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House Financial Services Committee Hearing on Housing Finance Reform

House Financial Services Committee

“The End of Affordable Housing? A Review of the Trump Administration’s Plans to Change Housing Finance in America”

Tuesday, October 22, 2019

Key Topics & Takeaways

  • Capitalization of the GSEs: Asked at what level he believes the GSEs would be safely capitalized, FHFA Director Calabria declined to give a specific answer but said he believes all systemically important financial companies should be well capitalized. Asked if the GSEs will be able to raise sufficient capital from the private sector, Treasury Secretary Mnuchin replied that he does believe the GSE can raise a significant amount from the private sector and that they will be able to reach the new standards.
  • Ending Conservatorship: Asked about the conditions the GSEs would have to meet to end their conservatorships and the timelines to meet them, Mnuchin said that bipartisan concerns including capital requirements must be addressed before they can be removed from conservatorship, adding that the critical component is ensuring there is proper capital. Mnuchin also said that the administration has made no decision as to whether the GSEs would exit by conservatorship or by receivership, and they are currently focused on how to ensure their safety and soundness and how to recapitalize them.
  • Congressional Action: All three witnesses agreed that congressional action is critical in this area, and they agreed that they support the Chairwoman’s housing finance reform principles.

Witnesses

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters said the Trump administration’s housing finance reform plan would be “disastrous” for the housing system. She said that threatening to end the conservatorship of the government sponsored entities (GSEs) without congressional action to provide an explicit guarantee would “create turmoil” in the housing market and block families across the country from attaining home ownership, calling it a “reckless plan.” Waters called many of the recommendations made by the administration “harmful,” saying they abolish affordable housing goals and undermine the Federal Housing Administration’s (FHA) ability to create affordable home ownership opportunities. Waters said that any housing finance reform proposal should maintain access to the 30-year fixed rate mortgage, ensure private capital is in place to protect taxpayers, maintain liquidity and stability, ensure a smooth transition to a new financing system, maintain access for all qualified borrowers and maintain access to affordable rental units.

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

In his opening statement, McHenry called the hearing a “powerful opportunity” for bipartisan cooperation, adding that in order to have lasting change in the housing finance system it is important for the Committee to legislate in a bipartisan way. He said he is encouraged that secretaries Mnuchin and Carson have proposed long-term solutions that sketch a path forward for making homeownership more achievable. McHenry said legislative and regulatory inaction will put taxpayers at risk, adding that without congressional action and reform of the GSEs a bailout is “more likely than not.” He stated that a new housing finance system must set clear boundaries between the roles of the GSEs and the FHA, and that Congress needs to level the playing field and create an open chartering process to foster competition in the market.

 Testimony

The Honorable Steven T. Mnuchin, Secretary, U.S. Department of the Treasury

In his testimony, Mnuchin noted that the legislative frameworks put forth by members of the Committee reflect bipartisan agreement on the need for legislative action and the general principles of reform. He said Treasury’s plan will preserve affordable housing and support the 30-year fixed rate mortgage. He noted the GSEs have four key statutory mandates, including: to preserve access to mortgage credit, particularly in underserved communities; a requirement to make periodic contributions to the Housing Trust Fund and the Capital Magnet Fund; charter authority to promote access to mortgage credit throughout the U.S.; and a requirement to purchase Federal Housing Finance Agency (FHFA)-specified amounts of certain single- and multi-family mortgage loans that support housing for specified underserved borrowers and renters. He noted Treasury’s plan seeks to preserve the duty to serve requirement with some added protections, as well as to establish a more efficient, transparent and accountable mechanism for delivering tailored support to underserved borrowers. Further, he noted the plan recommends that the FHFA continue to coordinate with the FHA and Ginnie Mae, who have a primary responsibility to provide housing finance support to low- and moderate-income families. He said it is the administration’s preference to work with Congress to enact comprehensive housing finance legislation to achieve lasting structural reform, though reform can and should proceed administratively pending such legislation.

