply across the board on that. >> what's your -- what is your foreclosure percent to the total? >> you got me off on -- >> well, i think i heard 2%. >> let us provide that information in writing. >> provide that and get back to us. >> we have -- we have the information about the loans since the meltdown. we have it overall for the whole history. we have it prior to the meltdown. i just -- i'm not finding it. >> that's fine. can you get that to me. another thing, too, when you -- of course, equity is important to everybody. of course, the bigger the down payment, the more equity they'll

have going in. there are some people, i guess that can't afford a home. do you advise these people of such? that possibly now is not the time for them to buy a house? maybe buy a home. maybe they need to go in the other direction, start with renting or something so they can -- >> when i was practicing law and when i was a member of congress, i used to give that kind of advice. but i don't have the opportunity to give that kind of advice, nor is it my role to give that kind of advice. fannie and freddie don't make loensz. we buy loans off of lenders' books and guarantee them and put them into a secondary market. so, there's just not an opportunity for me to be engaged in those kinds much sdugss with borrowers now. i mean, there are thousands of people, when i was practicing law, i would say, you can't afford to make a mortgage payment, you shouldn't be a homeowner, yes. homeownership is not for everybody. >> well, i appreciate you being

here. i hope one day with can get the government out of the homeowner business and get it back in the private sector where it belongs. mr. chairman, i yield back. >> chair now royces the gentleman from maine. >> thank you, mr. chair. thank you for being here director watt. from your background i understand you spent a little time in new england and i want to thank you very much in advance for rooting for the patriots. not that we need it, but on sunday we'll need it. thank you very much. >> i'm sorry i can't make that commitment to you. >> i was hoping we would start off on a good foot, mr. watt. but that's okay. everybody that has been listening today, sir, understands fannie and freddie are in conservativeship. we understand your organization is, in fact, the conservator. i heard you say a couple times today, in fact several times one of the roles you're playing is to be sure, to the best of your ability, that fannie and

freddie, are safely and soundly managed. such that we keep the credit flowing to those who want to buy a home, are able to buy a home and also to protect our hard working taxpayers. i'm going to be very honest with you, mr. watt. i have a little bit of a concern. if you look at fannie this is an organization connected to our federal government has been created by the federal government, is responsible for $3.3 trillion of home mortgages and they use our hard-working taxpayers to backstop those mortgages. i'm also concerned that freddie mac is also putting the u.s. taxpayers on the hook for an additional $2.2 trillion. now, my other point i would like to make, if i'm not mistaken, 2014 fannie and freddie together were responsible for holding 51% of all home mortgages in america. that being the case, would you

agree with me that fannie and freddie are large financial institutions? >> absolutely, they are large financial institutions. >> good. dodd/frank, as i'm sure you know, mr. director, requires nongovernment large financial institutions to hold substantial amounts of capital in reserve in the event something goes wrong. now, i am not here advocating that those capital requirements for nongovernment entities be increased. however, don't you think it's appropriate, sir, that fannie and freddie especially organizations of this size backstopped by the taxpayers, also out autought to live by the same rules our nonfinancial institutions when it comes to capital requirements? >> i don't know that that's my decision to make whether i agreed with it or not. >> well, you're the director. >> when i testified in the senate, i said to one -- in response to a question, i don't

have any personal opinions anymore. every opinion i express now is an fhfa opinion so i try not to express those personal opinions. >> i appreciate that very much, mr. watt. but with all due respect you're in position of a great authority. you're the regulator for the gses. and i would like to beg to differ with you a little bit that your opinion is greatly appreciated. what i'm trying to get across f i may, is that we have two very large institutions that do not abide by the same capital requirements as other nongovernment institutions around this country. i might also add f i may, if you're looking at fannie mae with dpz 3.3 trillion in assets, and this has been said here before, they have roughly $10 billion in assets, but they're asking the taxpayers to backstop $3.3 trillion in loans. now, if you're looking at freddie mac -- excuse me, you're looking at freddie mac, they

have about $13 billion in assets and backstopping $2.2 trillion. i think we could both agree, i hope so, that these organizations are grossly undercapitalized and represent one heck of a risk to the taxpayers if something goes wrong. would you agree with that, sir? >> i have two responses to it. one of which i've already given which is, i didn't set up the preferred stock purchase agreement. i wasn't even there when it was created. so, i'm living under that. i can't change it without. but the second response is you all can change that. everything you just talked about, you can change by doing gse reform. >> mr. watt, everybody wants a healthy economy. and the taxpayers in our district of maine are some of the hardest working, most honest people you could ever meet.

