|The Federal Housing Finance Agency (FHFA) will soon propose capital requirements for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, FHFA Director Mel Watt told the Senate Banking Committee during a May 23 hearing. The hearing also addressed housing finance reform, the shortage of affordable housing options, and the Housing Trust Fund. FHFA also released its 2017 Report to Congress the same day.
In his opening statement, Banking Committee Chair Mike Crapo (R-ID) said that housing finance reform remains one of his top priorities. The status quo, with Fannie Mae and Freddie Mac remaining in conservatorship, is unsustainable long-term, Crapo argued, and the federal government currently plays too large a role in the housing market. Crapo told Watt he looked forward to working with him to develop a long-term plan for reform.
Crapo also expressed concern about recent GSE activities he said were increasing taxpayer exposure to risk, specifically citing GSE programs that allow borrowers to take out mortgages with loan-to-value (LTV) ratios of up to 97 percent, GSE pilot programs that allow certain lenders to sell loans with a 1 percent or no down payment, and Fannie Mae’s recent decision to increase its maximum permissible debt-to-income (DTI) ratio to 50 percent.
Ranking Member Sherrod Brown (D-OH) began his opening statement by commending Watt for working out an arrangement with the U.S. Treasury Department last year to allow both GSEs to maintain a small amount of capital. He expressed concern that, despite FHFA’s many recent efforts, many borrowers are still struggling to access affordable mortgage credit. As Congress looks to reform the housing system, he asserted, it should determine what aspects of the secondary mortgage market are necessary to facilitate affordable homeownership.
Watt, whose term will expire in January 2019, noted that this might be his last appearance before the Committee. He focused his oral and written testimony on the serious challenges that remain for FHFA and the GSEs, which Watt contended will become more difficult to address the longer the GSEs remain in conservatorship.
The first challenge Watt cited is the difficulty the GSEs face in planning for the long term given their uncertain future. Because the GSEs are not sure when their conservatorship will end and what type of housing finance reform legislation Congress might advance, it is difficult for them to understand their personnel needs and set strategic priorities.
The second challenge, Watt said, is how FHFA can ensure the GSEs operate with market discipline when their conservatorship has effectively insulated them from market forces. Watt cited FHFA’s work with the GSEs to develop a Conservatorship Capital Framework that establishes uniform capital guidelines across different mortgage loan and asset categories. Watt announced that FHFA will soon issue a proposed rule establishing capital standards for Fannie Mae and Freddie Mac.
The third challenge is the shortage of affordable housing options, both homeownership and multifamily. The supply of affordable housing, Watt argued, is simply not keeping up with demand. While noting that both Fannie Mae and Freddie Mac have recently launched pilot programs to explore new ways to address housing affordability, Watt said many of the issues impacting affordable housing were outside of the control of FHFA and the GSEs.
GSE Reform Unlikely
Senator Bob Corker (R-TN), who has led efforts to develop bipartisan reform legislation with Senator Mark Warner (D-VA), acknowledged that Congress was unlikely to act on this issue this year. Corker, who will retire at the end of this Congress, expressed concerns that the GSEs may remain in conservatorship for the foreseeable future.
Warner expressed disappointment that many progressive political organizations opposed his and Corker’s efforts to reform the housing finance system. Such organizations, Warner argued, falsely believe that the status quo is better for affordable housing than the plan he and Corker were developing. What such groups don’t realize, he contended, is that current law allows Watt’s successor to enact unilaterally policies restricting the GSEs’ support for affordable housing, including setting less stringent affordable housing goals, adjusting guarantee fees, and establishing new loan limits. Watt agreed with Warner that his successor will have the authority to implement such policies but warned they would be detrimental to the housing market.
Committee members asked Watt for his opinions on how the housing finance system should be restructured. Crapo, Corker, and Richard Shelby (R-AL) expressed support for FHFA’s plan to implement capital requirements for the GSEs and urged Watt to make them as stringent as possible. Watt said he agreed with the need for strict standards. Shelby asked Watt for one lesson he learned from his time at FHFA that Congress should consider when passing housing finance reform. Watt responded that the public-private hybrid structure of the GSEs is untenable and puts all the risk on taxpayers while sending all the profits to private investors. One of the most important steps that housing finance reform can take, Watt told Shelby, is to remove the GSEs from the public sector.
In response to several questions from Committee Democrats, Watt reiterated his belief that a national housing finance system with government backing is necessary to foster a liquid housing market that serves all communities and preserves access to 30-year fixed-rate mortgages.
Affordable Housing Shortage
Several Committee Democrats pressed Watt on what FHFA and the GSEs were doing to address the shortage of affordable housing options. Brown asked Watt what FHFA was doing to increase lending to first-time homebuyers to purchase starter homes. Watt told Brown that FHFA has worked to make it easier for lenders to transfer smaller mortgage loans to the GSEs for securitization, allowed the GSEs to reduce their down payment assistance requirements, and approved Fannie Mae and Freddie Mac pilot programs for borrowers with high amounts of student loan debt. In response to a question from Chris Van Hollen (D-MD), Watt said that while loans with higher LTV and DTI ratios can be riskier, such risks can be limited through other compensating factors. For example, Watt said, GSE loans with a 97 percent LTV ratio currently have a default rate similar to all GSE loans.
Heidi Heitkamp (D-ND) complained that finding affordable housing is the biggest issue facing working families, but Congress is not talking about it. She asked Watt if he felt the GSEs were able to adequately address the affordable housing shortage. Watt said helping the GSEs support affordable housing is one of FHFA’s top priorities, but the GSEs cannot fix the issue on their own.
Corker said many of the GSEs’ new affordable housing initiatives increase the GSEs’ footprint in the market at a time when they should be shrinking their presence. Corker also expressed concern that Freddie Mac’s multifamily business had recently increased 30 percent year-over-year. Watt responded that all such activities, including Freddie Mac’s increased multifamily lending, occur in the affordable housing space that is not often supported by the private market. Consequently, Watt said, such activities are not crowding out private investors and are part of the GSEs’ affordable housing missions.
Housing Trust Fund
Van Hollen thanked Watt for directing the GSEs to make their 2017 contributions to the Housing Trust Fund despite both firms having realized losses for the fourth quarter of 2017. The losses were incurred due to changes in federal tax law that forced the firms to devalue certain assets, and not due to losses from their loan guarantee activities. Van Hollen asked Watt if he could expound on the important role the Housing Trust Fund plays in supporting affordable housing. Watt agreed the Trust Fund is a critical tool for addressing the nation’s affordable housing needs, but said he could not provide specific examples because it is administered by HUD and not FHFA.