i rarely agreed with anything he said, but he always commanded my respect and i listened carefully because he was a thoughtful member of this committee. i admire a fact that the director has chosen to continue his career. i might remind my friend and colleague that he was on this side of the witness table, that he always demanded short concise and substantive answers. i have no doubt that he is going to continue to demand the exact same from that side of the witness table. once this hearing is over i cannot wait to ask my last question -- which did you enjoy more, being the inquisitor or the inqueistiee -- though i suspect i already know the

answer to that question. i wish to yield a brief moment to the ranking member. >> thank you, mr. chairman. i, too, would like to welcome director mel watt to the hearing today. i was somewhat torn when he received this appointment. while i know, and always knew, he would do a great job at fhfa, i knew i would 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 the bill. >> melmel watt had not only read every line of the bill, he was the one who could come up with a

question that no one else could come up with because he spent so much time reading the bill. i also appreciate the fact that he served an important role. when there was a need for tough negotiations, bonnie frank turned to mel watt and asked him to work with the opposite side of the aisle, and he did that on any number of occasions. bonnie frank could never trust me with that. [laughter] i understand why, and everybody else understands why. we are so pleased again that we think that despite the fact i mourn your not being 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 know the issues so well. so welcome, we look forward to hearing from you today and don't worry, if anyone on the opposite side of the aisle tries anything with you, i will take them on. [laughter] >> the purpose again, of today's hearing is to take the testimony from the director of the fhfa. i now recognize myself for three minutes for an opening statement. as yogi berra famously said, it is deja vu all over again. memories are curiously short of the washington ruling class because they repeat the same stakes that caused the financial crisis in first place.

it was not deregulation, but dumb regulation. in a loud financial institutions to loan money to people to buy homes they could not afford to keep. 70% of all troubled mortgages were backstopped by fannie, freddie and other federal agencies. it was not wall street greed that brought down the system -- of course there is greed on wall street, but there is also something known as washington read. greed for power to control the economy. greed to allocate credit within our society, as opposed to we the people in a innovative and transparent market. the mentality is best summed up by jonathan gruber who famously stated, the american people are too stupid to know the

difference. i doubt the american people would have been foolish enough to roll the dice on subprime lending, clearly washington was. the dice were rolled, billions lost their homes and hard-working taxpayers had to pay for the mother of all bailouts. they've rolled the dice again. within the last 12 months, fhfa have announced three different policies that are hopeful to restore us to eight's sustaining -- to a sustaining financed system. fhfa is leveraging the taxpayer balance sheet, one that is clearly awash in red ink. next in a race to the bottom with fha fhfa has announced it

will begin to allow the gse's to buy mortgages. as history repeats itself, underwriting standards are being thrown of the window. the data is overwhelming that there is a direct correlation between payments and foreclosures on the one hand. finally, they have announced they will begin siphoning off taxpayer funds to fill government housing sludge funds. all the while, fannie and freddie remain ridiculously leveraged. the best affordable housing row graham -- it is time to grow our economy from main street up, not from washington down and time to get off the bailout cycle.

it is time that hard-working middle income families and greater opportunity to achieve financial independence and the opportunity to buy a home they can keep. >> thank you mr. chairman, let me welcome my friend and former colleague bill watt. in the years since you became head of the federal housing and finance agency, you have taken steps to make sure the housing market is up or double and works for everybody. it is 38 billion dollars more than the treasury invested. i think it is fair to say that our actions prevent a total collapse have been a resounding success. if we close without putting in place a viable alternative, as

republican colleagues would do, we would likely reenter a recession and in fact i think it is in the economy's best interest that they have lost whatever momentum they ever had. your actions to demonstrate that you are fulfilling your statutory mandate to fulfill a liquid competitive and national housing market. similarly, the fhf a has abided by a another mandate. this one action will help improve directions like mine to improve housing. there are 7.1 million american households for whom housing is neither affordable nor available.

we have the chance to improve the lives of millions of american children, families, people with disabilities and the elderly. i also applaud your efforts to expand the availability of home ownership for all americans. including those who are not qualified buyers, and are not fortunate enough to come from wealthy families. when fhfa lowered the requirements, the expanded for eligible buyers moving forward. i encourage fhfa to think outside the box it comes to credit scores to make sure all qualified buyers have a chance at the american dream. >> the chair recognizes the gentleman from new jersey, the chair of our capital markets

subcommittee for two minutes. >> thank you mr. chairman, thank you director watt for being here. i would like to begin by commending the chairman for your work and steadfast commitment to reforming our broken housing finance system. more specifically the goc's were at the heart and center of the recent financial crisis. i realize that the odds are long and the challenges are immense. his row can -- reforming this broken marketplace must remain a priority. there are members on both sides of the aisle with a number of specific legislative proposals. these proposals and the bipartisan bills provided foundation for which continued negotiations from congress can hopefully reach i partisan consensus.

-- bipartisan consensus. mr. watt, your been quoted as saying the fhfa should not interfere. i appreciate the difference you pay to the body where you want served, it is important to understand that any decisions you make as director will impact the reform effort, positively or negatively. i would hope your decisions with air on the side -- err on the side of helping. lowering down payments and defending risk-based guarantee pricing -- those things will make it harder to reform. it will quite possibly lead us down the path of another multibillion-dollar bailout. these decisions bring to mind, those who do not learn from history are doomed to repeat it. the subpar underwriting

standards, taxpayer subsidized pricing -- those were the main causes of the last crisis. i would ask the director to not let these decisions lead to the next one. i yield back. >> we recognize the lady from new york for two minutes. >> thank you for calling this important meeting and it is a pleasure to welcome our former colleague and good friend, mel watt. director watt has been on the job or 386 days and has reuven to be a thoughtful, deliver to and conscientious leader of this tremendously important agency. he has focused on maintaining liquidity of the mortgage market and on increasing access to credit for credit worthy borrowers. his first act was to delay a

planned increase which would have raised the gc's more in state stronger consumer connections. this was never a sound basis -- there was never a sound basis for penalizing states with strong consumer protection. i applaud the director for this decision. states that have strong consumer protections should be awarded and not penalized. in addition, the arbitrary 10% cuts to fannie and freddie's businesses and created a strong exception for multifamily housing. this was huge support for my district where multifamily housing is our single family business. it has also allowed fannie and freddie to buy certain mortgages which will allow our hours

