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House Financial Services Committee Hearing on FHFA COVID-19 Response

House Financial Services Committee  

“Prioritizing Fannie’s and Freddie’s Capital over America’s Homeowners and Renters? A Review of the Federal Housing Finance Agency’s Response to the COVID-19 Pandemic”

Wednesday, September 16th, 2020

Key Topics & Takeaways

  • Regulatory Capital Framework for GSEs: Calabria said the proposed regulatory capital framework for GSEs is a necessary step in both ensuring that Fannie Mae and Freddie Mac are sufficiently capitalized to deal with unknowns as well as move towards their release from conservatorship.
  • Adverse Market Refinance Fee: Calabria stated that the adverse market refinance fee is a mechanism to cover expenses recognized by GSEs over the course of the COVID-19 pandemic. He said the implementation of the fee is simply the FHFA following the law as GSEs must recapture expenses via income.
  • Conservatorship: Calabria stated that the pandemic has caused release to be delayed by roughly 4-6 months. Calabria added that GSEs will not be released from conservatorship unless he is confident that they have achieved sufficient capital and improved corporate culture to a point where they are responsible corporate citizens.

Witnesses

Opening Statements

Chairwoman Maxine Waters, (D-Calif.)

In her opening statement, Waters criticized the FHFA’s response to the pandemic, accusing Dr. Calabria of prioritizing the Trump Administration’s political agenda over the wellbeing of the public. Waters called on the FHFA to vacate the implementation of the adverse market refinance fee and the proposed rule for a new regulatory capital framework governing Fannie Mae and Freddie Mac. In closing, she said that without the passage of the HEROES Act, evictions and mortgage delinquencies will continue to rise.

Ranking Member Patrick McHenry, (R-N.C.)

In his opening statement, McHenry commended the leadership of Dr. Calabria, as well as recent action by the FHFA to confront the challenges of the pandemic related to the stability of the housing market. He said that he was concerned with the FHFA’s initial rollout of the new adverse market refinance fee but was pleased with recent modifications that delayed the implementation date and exempted homeowners with loan balances below $125,000.

Representative Steve Stivers, (R-Ohio)

In his opening statement, Stivers stated that he is looking forward to examining the adverse market refinance fee as well as the new rule on regulatory and capital framework for GSEs. Stivers thanked Dr. Calabria for his leadership during the COVID-19 pandemic and said that the Committee has more work to do in fixing Fannie Mae and Freddie Mac.

Testimony

The Honorable Dr. Mark A. Calabria, Director, Federal Housing Finance Agency

In his testimony, Calabria stated that he was proud of the FHFA’s swift and prudent response to the COVID-19 pandemic. He highlighted actions taken by the agency to support homeowners during the crisis, specifically noting the suspension of foreclosure and foreclose-driven evictions through the end of 2020, and said the forbearance period will be extended if needed. To ensure the safety of market participants, Calabria said the FHFA has authorized measures increasing flexibility in loan closing, employment verification, and appraisal. He said unrest across the nation over the past months has strengthened the agency’s resolve to uphold core values of fairness, diversity, and inclusion. In closing, Calabria stated his mission is to ensure the Fannie Mae and Freddie Mac never fail the families that rely on a stable mortgage market.

Question & Answer

Regulatory Capital Framework for GSEs

Reps. Bill Foster (D-Ill.), Scott Tipton (D-Colo.), Carolyn Maloney (D-N.Y.), and McHenry asked why the new regulatory capital framework for GSEs is necessary. Calabria said that if GSEs are well capitalized, they would be better positioned to support low income families in times of crisis. Moving forward, Calabria said GSEs need sufficient capital to weather unknowns like climate change or pandemics. In response to a question from Foster addressing the framework’s impact on the market, Calabria noted that there is nothing in the rule that requires Fannie Mae or Freddie Mac to change their pricing models and that the rule in no way intends to drive a particular market structure. Tipton asked if the COVID-19 pandemic has shifted the FHFA’s views on the importance of capitalization. Calabria responded that the pandemic has proven the need for an adequate capital buffer to mitigate periods of stress. In response to a question from Maloney addressing whether the proposed rule could harm access to underserved communities, Calabria said he believes the ruling will benefit low income communities by helping avoid a financial crisis, as those communities tend to be disproportionally impacted by such crises.

Adverse Market Refinance Fee

Reps. Ann Wagner (R-Mo.), Stivers, and McHenry asked Calabria to explain the reasoning behind the announcement of the proposed fee. Calabria stated that GSEs requested the fee as a mechanism to recapture expenses caused by the COVID-19 pandemic via income as is mandated in their charters. Wagner expressed concern that the fee may increase uncertainty in the refinance market and for borrowers with Calabria responding that no pre-existing monthly payments will increase due to the rule. He added that it will also help avoid the insolvency of GSEs. Stivers asked if Congress could provide relief in replacement of the fee. Calabria explained that roughly $10 billion in congressional support would be necessary to cover costs recognized over the course of the pandemic and avoid such a fee.

Conservatorship

Reps. David Kustoff (R-Tenn.), Maloney, Foster, and Tipton asked various questions concerning the release of the GSEs from conservatorship. Calabria said the release determination is process driven, not calendar driven. However, he noted his belief that the COVID-19 pandemic has delayed release by 4-6 months. Tipton asked what tools the Committee should consider in order to assist in the release of GSEs from conservatorship. Calabria responded that granting FHFA the authority to examine third parties would be crucial, and that additional authority over chartering is also important.

Maloney asked Calabria if he could commit to not release Fannie Mae and Freddie Mac from conservatorship before the end of 2020. Calabria explained that he could not envision a scenario where they would be ready for release by the end of the year.

Credit Risk Transfers (CRTs)

Reps. Blaine Luetkemeyer (R-Mo.), Bill Huizenga (R-Mich.), Andy Barr (R-Ky.), Roger Williams (R-Texas), and Stivers asked various questions about CRTs. Calabria explained that while the CRT market basically shut down in March due to COVID-19 related concerns, it has gradually started to open back up since. Additionally, he committed that while GSEs remain in conservatorship, FHFA will require them to engage in CRT transactions.

Barr expressed concerns that the proposed GSE regulatory capital framework does not account for the value of CRTs, which may impede private market participation. Calabria agreed that CRTs play an important role and said the CRT rule under the proposed framework is considerably more generous than that under bank treatment.

General Housing Market

Reps. Kustoff and Williams asked Calabria to characterize the current state of the housing market. Calabria explained the state of the “two track housing market,” with the single-family purchase market being currently healthy, and projected to remain so, contrasting with the rental and multi-family side in which participants are facing considerable stress. He added that while student lending programs are under stress, they are not large enough to be a systemic issue.

Forbearance

Reps. Nydia Velázquez (D-N.Y.), Al Green (D-Texas), and Al Lawson (D-Fla.) asked various questions about mortgage forbearance. Calabria said that if data suggests it is necessary, FHFA will extend the forbearance period. Lawson asked what will happen at the end of the forbearance period. Calabria reaffirmed his commitment to minimize foreclosures and evictions, adding that no one will be required to pay a lump sum at the end of the period.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.