January 28, 2015

Takeaways from the House Financial Services Hearing on FHFA

Yesterday the House Financial Services Committee held a hearing entitled “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency.” Over the course of four hours, lawmakers from both sides of the aisle grilled FHFA Director Mel Watt on an array of policy changes at the agency over the past year, including an expansion of Fannie and Freddie purchases of low-down-payment mortgages and the decision to begin funding the Housing Trust Fund and the CapitalMagnet Fund. Below is a summary of the top issues discussed at the hearing, along with a few key facts to keep in mind about each policy.

  1. Funding the Housing Trust Fund and the Capital Magnet Fund

When FHFA announced in December that it would lift its temporary suspension of mandatory funding to the Housing Trust Fund and the Capital Magnet Fund, Enterprise’s President & CEO Terri Ludwig called it “one of the most important policy actions in support of affordable housing in years.” During yesterday’s hearing, several members of the committee thanked Director Watt for this decision, describing it as a crucial tool to address the growing affordability crisis facing low-income renters.

Not every member of the committee shared this sense of gratitude, though. Several members - all of them Republicans - pressed Mr. Watt on his rationale and legal justification for the decision. One member, Rep. Ed Royce of California, even vowed to introduce legislation that would bar Fannie and Freddie from contributing money to the funds.

As Director Watt pointed out multiple times during the hearing, the Housing and Economic Recovery Act of 2008, which created the two funds, lays out three conditions under which FHFA can suspend these mandatory contributions. The contributions must either: a) make the companies less financially stable; b) cause the companies to be deemed undercapitalized; or c) prevent the companies from completing a capital restoration plan. None of those conditions are relevant today.

In addition to defending his decision to lift the suspension, Director Watt told the committee that FHFA will work with Fannie and Freddie to expand their support to affordable rental housing. He said that these policies were “not intended to compete where there is adequate coverage” in the multifamily market, but to focus on underserved segments of that market.

  1. Fannie and Freddie Purchases of Low-Down-Payment Mortgages

Also in December, FHFA approved new guidelines for Fannie Mae and Freddie Mac to begin purchasing mortgages with down payments of as little as three percent. In yesterday’s hearing, several members acknowledged this as important step toward expanding access to credit for first-time homebuyers and low-income families on the margins of homeownership. But others saw it as a return to the loose underwriting standards of the most recent housing bubble, which put many homebuyers at serious risk of foreclosure.As Director Watt rightly pointed out, these concerns are often exaggerated. For one, based on FHFA’s estimates, mortgages with down payments of 3-5 percent are likely to make up a small fraction of Fannie’s and Freddie’s overall portfolios. Second, according to recent analysis from the Urban Institute, all else being equal, the default rates on loans with down payments of 3-5 percent are actually quite similar to the default rates on loans with down payments of 5-10 percent. Third, in an effort to mitigate risks and ensure that the loans perform, FHFA will require Fannie and Freddie to use so-called “compensating factors” when underwriting low-down-payment loans, such as higher credit requirements or mandatory homeownership counseling.

  1. Future Changes to Guarantee Fees Charged by Fannie and Freddie

Shortly after taking office in December 2013, Director Watt suspended planned increases in the guarantee fees charged by Fannie Mae and Freddie Mac, pending further study on the impacts of such a change. A few months later, FHFA requested input on the factors that should be considered when setting guarantee fees, to which Enterprise responded as part of the Mortgage Finance Working Group.At several points throughout yesterday’s hearing, lawmakers pressed Director Watt on his plans for future changes to guarantee fees. He said that the agency was still weighing the input it received and hoped to announce its plans by the end of the quarter.

  1. Modernizing How Fannie and Freddie Use Credit Scores

In recent months, several consumer groups and other stakeholders have called on FHFA to update its rules for assessing the creditworthiness of potential borrowers. Fannie and Freddie currently rely on an outdated version of FICO scores, which do not take into account on-time rent payments and other potential indicators of a borrower’s ability to pay back a loan. Meanwhile, alternatives like VantageScores do take these factors into account, which could potentially help many creditworthy families on the margins of homeownership qualify for a long-term, fixed rate mortgage.When asked about this issue, Director Watt explained that he recently directed Fannie and Freddie to evaluate the reliability of alternative credit scoring models, as well as the operational challenges with their implementation. The results of that study are not yet available.

  1. Proposed Rules Governing Membership in the Federal Home Loan Bank System

Late last year, FHFA proposed new rules for membership in the Federal Home Loan Bank System, a network of 12 regional cooperatives that support lending for housing and economic development. Among other provisions, FHFA’s proposed rule would require all members of the FHLBank System to show that at least one percent of their lending is in “long-term home mortgage loans,” meaning loans with terms of at least five years that are secured by a first lien mortgage on the property.When pushed on that proposed rule during the hearing, Director Watt said that FHFA received about 1,300 comment letters from stakeholders, and an estimated 90 percent appeared to oppose some aspect of the proposal. (Enterprise submitted one of those letters.) He added that FHFA was still working its way through the comments and would pursue a final rule that “applies the statute without an adverse impact” on lenders.From the length and atmosphere of yesterday’s hearing, it’s clear that the decisions being made at FHFA will have a tremendous impact on the U.S. housing market. We look forward to continuing to work with Director Watt, members of the Financial Service Committee and other lawmakers to ensure that America’s housing finance system is stable and works for every family, regardless of whether they own or rent their home. The Enterprise Public Policy team works to safeguard, expand and improve programs that end housing insecurity. Learn more about our public policy efforts.

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