strong credit history's not stockpiles of extra cash to get a mortgage. i think that was tremendously important and he was guided by the data which clearly demonstrates that the size of the down payment is not a most important factor in predicting default rates. he made the decision to start funding the national trust fund, which will provide hundreds of millions of dollars for affordable housing programs. this was a critically important decision, because this was one of the only dedicated sources of funding for affordable housing that we have. we're delighted to have you back here before the committee. >> thank you for inviting me to

discuss the work we are 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 statutes to ensure the safety and soundness of the federal home loan bank, fannie mae and freddie mac and to make sure they provide liquidity in the national housing finance arctic. fhfa -- market. fhfa works to balance these across all activity. because fannie mae and freddie mac are in conservatorship, we are mandated by the statutes to

preserve and conserve their assets. earlier this month, fhfa issued a new scorecard that outlined our conservatorship expectations for the enterprises in 2015. the conservatorship strategic plan that we issued in 2014 and the scorecards we issued in 2014 and 2015 are centered around three strategic goals that are fully aligned with the statutory mandate. the first goal is to maintain the credit availability and foreclosure invention 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 more anti-framework -- and warranty framework and to enhance the enterprise's outreach 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 credit

risk transfer requirement and executed transfers on several -- single family mortgages with a combined unpaid rentable 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. they will explore other ways of transferring and reducing risk to taxpayers. our third goal is to build a new securitization infrastructure, for use by the enterprises and adaptable for use in the future mortgage market. last year, we defined the governance structure of the common securitization platform.

and the enterprises announced a ceo for the joint venture. we also made significant progress toward our multiyear goal to developing platform technology and a single security. our strategic plan and the 2015 scorecard, also had affordable rental housing priorities for the enterprise. the trick is not to compete where there is adequate private sector coverage, 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 focused on regulating the federal home loan bank. as part of our responsibility, to ensure the banks will fill their statutory objectives, we proposed a rule concerning the bank never ship requirement. we received approximately 1300 comments. i want to emphasize that getting and evaluating input them stakeholders 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 actively considering input we have received on guaranteed fees, single

securities and the enterprise housing goals. we have provided a lot more details in the written statement and i look forward to responding to your questions. i expect to be back and i'm happy to know i can leave when the hearing is over. >> thank you director watt. i wish to echo the comments of the chair, i fear director watt, that you have reversed policies of your predecessor which will make it more difficult to have a's sustainable -- a sustainable housing finance system. i want to focus on what you have done when authorizing the gsd's

to back down 3% loan. we know the down payment itself is not the most reliable indicator of when a borrower will repay the loan. all things the equal, it is a 3% down loan, riskier to the taxpayers than a 10% down loan. >> i would say that is utterly true but when you compare it to other compensating factors which is apparently something people missed when i announce this, you can make a 3% down payment loan as a secure -- >> i understand there are other

factors, mr. director. but the ability to repay is certainly an indication of whether or not a homebuyer can save if they can only afford 3% down. do you agree that 3% down is riskier to the home purchaser than 10% down? >> the same considerations would apply to the borrower as would apply to the lender. if you carefully look at other its iterations and take them into account in deciding whether to extend that credit or whether to back that credit, you can ensure that a 3% loan is just as safe as a 10% loan. >> let's explore some

information that came out of your agency recently. your agency, along with treasury, the fed, the fdic, and hud, like most charts it is somewhat difficult to read but on the horizontal access, this is the loan to value ratio. when the vertical axis is default rate and on the far right-hand corner you see a precipitous rise in full rates when you go from 90% loan to value, in particular, an incredible slope of 95% when we reach no downpayment whatsoever. this is information coming from your agency. so doesn't that indicate that

again, a 3% down payment, you are once again putting people into homes they cannot afford to keep. you have previously testified when you were on this side of the witness table i have always believed you cannot make a loan to somebody who cannot afford to repay it. this is data from your agency and others. why is this sustainable? >> i have not changed my position on that and i want to a short this committee that i have not changed my position. you should never make a loan to somebody you cannot anticipate would pay it. >> this is data from your agency. >> when you make a payment as saved him which is what we have done with this 97% product

housing counseling >> including -- >> let's not just look -- >> they will take all these things to account -- >> you do recall i get to control -- [laughter] let me quote. ratios above 80% with substantial that limit indicating that loans with ratios of 80% or less performed noticeably better than those with ratios above 80%. notwithstanding, mr. director, i understand what you are saying, but i fear that what you are doing is repeating the same mistakes that brought us here in the first place and now you are in a contest to see who can be the nation's rigorous subprime lender.

i recognize the ranking number for five minutes. >> i really wanted to spend my time on affordable housing trust funds, but i must step in here to ask -- when we take a look at those we would lend to with 3% down, are we not talking about people who have shown that they pay their bills every month that they have good credit, they have not defaulted. they just are not able to save up a 10 detroit percent -- as some -- 10 to 20% -- as some wealthier people are able to do, for these people you're talking about? >> those are the kind of people we would be looking for and we would compare that to strong credit scores, lower debt to income ratios and private

mortgage insurance all of which would put together and compensate for the fact that you're making a loan to somebody with a lower down payment. we have no interest in going back to irresponsible lending and it is part of our mandate to make true that doesn't happen. >> even though i do not have the data or information that a large part of our society fits into that category and they deserve to be homeowners if they are hard-working citizens who pay their bills and have not had problems -- a 3% down payment should not cause us issues at all like to commend you on your recent decision on your report to lift the suspension on fannie

mae and freddie mac obligation to fund the national trust fund. as you are well aware we are seeing the worst rental and housing prices in this nation, in the richest country in the world it is unconscionable that there are 7.1 million american households are home safe and decent housing is unaffordable or unavailable. these critical new funds will not only add to the supply, but will also hope to address homelessness and poverty across the country. please give us your factors that will -- >> i simply followed the statute. the statute tells us the exact

qualifications for the criteria to be applied, it tells us the criteria to be applied under normal circumstances for funding . that is whether they are contributing, whether the contributions to these funds would contribute or are intervening to the financial instability of the enterprises. whether they are causing or would cause them to be classified as undercapitalized and whether they are comprising a would comprise a capital restoration plan. those are the statutory's. -- statutories. those are the same that were applied when they would suspend

contributions to the trust fund. there are the same criteria i applied to reinstate them, circumstances have changed in that interim. i simply followed the statute. >> that is very important to know because some of my friends on the opposite side of the aisle would have us believe that you have done something outside the statutory requirements. i am pleased you're able to clarify that. i think if we can get this implemented, it will be very good. i yield back. >> the chair now recognizes the german from the new jersey chair. -- chairman from the new jersey chair.