The Honorable Dr. Benjamin S. Carson, Secretary, U.S. Department of Housing and Urban Development

In his testimony, Carson said the Department of Housing and Urban Development’s (HUD) housing finance reform proposal addresses how to best serve affordable housing needs, noting that there is significant common ground about what a reformed housing finance system should look like. He noted that the plan preserves and strengthens the FHA’s and Ginnie Mae’s “pivotal” roles in delivering affordable housing support and protecting taxpayers. Carson said that to help borrowers buy their first home and stay in that home, the plan calls on the FHA to improve servicing by allowing more flexible loan mitigation processes. He also noted that the agency is working to improve its technological infrastructure and to attract a more diverse set of lenders back into the FHA program.

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

In his testimony, Calabria said that far too many Americans lack an affordable place to call home, noting that it is a fundamentally local problem due to zoning laws, land use restrictions and permitting requirements. He said, however, that Fannie Mae, Freddie Mac and home loan banks can play a role in ensuring affordability throughout the economic cycle. Calabria said that in their current condition, Fannie Mae and Freddie Mac will fail in an economic downturn and home affordability problems will “get even worse.” He noted that in September, he and Mnuchin agreed to allow the GSEs to retain capital of up to $45 billion combined, calling this a significant step forward that has improved their leverage ratio by roughly half. However, he noted that the leverage ratio still stands at nearly 500 to one, and combined with these low capital levels, credit risk has been rising in recent years and this pro-cyclical pattern of increasing mortgage risk harms first-time and low-income borrowers. He said the reform plans put forth by Treasury and HUD will help address these problems and build a more resilient housing finance system that protects taxpayers and ensures stable mortgage access.

Question & Answer

Capitalization of the GSEs

Waters asked about the FHFA’s capital rule, calling it a “key factor” in determining whether pricing will work for a broad base of future homeowners. Calabria responded that they are in the middle of the rulemaking and he hopes to announce in the coming weeks whether the rule will have to be reproposed or not. He said he agrees that it is the most important rulemaking he will engage in during his tenure and it is important to “get it balanced.” He added that he is confident they will maintain access and affordability while also protecting the system.

Asked by Waters at what level he believes the GSEs would be safely capitalized, Calabria declined to give a specific answer, but said he believes all systemically important financial companies should be well capitalized. Asked by Rep. Roger Williams (R-Texas) if the GSEs will be able to raise sufficient capital from the private sector, Mnuchin replied that he does believe they will be able to and that they will be able to reach the new standards.

Rep. Frank Lucas (R-Okla.) asked how reforms will help ensure shareholders, rather than taxpayers, bear the loses in the event of a potential downturn. Mnuchin replied that the first issue is to ensure proper capitalization as well as proper underwriting and allocations. Asked about a timeline, Mnuchin said he hopes this will be accomplished over the next one-to-two years, but that the timeline could be affected by market circumstances.

Rep. Bill Foster (D-Ill.) asked where GSE profits go, to which Calabria explained they are swept to Treasury. He explained that under the proposed changes, the GSEs would build capital to protect the taxpayer in the event the GSEs become insolvent, noting that Congress can legislate a different path if it chooses.

Rep. Bill Huizenga (R-Mich.) asked how to get more private risk back into the system. Carson replied that HUD has explored a tiered risk model in which contracts are based on risk factors rather than a one-size-fits-all approach. Calabria said that this is part of leveling the playing field, as much of the risk is due to the GSEs’ exemption from many rules other market participants must follow.

 Ending Conservatorship

Lucas asked about the conditions the GSEs would have to meet to end their conservatorships and the timelines to meet them. Mnuchin said that bipartisan concerns including capital requirements must be addressed before they can be removed from conservatorship, adding that the critical component is ensuring there is proper capital.

In response to a question from Rep. Juan Vargas (D-Calif.), Mnuchin said that the administration has made no decision as to whether the GSEs would exit by conservatorship or by receivership, and they are currently focused on how to ensure their safety and soundness and how to recapitalize them.

Rep. French Hill (R-Ark.) said he has noticed a bias towards recapitalizing and releasing the GSEs. Calabria said he does not support “simply putting them back out there” in the same form as before the financial crisis, noting that no decision has yet been made on the path forward. Mnuchin said he disagreed that such a bias exists, saying that they have the option to take them out through conservatorship or receivership, and though a decision has not yet been made there is consensus that the GSEs need more capital and the decision must be in the best interest of the taxpayer.