they to want make sure they have a government that works for them and not against them. and i happen to believe that accountability in all stages of government, all levels of government, are a good thing. and i'm very concerned about these large institutions that are highly leveraged with very little capital that's requiring the taxpayers to backstop them. when we have interest rates at historic lows historic lows w a rise in interest rates that could cause a problem with the housing market and also our economy, wouldn't you agree that it takes gaish. >> time of the gentleman has expired. a brief answer please. >> i think i've already answered your question to the best of my ability to do it. representative. >> thank you very much, sir. >> that was brief. chair now recognizes the gentle lady from utah, ms. ludd. >> there we go. i appreciate the opportunity to meet you here today. >> very nice meeting you. >> i just wanted to say as a

former mayor, i have had to ask myself three questions before making any new commitments or changes or going a certain direction and that is, is it affordable? is it is sustainability and it is my job. one of the questions i had in your studies. did you determine how many people the lowering of the standard was going to help? >> you're talking about the 97% product, ma'am? >> i'm talking about getting the standards to the 3% payment. did you determine how many people this was going to help get into homes, how many people it was going to hurt? did you have any studies that -- >> we had some projections that it would be a very small percentage of the overall port yoel owe of either fannie or freddie. i probably have the percentages but not the actual numbers. >> a small percentage that was going to help bringing down these fees, actually going to help get into homes. obviously we talked about some

risks and risking the take pair dollars. i mean you have no guarantee -- is it fair to say that you is no guarantee that the people that are going to get into and borrow will be able to get into homes they can afford and not default on their homes? >> i don't think we're ever in a position to guarantee. we make responsible decisions based on risk assessments. and i can guarantee you that we have made a robust risk assessment. i don't think you could guarantee that anybody could pay a loan if they paid 99% down because something might come up next week that would prevent them from doing that. so that is not about being able to guarantee it. it's about assessing the risk and likelihood of it. >> okay. so -- >> we've done what we can to minimize that risk. >> the reason why i ask those

questions is because when we get into risk, we realize inevitably we've taken a lot of the risk out of those decision-making. i believe i believe that utah beliefs and the majority of hardworking americans believe that if washington bureaucrats actually asked those questions we wouldn't be in the financial crisis that we are in today. as i've witnessed as a mayor, i have actually seen how these heavily involved government policies have actually hurt many cities and their abilities to thrive and to grow. we've watched homes being built and actually seen those homes a year later completely empty. and hardworking families lose their credit and their ability to get into a home. and that's why i ask the question about how does this actually help hardworking americans get into a home and be able to sustain a future. too too many times i'm afraid

that these government-backed programs that vow to help and protect hardworking poor americans, it's actually done the opposite and hurt those that it's vowed to protect. if the administration or as you would say, independent regulatory agency, go down this road, a bigger government policies and getting involved more in what the free market should be involved in, i just want it on record that as hardworking americans start losing their homes that you remember this warning today. i've been in the trenches of this. i've actually seen this happen. i'm not taking the 60-foot view of what's happened. i've been a mayor and i've actually seen my city have a really hard time with the housing market. and i don't want to go back into that direction. this is an area where i've said, this is not about the hardworking americans trusting you to do the right thing. it's about you trusting hardworking americans to make decisions and do the right

things for their future. i yield back my time rnls if you're about to yield would you yield to the gentleman from wisconsin? >> yes, i will yield to chairman duffy. >> appreciate the gentle lady for yeelgd. going back to my previous it's basically to make sure that the goss aren't losing any money. you're trying to find the balance to go boom what's the cost. i'm not trying to trick you. this is a pretty simple, straightforward question. >> it's a straightforward question but it's inconsistent with the approach that a number of people have used that we should be using them to attract private capital. if we raise them to that level we would be making a bunch more money, but is that an appropriate thing to do -- >> my question for you, mr. watt -- >> is it an appropriate purpose. >> i'm asking you are you