>> obviously we are seeing a return to loose underwriting standards. they have publicly stated that a 3% down payment loan is too risky to originate. but on the other hand you have the agency, you're instructing them to take on more risk in the largest too big to fail banks. it would appear in this situation that you are doing the exact opposite. you say let's roll the dice, but the difference is where rolling the dice with taxpayer money instead of investors. is this wise to do? >> let me clarify that i have not instructed any bank to make any loans that they think -- >> not the banks.

you're instructing your agents -- >> i've instructed fannie and freddie that they can guarantee loans that are made responsibly that fit our criteria. the bank you're talking about is the same one that made the decision to buy countrywide. i can understand why they might be a little reticent to go back into that business. that should not control the entire mortgage market. >> they are doing that on behalf of their investors and i'm speaking on behalf of the american taxpayers that we are concerned where the taxpayer dollars to potentially be going as we return to these loose underwriting standards. after the last crisis, a lot of people felt they did everything right and still the got burned.

it seems to me that the handling you're doing is the same thing you're doing now. with regard to lower-level price adjustments. what is that mean -- what does that mean? you have good borrowers with high down payments and better at scores being told they have to pay the same fees as borrowers with low down payments and worse credit scores. why do you consider it fair to tell people who have done everything right, saved or money and acted in prudential way that they have to pay the same fees in comparison to those people did everything wrong and have not saved and have worse credit scores? >> i think your question illustrates the complexity of this issue, representative garrett. all i did was suspend the increase in guarantee fees until

we had a chance to evaluate the implications. when we announced the guarantee fees, which we will do by the end of this quarter, we well might take into account the things you're talking about. doing that without a thorough evaluation and consideration of all the aspects as you suggest we should do would be irresponsible. >> you only suspended the decreases as i understand, and it seems plain on its face that those who do good are being penalized for those who did poorly and yet here we are later and we are still in a situation of rewarding bad behavior and unfairly treating those with good behavior. moving over to other items.

the securitization platform. i mentioned earlier that the bipartisan support, one of those areas is the securitization platform. members of both parties agree we should have this, yet the industry seems to be cut out of the development of the securitization platform. they are not allowed in on the ground floor why are you cutting out industry? is this another attempt to try to control the marketplace and manipulate the reforms as opposed to allowing those players to have a say? >> my response is two fold. we are not cutting out private industry, we are in regular consultation with the private industry. it really is -- the one i made

to the chair when i discussed it with him, what i did was what i thought republicans support. it the risks this home -- it de-risks this whole platform by not trying to form a securitization platform for a future you have yet to find. >> the time for the gentleman has expired. numbers don't need to be reminded that we are not in our usual hearing room, we do not have the usual blocks, so to gauge your time you need to look at the color wheel at the witness table, you otherwise know the drill. the chair recognizes the gentlelady from new york. >> director watt, i was pleased when you delayed your predecessors decision to raise

gc -- gp's. your predecessor wanted to raise them even more in other states. this would have needlessly harmed the new york economy and would have discouraged states from an acting stronger consumer -- from eenacting stronger consumer protections. we should be rewarding not penalizing. what the markets are telling me, is that they anticipate a possible decrease in the gc's fees in general, do you anticipate a will be going up? >> i don't know where that

information would come from, we are still in the process of evaluating the input that we got in a request for input. we anticipate making a decision hopefully by the end of this quarter. it may slip into next quarter but we are going to make a decision and then we will justify and outline the reasons for that decision. i don't think i have any information about whether they are going down, going up. risk-based might have some adverse impact on some of the states you're talking about, but at this point it would be premature to talk about what that result would be, as i don't even know what it would be. we are in the process of evaluating. >> in your deliberation i hope

strong consumer protections are considered a plus. i have another question, director watt, we've heard a lot about the council trust fund and the council magnet fund. we know that the facts are that the capital magnet fun as ari had once it -- has already had one successful round of funding in 2010 and it was a huge success through a public-private partnership model. it has turned into $1 billion for affordable housing. i congratulate this effort. now with your decision to start funding, there will be hundreds of millions of dollars for affordable housing every year. can you talk a bit about the impact you expect this funding to have on the affordable housing crisis the countries are facing?

can you talk about the public-private partnership that emerged to magnify the money and are you looking at more public-private partnerships? >> to be quite honest, i did not take any of that into account. those are policy decisions, that i think are legislative decisions, congressional decisions. we don't have any control at fhfa over the use of these funds. those decisions are made at the treasury and hud. our decision related only to whether to fund them or not and to apply the statutory criteria to determine whether they should be funded or should not be funded. we did not look at the use of these funds. we did not look at the history. i am not even sure i knew -- >> thank you for clarifying.

i would like to ask you about the risk retention rule. the final rule inadvertently failed to exempt freddie mac multifamily securities. even though it did exempt fannie mae's multifamily securities. can you give us enter update on these efforts -- can you give us an update on these efforts? >> the original was not done by fhfa, that was a joint rulemaking process. i am not sure that we are looking at anything -- >> the fact that it inadvertently failed to exempt fanny -- freddie mac's multifamily securities even though it did exempt fannie mae those should be treated the same. >> i would hope that whatever rules come out would treat them both the same, that is what we

are trying to work our way toward in the single security -- so -- >> thank you, my time has expired. >> the chair now recognizes the gentleman from north carolina. >> thank you, good to see you again and always good to see you on the plane coming back and forth from your former district. >> congratulations on that beautiful baby. >> i appreciate your kindness and friendship over the years. we have been able to have conversations, even when we disagree on issues. i just want to ask you a few questions, but you know me fairly well so at some point you will cut me off. [laughter] it seems that we have some conflicting actions. one is you suspend the g-fees and you move away from

risk-based pricing and you start out holding reserves for trust funds and allocating capital and one assessor you talk about conserving capital and in another you talk about moving capital away from the enterprise, how do you reconcile that? >> all i am doing this following the statutes that were written by congress and passed by congress. we are trying to do it as judiciously and prudently as we can. i'm not even trying to connect those two things. the housing trust fund funding was an independent decision based on the statute. the g-fees decision was a prudence decision to give us an opportunity to study the issue really and we are doing that -- issue thoroughly, and we are