 Congressional Action

McHenry asked how important congressional action is in this area, noting that almost one third of the recommendations laid out in the administration’s plans require legislative action. All three witnesses agreed that congressional action is critical.

Rep. Steve Stivers (R-Ohio) asked the witnesses if they support the Chairwoman’s housing finance reform principles, to which all three replied that they do. Asked by Stivers if they all prefer a bipartisan congressional housing finance reform proposal over administrative action, all witnesses replied yes. Rep. Brad Sherman (D-Calif.) asked if the entities can be “spun off” without congressional authorization. Mnuchin replied yes, which Sherman called a “terrible mistake.”

Default Risk

Rep. David Scott (D-Ga.) asked about the current default risk of the GSEs’ portfolios. Calabria responded that the most serious delinquency rates for Fannie Mae and Freddie Mac are 0.67 and 0.61 respectively, noting that these numbers are similar to those at the beginning of 2008.

 Debt-to-Income Ratio

Scott asked whether the debt-to-income ratio is a good measure to determine default risk. Calabria said that debt-to-income ratio is explicitly mentioned in Dodd-Frank, saying it is perhaps the best measure of ability to pay rather than willingness to pay, calling it an important factor. He added that borrower credit and loan-to-value are stronger predictors of default, but Dodd-Frank specifically lays out a set of factors to consider.

Opportunity Zones

Rep. Emanuel Cleaver (D-Mo.) asked what can be done to improve opportunity zones, to which Carson replied that there must be an effort to communicate their results with the public. Rep. David Kustoff (R-Tenn.) asked how opportunity zones are addressing blighted communities. Mnuchin said that they have been very beneficial for housing, new businesses and relocating businesses.

 CECL

Rep. Blaine Luetkemeyer (R-Mo.) asked about the current expected credit losses (CECL) accounting standard and whether Mnuchin would be willing to ask the Office of Financial Research for a study on its implications. Mnuchin said he plans to discuss this request at the next Financial Stability Oversight Council (FSOC) meeting. Rep. John Rose (R-Tenn.) agreed that such a study would be important.

Libra

Cleaver asked about Facebook’s Libra and how Treasury will monitor its development. Mnuchin replied that Treasury has met multiple times with Facebook representatives and told them the launch of Libra is premature as they have not yet addressed fundamental anti-money laundering (AML) and Bank Secrecy Act (BSA) concerns. He said Treasury and FSOC are addressing this and other crypto assets and are working on an interagency basis. Mnuchin also assured the Committee that they are assessing the systemic risk implications.

QM Patch

Sherman noted that the qualified mortgage (QM) patch is set to expire, to which Calabria said he would “endlessly nag” the Consumer Financial Protection Bureau (CFPB) to “get it done in time” for businesses to have appropriate notice. In response to a question from Rep. Scott Tipton (R-Co.), Calabria also stated that it is important to allow the QM patch to expire and replace it with consumer protections that work for all borrowers.

Access to Affordable Housing

Multiple Committee members asked about preserving access to affordable housing. Rep. Joyce Beatty (D-Ohio) noted that many affordable housing advocates have criticized the administration’s plan, saying it will decrease access and increase costs. Carson said the plan will increase the ability of underserved communities to access housing.

Vargas asked about the availability of 30-year fixed rate mortgages under the plan. Mnuchin said that he is committed to supporting the 30-year market. In response to a question from Rep. Ted Budd (R-N.C.), all witnesses agreed that the plan would not lock Americans out of 30-year fixed rate mortgages and that the goal of affordable housing would be better served through the proposed system.

Rep. Jennifer Wexton (D-Va.) noted that the FHA currently charges a flat fee for the mortgages it backs, but the plan recommends a risk-based pricing structure, saying this could undermine its mission to serve underserved borrowers. Carson said they have looked at many different scenarios and determined that a one-size-fits-all model is not effective.

 FHA Regulatory Power

Williams asked what changes would be needed at the FHFA to ensure it can succeed as a regulator in a post-conservatorship world. Calabria responded that other bank regulators have authority to look at service providers, which will be important for the FHFA to ensure cybersecurity issues are addressed as Fannie Mae and Freddie Mac transition to the cloud. He also said chartering authority is important as well as the authority granted under Section 38 of the Federal Deposit Insurance Act.

For more information on this hearing, please click here.