trying to get it to hit just right. ♪ not trying to bring in extra money, not trying to lose money trying to hit the nail on the head, hit it head on. or are you trying the make money or lose money when you set it? >> we certainly don't want to lose money. that i can assure you. >> are you trying to make money? >> but i think it would be more appropriate to wait until we come out with what we are going to do on them, articulate the reasons that we're doing it -- >> but this is an important -- >> then you'll see where we come out, because -- >> mr. watt this is important -- >> i don't vn opinion about the things you're asking me about. >> you don't know if you're trying to set it a little higher than the actual cost or are you trying to hit it head on? you can't tell us head how you're trying to -- >> representative duffy if i knew that, i wouldn't be studying the issue. that's the reason we're going

through this extensive study. >> what is the goal? >> to keep from applying my own opinion about that -- >> what's the goal? >> our agency is research based -- >> what is the goal? >> we're going to apply the research that we have -- >> i'm not trying to trick you. let's take reality aside for a second. is the goal to get it just right? whether you can or not, you want to get it just right where you're not making any money and you're not losing any money. you're charging with the services consistent with the risk and other factors that you referenced. >> one of the purposes certainly is not to lose money. we're not trying to set it to lose money. are there other factors in addition to covering the risk and breaking even that should go into setting the g fee that's the question we're evaluating in the agency at this point. >> the intent to look at it and

hit it right just right, correct? not to make any money or not lose any money take the figures and try to hit it just right. that's of course what we're trying to do. we're trying to get it just right >> gentleman is going to need up this line of question. >> quickly. if you take a sweep of the affordingable housing refund, 4.2%, not a tax you're saying but if you hit the g fee just right but you sweep the basis points away to go into the affordable housing trust fund you're actually now below the cost of your risk. the taxpayers are going to bear that cost sh. >> representative. >> if you go above you're actually charging then the end homeowner an extra fee to drive money into the affordable housing trust fund. either it's taxpayers that are going to pay or those with a mortgage is going to pay. someone is going to pay.

to come here and say it's magical fairy dust and no one pays this money isn't really being tote by forth right. taxpayers are on the hook or mortgagees are on the hook. i would ask if mr. watt agrees with that. >> i've tried to answer this question as foth rightly as i can. with the size of our portfolio i don't think we could ever set g fees to just break even. that could never happen. so if the question is are you setting it just to break even the answer is no. we have to have some margin even if we don't take anything into account other than risks. >> mr. watt, you're a very good lawyer and i can recognize that and what appreciate it. but you're not answering my question. i think you know what it is. i yield back.

>> i don't understand the question. >> e eel allow the very good lawyers to have the conversation online. we recognize you. >> let me add my congratulation to all of those that have been expressed here today. much deserved. you've indicated in your written testimony and it's been alluded to that on the 22nd of september, you approved a merger between the banks of seattle and des moines. by the way, i believe that's the first, is it not? >> it is, yes. >> i'm going to confidently predict it won't be the last. mr. lucas also referred to the concerns among many of us in congress about the new membership rules, which i don't want to relitigate this but i want to state for the record -- you and i had a private semi private disagreement about this. i think both fhfa and congress is missing an opportunity here to take a step back and reexamine just exactly what the

role of the federal home loan bank should be going forward. >> be clear that's exactly what we're doing in this evaluation process. we've got 1300 comments. we're going through every single one of them before we make a final determination of what the final rule is. so we're in that taking a step back looking at all of the input that we have received, just because we put out a proposed rule, a proposed rule is not a final rule right? we're doing exactly what you're suggesting >> i's not the specific rule that i am focused on. it is the larger issue of what role do we want the federal home loan banks to play in this new world that doesn't look like it did when they were created in 1932 or thereabouts. >> congress has made that determination. that's not a determination -- >> exactly what you said to me earlier during our semi private disagreement.