doing that. judging where that might go at this what would be premature. >> you have no choice according to the statute, you have to allocate capital for the trust fund? >> 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. we applied the same principles under changed circumstances to reinstate them. that is all we did. the housing trust fund was not created by hfa j -- fhfa. it was based on statutory criteria. >> you could look at this and think -- look at freddie being

leveraged at 156 to one and family -- danny leveraged at 134 to one, the conditions are not right. the requirement to suspend the allocation of capital an the housing trust fund could not be justified under these circumstances with this type of leverage rate. >> that is not one of the statutory criteria that congress set for evaluating whether to fund housing trust fund or not. >> is this an odd circumstance? you are outspoken on subprime lending in the private sector leading to the financial crisis. i heard you in debates here and on tv at home. you said these really high loans were problematic, that this was

deeply concerning, especially for those that did not have savings. that a small fluctuation in the marketplace could problems. in many respects your making huge decisions. the consequences of these actions are real. i know you know that. is their conflict looking back at what you said about the private sector and the actions you are taking? >> i don't think there is any conflict between what i said then and what i am doing now. you need to make responsible loans. this decision was surrounded by a bunch of compensating actors that would make their loan as reliable a loan as a 10% down payment loan or a 20% down

payment loan. that is our responsibility and i would hope that you would allow the same things that i said in advocating for reform in this area, to know that we are going to apply those intervals and not sanction loans back by fannie and freddie and the taxpayers that are not reliably expected to be paid. >> the time has expired, the gentleman a -- the chairman recognizes the gentlelady. >> i would like to revisit the question made by congresswoman maloney regarding the national housing trust fund. i heard you when you said it would be hud and treasury making

the decision as to which programs to fund. my question is when with that money make it there? have you had any discussions with those two agencies? >> i have not had discussions with them about the application of the funding -- that is their decision to make. treasury makes the decisions about the capital fund, hud makes a decision about the housing trust fund side of it. those are their decisions to make. >> do you have any idea when this money will start? >> i can tell you that because the process we follow 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 moneys would actually be allocated into the trust fund and capital magnet fund and it can be used. there won't be any use of those funds during 2015. it would be 2016 at the earliest for they would be available. >> director watt, as part of -- freddie mac and fannie mae committed to serve the housing market in 2008, congress asked fhfa to issue a rule to implement this duty to serve requirement. while a proposed rule was issued in front to -- 2010, a final rule has not been implemented as of today.

when you plan to implement a final rule? >> we are in the process of looking at that, and you are right, a proposed rule was issued in 2008 and 2009. it never was finalized because of whatever reason, we have not tried to evaluate that. we are going to have a duty to serve rule finalized hopefully in the year 2015. >> in august fhfa created a new housing category or small multifamily properties. this effort is very important for places like new york city where this is an important part of the housing. while your agency has set low initial edge marks to take a gradual approach, explain how

this growth will be evaluated so that more judicious targets can be set in the future? >> we will evaluate it on the same terms evaluate everything, to make sure the loans are safe and sound and then that they achieve the purpose of serving a group or category of people who have been underserved which is why we encouraged or directed fanny and freddie to look at how to incentivize small developments. generally, smaller developments have more than orientation toward middle and lower income people. that is included in the 2015 scorecard for fannie and freddie, to continue to work, to

encourage those kinds of loans we will have in place an evaluation mechanism that makes you effective -- or we will revise expectations in the future based on experience. >> thank you. >> the chair recognizes the gentleman from oklahoma. >> thank you mr. chairman, and my old colleague director what. -- watt. i would like to address the proposed membership making requirements for banks. i'm concerned the proposed rule would unnecessarily harm a significant number of financial institutions in oklahoma and across the country by limiting home membership. in recent years, it has been increasingly difficult to

provide the financing needed in their communities and the federal banks have served a critical role of a source of liquidity. my question -- why propose such regulation at a time when community banks and credit unions are in need of every credit resource available to them? as congressman watt might have said, what is the problem you're trying to fix? [laughter] >> there are some potential problems we are trying to fix to make sure the federal home loan banks meet the statutory purposes that have been set. you don't want anybody to be a member of the federal home loan inc. system -- bank system and get the benefits of it unless they meet the criteria that congress has set. we were concerned that some of the members of federal home loan

banks were not meeting those criteria. i can go into more detail and give you a complete outline of the rationale -- we're trying to do this in a way that does not have the adverse impact you're talking about. >> under -- the way i understand it, under the present system, they still have all the obligations and standards that have to be met by any bank institution. there is just concern in the countryside and perhaps the hallways of congress, that there is more to this than an ongoing set of standards. perhaps a legislation has not been able to legislate much and this is another effort to change how the system works by a rule, but not by law. i don't think this institution would pass a bill to do this. my question is, is this a way to

steer how these institutions use the resources? >> let me be clear with you, i am not part of the administration. the federal housing finance agency is an independent regulatory industry. we don't play out the administration's policy, we follow the statutes and that is what we are doing. >> to paraphrase congressman watt the folks with money are the people who will keep you there. [laughter] ie, it goes back to, is this an effort to find the real process determine how these resources are used and to put it on a rather short leash? >> we have no agenda, other than making sure that members of federal home loan banks meet the criteria that congress has

established for membership. i know that this is a controversial issue, we put out the rule and we got 1300 comments. that is almost unprecedented. we will go through every comment and evaluate every single one of them. most of them -- i would say 90% appeared to be against the proposed rule. that obviously -- we touched a nerve. we are going to apply the statute and try not to have the adverse impact that people are contemplating might be a result of this. >> you are always been a man of your word and i take you as a man of your word, but we are in an environment were a lot of things are going on in interesting ways and i would hope the community -- committee would be sensitive to disrupt

anything that has been going well and working well. >> i agree with you. >> i appreciate our friendship and many of the underclassmen were here when you and i helped to -- worked to help whoever the ranking chairman was at any given time. as we help the leadership, i will try to help you. >> thank you so much, great to see you again. >> the chair recognizes the gentleman from massachusetts. >> i want to welcome back director watt, good to see you again. some things have not changed here, in terms of how we might view affordable housing and the way that fhfa works. there was a great article yesterday in the "new york times," that talked about how the middle class is continuing

to shrink in this phenomenon results and more people thing squeezed into the bottom income earners which puts a lot of pressure on affordable income housing -- 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 low income households and those with 30% or less of the area medium -- income. in the area where i lived there are about 175,000 affordable units and in my district there are 16,000 units. there are tools that you have and i could see they are beginning to be used. i think they can be part of the solution. i know you are following statutory erectus in terms of the magnet fund, but can you

talk more broadly about how your affordable housing goals are consistent with the reality we are seeing? the situation seems to be getting worse for that tear of people that would benefit from access to affordable rental housing. nevermind the 3% down payment on purchasing. there are folks with every signed themselves that they are not home purchasers, they are renters. how does your affordable housing goal help those people? >> we haven't defind that yet. the goal is in process and we are evaluating comments. >> how do you anticipate your goals once you figure them out?

>> first people who can afford the mortgage make it available the them. on the rental side we want to make sure that affordable housing is available in the marketplace. there's 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 scorecard criteria we exempted from the $30 billion or whatever the figure was -- i can't even remember what it was -- cap, affordable housing development. to try to encourage fannie and freddie to be more involved and

active in getting into that space, which is underserved by the private sector. so that's what we've 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 historicically renting. the rental market is robust. and there are not enough units to serve that market. >> ok. i see my time has just about expired. i yield back and i thank you. >> the gentleman yields back. the chair now recognizes the gentleman from texas mr. naugbour. >> direct watts, good to see you again. you mentioned a couple of times

that you all are here currently studying the gp issue and will make a determination. it was my understanding that a study was done prior to the previous director issuing a directive to increase the gp to 10%. so 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 have reached into account in reaching our conclusion. but we've been very transparent in seeking input about how these gp should be set, what criteria should be applied in setting the gc's. should it be just about

protecting against the risks that fannie and freddie are assuming? should it be about capital formation? should it be about attracting private capital into the -- the process has been very transparent. >> so you've decided to study it again. >> yes. >> so the issue that the gentleman from new jersey brought up i think is an issue that i'm i want rested 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 loaned the money in good faith not months but years from getting paid. in those cases i support those -- that is a higher risk to those entities and those, where

those that have foreclosure rules are very consumer oriented. so i am not opposed to those states deciding that. i think that's their right. but what they have to also understand when you make it so consumer oriented and you penalize the people that are loaning the money and causing losses -- what we've seen in many states where it's very difficult to get your property back that those properties were stripped of windows and sinks. so i just wanted to say to you that i think pricing your gp's on risk is important. now, one of the thingings that you allude to in your report -- and -- i mean in your written testimony 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 wonder if you can give the committee some idea how many basis points it's costing

to transfer that risk. what is the pricing on those transactions that you're doing that would -- to give us some idea of what'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 conservativeship statute. >> the point i'm trying to get to though isn't the correct situation where freddie and fannie -- you don't mean that they need to make a profit, but there really is no market forces in place there to determine what the value of these entities are.

so the question is if you are transferring that risk, you know, wouldn't it be helpful for us to know that? because that should also influence what your gp 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 models say the value was. what fannie and freddie made on the transactions. we have that information. but you asked me what are the number of basis points. i mean, 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. the final point i would make is that on the down payment i think it's kind of ironic that maybe erroneous too but it's ironic that we made fha

increase their down payment and it looked like the race here of seeing who could get the most market share here so you kind of wound up fha by going to a 3% down payment when they have a 3.5% down payment. >> first u you should be clear that we are not in competition with fha. >> sure you are. >> we're not. the market might -- the market is going to go to whoever gives them the best deal. we know that. but we are not competing with fha. we're trying to provide liquidity in the market which is what our mandate says we are supposed to. >> the time of the gentleman has expired. the chair now recognizes the gentleman from georgia, mr. scott. >> thank you, mr. chairman. and welcome director. 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 for us to revisit

for a moment the housing trust fund. and i would 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 this 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 payments largely following the orders of us in congress. because during the economic recovery we put three criteria in it for suspending it. those criletion now no longer exist for the gse's and so you are operating on this trust fund with 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 appreciated you there with the harp program. but you went to detroit where it's very -- 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 that i made with

representative naugbour. this is one of those issues that i have received a lot of second guessing about because there was a study done about principal reduction before i got the fh, fa also. and i haven't done principal reduction, either. we're still studying that issue just like we're still studying the gp issue. and what we're trying to do on principal reduction is find a place where it is beneficial to borrowers and not negatively net present value to fannie and freddie. 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 are trying to craft something that will work for the enterprideses and for the borrowers. >> the time of the gentleman has expired. the chair now recognizes the

gentleman from missouri mr. luth luke mire, chairman of our housing and interest subcommittee. >> thank you mr. chairman and congratulate you mr. watt. we're glad that you're here today. to follow up on a couple of the comments that were made earlier with regards to the capital that you have in your -- in the gse's and the ability to provide stability. one of the things that i'm looking at here as i read through this is your past dues on fannie mae and freddie mac are just less than 2%. so that's good. >> i hear you but i'm having a little trouble picking up all of your sentence. >> i'll hold the microphone a little closer. your past dues are a little under 2% right now which is very good.

but your capital is at 0.4%. you're supposed to be at 2. so i guess my question is, how -- and your testimony you say enterprise does not have the ability to build capital internally while they remain in conservatorship. how do we solve the problem of additional bad debts popping up and i guess another subsequent question to go with that do you have any lawsuits pending that can bring in cash to bring into your capital account? or wher lawsuits are filed and you win does it go to capital or treasury? how do you solve the problem of having enough capital? >> we can't build up capital because we're operating under a preferred stock purchase agreement with treasury in conservatorship that sweeps all of the profits that fannie and freddie make to the taxpayers. that was the quid pro quo for -- >> if that's the case though --

>> from keeping them from going into bankruptcy. >> if that's the case though how do you firster -- where do you take those losses? eventually just go to the treasury and ask them to write a check? >> that's what would happen under the preferred stock purchase agreements. 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 gse reform. that's why it's so important for congress to act on gse. >> i saw some nice income figures. i presume part of that is the settlement of lawsuits with different entities. do you have lawsuits pending now? >> there are three more lawsuits, two more lawsuits pending. >> when you win those lawsuits do those dollars to go to your

capital account or 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 in the loaning money for 35 years i can tell you there's tenets of lending. you can't get away from them. certain things have to happen. if you don't you lose. it's just that simple. everybody wants to say i can slice it thinner i'm a little smarter than the next guy. it doesn't work. after 35 years of stubbing my nose against certain things, there's certain tenst that have to be there. that's it. my concern is that when we change these things and we loosen rules oup as you've seen fannie and freddie have had a

resurgence. they are now profitable. so why do you go back now and want to change those sound tenants of lending to loosen it up and go down the same path that caused the problem before? >> first you are absolutely right we are in the risk business. and there's 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 try -- that we back, we try to assess what are the risks associated with this loan? and we try to minimize those risks. now, you can't eliminate risks. >> with respect i've got one more question and i see my time is about up here. in your testimony you also want to try to move a lot of stuff to the private sector and i think that's laudable. that's a thing we need to be doing. my concern is, though, if you

continue to compete with the private sector by lowering guarantee fees by loosening lending standards it makes it more difficult for the private segment to do that. do you agree? >> i agree generally but at the same time our responsibility is to ensure a liquid housing finance market in the i want rim 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. >> the time of the gentleman has expired. the chair now recognizes the gentleman from texas mr. green. >> thank you, mr. chairman. i thank the ranking member as well and director watt it was a privilege to serve with you for nearly a decade in congress. you were always a voice of reason. and i see that you continue to be that voice of reason.

i would like to talk to you about the fico score that the gse's are required to adhere to. under this current fico standard we have a circumstance that allows bad credit for utilities and rernl payment to be utilized when ascertaining a score. but the good credit that one has for these very same utilities and rental payment is not utilized. and i am 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 just think that 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 view

that information in a positive way when it is available for -- for the score. these fico scores as you know are exceedingly important in fact they're everything when it comes to getting a loan. so can you please give me just 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. [inaudible] >> directedor watt, is your microphone on? >> would you add these 30 seconds to my time please. >> i'll consider. >> thank you. >> some things don't change in this committee. so there are alternative credit scoring models that are beginning to be out there now.

fico is updating its credit scoring model. advantage has a credit scoring model. there are several. and what we've done in this year's 2015 scorecard is we've instructed fannie and freddie to evaluate these credit score -- 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 scores 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 with -- that would go with implementing alternative credit scoring models. so this is an area that we are 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 alternative credit scoring models both on the republican side and the democratic side. it's not a partisan issue. so we are 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 some significant implications. >> well, thank you for exploring the possibility because i concur with you there are 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 to -- for us to explain when we

develop the formula, if you will, we put a trigger in. and that trigger was placed there to prevent a person who might be in your position who might have opinions that would vary from what we thought the law would require. so the trigger requires that we not fund because of circumstances and then it requires that 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. it seems like it's 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 that 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 stand by that decision. >> the time of the gentleman has exiferede. the chair now recognizes the gentleman from california, mr. royce, chair of house foreign affairs committee. >> good to see you here. >> thank you. >> 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 have considered some of my concerns hypothetical or philosophical. but after 2007, i think that overleverage 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 order gse's to start

supporting affordable housing trust funds. now, surprisingly, if era 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 is kind of a frightening race here because in my view we've seen it before. the f.h.f.a. has joined sort of a moral hazard problem here and in december you announced that the gse's should begin to put more money into the coffers of housing advocacy groups sthru 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 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 overlerge. so it is difficult to see how you can argue that as it is required by law the gse's 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 to 1. and now that's capital ratio of 0.29%. freddie mac, 153-1 and an equally concerning ratio of 4.56%. you remember a decade ago i was arguing about 100-1 ratios. this is excessive of that. and you said earlier in this that the leverage ratio is not something the statute requires

you to look at when suspending allocations. i've got a different reading of that statute. 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 undercapitalized. 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 341-1, and not be deemed both financially and stable and undercapitalized? that's my question. >> so first of all we put in place peru dential stops if circumstances go back in the other direction.

if we ever have a straw on the treasury that would automatically stop funding of the housing trust fund. >> but it's already undercapitalized is the point i'm making here. >> well, we don't have -- when fannie and freddie were put into conserve torship and the preferred stop agreements were entered into with treasury that suspend it had capital of fannie and fred eafment now, if we were building up capital, i understand exactly what you're saying. but those two criteria don't apply any more because they are in conservatorship. every dime is going to the tax payers 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 will close with this. today i along with many of my republican colleagues will reintroduce the pay back the taxpayers act. and this bill will ensure that money coming in from the gse's will go to the taxpayers. in other words, will go to address this issue instead of being diverted to the housing trust fund. but thank you, director. good to see you again. >> the time of the gentleman has expired. the chair now recognizes the gentleman from moser mr. cleaver. -- 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 of v.a. has a 0% down and a lower

foreclosure rate than the prime lenders. so is there any evidence that 3% is going to cause more foreclosures if 0% is not causing foreclosures? 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 riskier loan. 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 is that even probably

90% of the people who are underwater have no equity in their mortgages at this point are continuing to pay their mortgages. right? so that's not a criteria whether somebody is going to pay whether you've got 3%, 10%, you know. it's about whether you want to have a home that you own. right? and so you assess those criteria and there's substantial studies that suggest that confirm that 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 back the loan. so it's not as if we have created a risky situation. these are not the loans that had no documentation, no -- you know, resets after 90 days or three years. i mean these are not risky loans. and we have made that assessment based on research. not based on politics. based on research fofment we have that he had that assessment. and i stand behind this decision. that's why i was happy to come here and have the opportunity to talk about the prodential 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 look down there and say

this person can't pay this loan, it would be irresponsible for us to say that we should be making loans to those people or that fannie and freddie should be backing those loans. >> i think i heard you clearly. maybe i have time for a quick question. let's remove the sociological issues if people want to connect that to the loan. the economy is not healing for some people. we still have stagnant wages. in fact, hourly wages are actually ticking down in terms of keeping up with inflation. so if we are having stagnant wages and we're trying to heal the economy and how'sing is a significant part of healing the economy, having a housing market 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? i mean can we heal the housing industry without getting more people to buy houses? people who qualify worthy -- credit worthy people. is there any other way to do it to get people to buy more housing without making it affordable? >> congress has given us this mandate. do lending back loan that is 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 plan to continue. >> the time of the gentleman has expired. the chair now recognizes the gentleman from michigan. >> thank you, mr. chairman. and welcome back to -- i guess this isn't quite home turf

since we're visiting somebody else's committee hearing room while ours is under much-needed repair. almost two years ago i had a chance to ask your predecessor about fhfa's intentions as related to new regulations in the lender-placed insurance market. and i urged director demarco to make sure that any such regulations met a test of a fair and open marketplace for providers and 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, acting director demarco is to be commended and fha is to be commended for getting into this space. because there was a lot of abuse going on. there were virtually no

controls. and fhfa addressed some of those inappropriate practicings by directing the enterprises to prohibit servicers or a servicer affiliate from receiving compensation in the form of commissions for placing insurance because there was a per verse financial incentive for placing insurance in these circumstances with affiliates or people who were paying commissions. and we've 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. >> and when was that formed? >> that was formed in 2013. >> ok. 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 are continuing to work on a set of guidelines that would apply across the whole housing industry. >> do you have a time frame,

time line of when that would be completed? i think anything that's in limbo like that is probably needs to get wrapped up. >> it's hard to set a time frame on a lot of these things, as you have noted. but we are going to do it as as soon as they come out with a set of recommendations. >> so they have not come out with those recommendations as of yet? >> it's in the 2015 scorecard. >> ok. >> and so we expect that to happen sometime during this year. >> all right. we'll follow up on that. now, i'm going to ask you a question as i was going back over some of the testimony from then. i am 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. i think that's a decision that really is more appropriately made. i can tell you that demographics are changing. people are a lot more mobile than they used to be. and a 30-year mortgage was 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. but that's not really a decision that fhfa is going to make. that is a decision that i think is more appropriately made in the legislative context. >> i personally think it might be the private market space that is probably where that most of that is. >> that is true also. >> i don't know if you're aware of this. i will quote this.

the more thuse la of mortgages have ariveed the 50 year home loan. that makes me very nervous. i appreciate it. thank you, mr. chairman. >> just for his information we don't allow that fannie or freddie to back 50-year mortgages. 30 is our limit. just to be clear on that. >> listening to your comments it was one of the few times i agreed with you. i was about to yield you more time. instead, we will turn to the gentleman from texas who is recognized for five minutes. >> thank you mr. chairman. i apologize for not being here earlier but i was at another committee where we were reorganizing. i want to say good morning and thank you to my former colleague director watt for being here today to give the financial services committee 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 insuring liquidity in the mortgage market and promoting home ownership. however, due to their financial trouble in recent years we have seen attempts to not just refund them but wind them down completely. and i don't agree with that. i would like to go right into the questions and director watt last year president obama made remarks that he would like to see fannie mae and freddie mac wound down and replaced by government-backed mortgage bond insurer. can you tell us where you stand on that proposal? and do you think this will negatively or positively affect home buying market? >> representative hin jose, that's a subject that i am not going to express an opinion about. that's a legislative congressional decision and just to kind of put it in perspective when i got the fhfa

there were multiple visions of views about gse reform. and 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 gse's for the better and we thank you for your leadership and your being able to make those improvements. i especially like the $38 billion in extra funds that you gave our nation's treasury.

i have another question. late last year 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 for a home from 5% to 3%. what other proposals is fhfa looking at to encourage first-time home buyers and how is the agency making people aware of these initiatives that i have mentioned? >> well, we have a number of things that already are 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 harp program which is a refinance program for

people who are under water 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 in this space evaluate how we can make credit available to credit worthy people and that's part of the 2015 scorecard. it was part of the 2014 score card. they operate in this area regularly. we evaluate what they propose. it is all research based. and we try to make good prudent decisions in the interest of safety and soundness and the interest of liquidity in the

market. >> i want to make my last question. what steps, if any is fhfa taking to ensure that private capital is reentering the market? because i can see some months where the numbers that people are buying new homes or used homes has been going up and then suddenly they went down. so this is important to me on the private capital reentering the market. >> well, the major way of -- is that we are doing aggressive risk transferring to the private sector. we are not holding on to these loans. we are transferring that risk back into the private sector. and we've tripled quadrupled really the risk transfers since i've been there. >> thank you, mr. chairman. >> the time of the gentleman has expired. the chair now recognizes the gentleman from wisconsin mr.

duffy chair of the oversight and investigative subcommittee. >> thank you. welcome again mr. watt. over the course of your testimony you have indicated that you are following the law and following the statute which we appreciate that because we always don't think that laws and stat stutes should be followed. i want to follow up on mr. royce's line of questioning in regard to the funding of the housing and trust fund. now, you're obviously aware of section 1337 and basically we have a discussion about whether the gse's are well capitalized and if they are undercapitalized you really can't fund the housing trust fund. would you agree with that? >> yes. well no. not undercapitalized. but if they are not making a profit i absolutely agree with you. >> they have to be well capitalized. >> capital is a whole different issue that basically when the

fannie and freddie were put into conservatorship the capital conversations went away because basically we don't have any capital at this point. >> one of the drawbacks of statutes is that don't get to split hairs. the language is pretty clear. you would agree that the language in the statute requires that the gmp se's are well capitalized not undercapitalized. correct? before you can fund the housing trust fund you have to find that the gse's are not undercapitalized. correct? >> i don't think that's the case. >> do you think -- >> 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 that i wrote that reinstated the contributions. i specifically said that that

provision nor the third provision was applicable any more 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 gse's are in conservatorship? >> well, there's nothing in there that says unless they're in conservatorship. but -- >> so where did you come up with that? >> the conservatorship statute tells us what authorities we have in conservatorship. it wouldn't be in the housing trust fund statute. >> so is your testimony that that trumps section 1337 b? >> i think the preferred stock purchase agreements trump b 2. yes. >> so you're saying, to be clear, that 1337 b doesn't

really apply and that you have the authority to how's the housing trust fund? >> that's correct. if i hadn't conclude that had i wouldn't have done it. >> would you mind sending me the legal analyst on that? because the statute seems pretty clear. so if you would help me out on how you've reasoned that. >> i would be happy to do so. >> that would be wonderful. just quickly. how is that going to be funded? >> how is it going to be funded? out of the profits of fannie and freddie. >> where do those profits come from? is there a surcharge or tax? >> no. in fact the statute specifically says there cannot be a surcharge to fund the housing trust fund. and we have put out a rule that ensures that that does not happen. >> will it increase the cost do you think to the end of home purchaser?

>> no. because the statute says we are not allowed to increase the cost to the borrower. >> statutes say a lot of things but sometimes is applicable and sometimes not. >> well, all the time we try to follow the statute though. >> i appreciate that. mr. garrett and i had 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 the letter? >> yes we did. >> can we expect a response? >> yes, sir. you can. you might have gotten it yesterday but i thought you all would say we were doing it just in response to the hearing. we take every inquiry we get seriously and we try to go and get to the bottom of what -- of whatever charges. but we will respond. >> are you going to continue the ban on gse lobbying?

>> yes. absolutely will continue the ban. >> thank you. i yield back. >> the time of the gentleman has expired. the chair now recognizes the gentleman from missouri mr. clay ranking member of the financial subcommittee. >> thank you mr. chairman. and welcome back director watt. how is the family? >> the family is good. >> good. >> we hope it's going to grow. >> thank you for being here. although there are operational costs involved in requiring the gse's to update the credit scoring model that they use in their seller service guidelines, the gse's are still using the fico classic model in their seller servicer demrines despite the fact that newer versions of fico including 2008 and 2009 are currently available in the marketplace. given this, how concerned are you that the failure to compel

the gse to use their most updated credit scoring models and their seller servicer guidelines may not be giving the gse's the best available assessment of whether a borrower is a good credit risk and may be unnecessarily restricting credit to eligible borrowers? >> well, your question illustrates the difficulty of this because to move from fico classic to fico 8 or 9 is the same challenge that we have to move from mikeo classic to -- fico classic to advantage or some other credit scoring model. so what we've done is in the 2015 score cards we've instructed fannie and freddie to evaluate both the feasibility and the operational complexity challenges related

to using updated or alternative scoring models. now, feasibility is, are these credit scoring models better than the ones that 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 to using alternative credit scoring models because turning that ship is a major task. >> right. so have the credit scoring agencies, have they been receptive or have they pushed these new versions? >> yes they have. both fico has updated its

credit scoring model and advantage, and others, are -- we're regularly talking to them about this process. yes. >> i see. let's move over to the -- to harp. director watt, fhfa recently launched an interactive map showing that there are more than 7 2,000 -- 722,000 eligible household nationwide that could still benefit from harp a program that allow certain home owners to refinance in the mortgages with lower interest rates thrsh reducing their payments by as much as 200 per month while also reducing risk to the taxpayer by reducing their likelihood to default on their mortgages. what are you -- what is your agency doing to ensure that how'sholds are aware of this refinancing program? >> well, first of all, we are

very proud of that map. because it gets you to the people who are eligible for harp refinsancing. 3.2, 3.3 million people have already taken advantage of harp. there are over 700,000 who would still be eligible for it. that would get an advantage of taking advantage of it. and we are 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 homes. they are -- their homes are under water. and they have been continuing to pay their mortgage despite the fact that they are under water. that takes us back, you know, 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 home owners and borrowers is just in the face of all of that. so we're trying to get to those people. we've done a series of meetings around the country and the highest cons fration where those people are and trying to get them to take advantage of the harp refinsance program. >> the time of the gentleman has expired. the chair now recognizes the gentleman from south carolina. >> thank you mr. chairman. thank you chairman watt 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 the statute regarding the suspension. what statute did you rely on in ending the suspension? >> the housing trust fund statute. the affordable housing allocations. that's in error. it was reauthorized by congress

in hera. >> i misunder you. 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 that there's no statute that specifically says. >> let's walk through this. >> but you apply the same criteria to suspend and unsuspend and that'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 that these three things don't apply. >> so let's walk through them. it says that they contribute to

the financial instability of the enterprise causing would cause it to be undercapitalized or preventing it from doing their capital restoration plan. but i heard you say something earlier that was new which was a reference to the fannie and freddie making a profit. that's not in the statute. right? that's not one of the factors you can consider in making a decision to suspend or end a suspension. is it? >> number one says are contributing or would contribute to the financial instability of the enterprises. if you are waiving the financial stability or instability of the enterprises the primary factor you're looking at is whether they're making money or not. >> really? so 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? if bank of america is making a profit therefore you must be stable? >> i don't make decisions about bank of america. i am following the statute. >> 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. >> i appreciate that and read that it's not in the statute. what you supposedly put in the letter is not part of the statutory consideration. i hear what you're saying, but it's want statutory. you can't take the position you're following the statute, and then say what we're really considering is profitability, but don't worry, we put something in the letter. you're rewriting the law, aren't you? >> well, i'm following the conservatorship statute there, representative mulvaney. >> some would say number two regarding the undercapitalized, because i think you've taken the position several times that your agreement with the treasury moved this section is

that fair? >> yes. >> my understanding, and again, i'm new to this, is that your agreement with treasury is an agreement, right? >> that's correct. >> how does an agreement trump the law? >> well, i think the law got trumped when they went into conservatorship and the taxpayers had to ante up $187 billion, and so an agreement was made. that was before i got there. i didn't negotiate the agreement. >> you would agree -- >> the agreement was in place when i became the director of this agency. >> typically an agreement between one agency and another department of 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 b-2 then section b-2 is still a valid law. >> i don't agree with that.

but i understand what you're saying. i just disagree with you. faup the conservatorship statute doesn't speak to b-2, why is b-2 still not good law? >> well, it just doesn't apply. we're engage nag legal argument here -- >> that's what we're supposed to do. >> if you all didn't want to fund the housing trust fund, you have the authority to stop the housing -- funding of the housing trust fund, but don't expect notice disregard the law and do it for you. if you want to do that, i mean, that's what -- >> we said, look under these certain circumstances, we don't think we should be funding the trust fund. all we're asking you to do is follow the law. if you believe it is undercapitalized or unstable, then you should stop the payment. i yield back. >> the chair now recognizes the gentleman from california mr. sherman, for five minutes.

>> the chair declares a five-minute recess. >> committee will come to order. members will please take their seats. chair now recognizes the gentleman from california for five minutes. >> 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 -- i look forward to your input over the next five minutes. good moving on the housing trust fund. i want to commend our colleague, mr. ellison, for organizing a letter, and unless he objects i'd like to put that in the record of these hearings. so i don't request unanimous consent to put this fine letter in the hearing. >> without objection. >> and to commend mr. watt for his actions. first kind of a technical question. the h.u.d. one is being phased out by the new integrated mortgage disclosure form that combines the tila forms and is intended to give consumers a better understanding of all itemized line-item costs of the home closing.