[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
THE END OF AFFORDABLE HOUSING?
A REVIEW OF THE TRUMP
ADMINISTRATION'S PLANS TO CHANGE
HOUSING FINANCE IN AMERICA
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HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 22, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-61
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
42-450 PDF WASHINGTON : 2020
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York PETER T. KING, New York
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio ROGER WILLIAMS, Texas
DENNY HECK, Washington FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan TED BUDD, North Carolina
KATIE PORTER, California DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
BEN McADAMS, Utah BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
October 22, 2019............................................. 1
Appendix:
October 22, 2019............................................. 65
WITNESSES
Tuesday, October 22, 2019
Calabria, Hon. Mark A., Director, Federal Housing Finance Agency. 8
Carson, Hon. Benjamin S., Sr., Secretary, U.S. Department of
Housing and Urban Development.................................. 6
Mnuchin, Hon. Steven T., Secretary, U.S. Department of the
Treasury....................................................... 5
APPENDIX
Prepared statements:
Calabria, Hon. Mark A........................................ 66
Carson, Hon. Benjamin S., Sr................................. 74
Mnuchin, Hon. Steven T....................................... 82
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the Bond Dealers of America............. 84
Written statement of the California Association of REALTORS.. 87
Written statement of the Credit Union National Association... 90
Written statement of the Housing Assistance Council.......... 93
Written statement of the Main Street GSE Reform Coalition.... 97
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 99
Cleaver, Hon. Emanuel:
Written responses to questions submitted to Secretary Carson. 101
McHenry, Hon. Patrick:
Article from The New York Times entitled, ``Climate Risk in
the Housing Market Has Echoes of Subprime Crisis, Study
Finds''.................................................... 106
THE END OF AFFORDABLE HOUSING?
A REVIEW OF THE TRUMP
ADMINISTRATION'S PLANS TO CHANGE
HOUSING FINANCE IN AMERICA
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Tuesday, October 22, 2019
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Velazquez,
Sherman, Clay, Scott, Green, Cleaver, Foster, Beatty, Heck,
Vargas, Gottheimer, Lawson, Tlaib, Porter, Axne, Casten,
Pressley, McAdams, Ocasio-Cortez, Wexton, Adams, Dean, Garcia
of Illinois, Garcia of Texas; McHenry, Lucas, Posey,
Luetkemeyer, Huizenga, Stivers, Barr, Tipton, Williams, Hill,
Emmer, Zeldin, Loudermilk, Mooney, Davidson, Budd, Kustoff,
Hollingsworth, Gonzalez of Ohio, Rose, Steil, Gooden, and
Riggleman.
Chairwoman Waters. The Committee on Financial Services will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``The End of Affordable
Housing? A Review of the Trump Administration's Plans to Change
Housing Finance in America.''
Before I recognize myself, Members, today is Mr. McHenry's
birthday.
If anyone wishes to sing happy birthday, please save it
until later.
Mr. McHenry. We all thank you for that, Madam Chairwoman.
Chairwoman Waters. Happy Birthday.
Mr. McHenry. Thank you.
Chairwoman Waters. I now recognize myself for 4 minutes to
give an opening statement. Good morning. Today, we are here to
discuss the impact of the Trump Administration's housing
finance reform plans. We are joined by Treasury Secretary
Steven Mnuchin, HUD Secretary Ben Carson, and Federal Housing
Finance Agency Director Mark Calabria.
Welcome. Let me say upfront that the Trump Administration's
housing finance reform plan would be disastrous for our housing
systems. The Trump Administration is threatening to end the
conservatorship of the Government-Sponsored-Enterprise (GSEs)
without congressional action to provide an explicit government
guarantee. If implemented in this way, it is likely it would
create turmoil in the housing market, prevent many Americans
from obtaining 30-year fixed-rate mortgages, and block families
across the country from attaining the American Dream of
homeownership.
With this reckless plan for administrative action on the
table, the Trump Administration also recommends that Congress
make several harmful legislative reforms. For example, the
Trump plan would abolish the affordable housing goals which
help to support affordable homeownership and rental housing,
and replace them with a mortgage fee for which Trump officials
have not bothered to spell out the details. The plan would also
fundamentally undermine the Federal Housing Administration's
(FHA's) ability to create affordable homeownership
opportunities.
The Trump Administration has proven again and again that it
is not to be trusted. It has consistently pushed for harmful
housing policies and for slashing and eliminating key housing
funding for those most in need. This is an Administration that
has proposed tripling rents on our lowest-income households,
and slashing HUD's budget by 18 percent.
This is an Administration that has eliminated protections
for LGBTQ+ individuals, blocked Dreamers from FHA loans, and
proposed to make it nearly impossible for victims of housing
discrimination to obtain justice. This is an Administration
that reportedly wants to raze homeless camps and round up
persons experiencing homelessness and force them to live in
decrepit Federal buildings. By contrast, Democrats on this
committee have put forth measures to improve the affordability
and availability of housing. For example, we have bills to end
the homelessness crisis, make FHA mortgages more affordable,
and protect Dreamers, LGBTQ+ individuals, families and children
with mixed immigration statuses, and foster youth.
When it comes to the housing finance system, I have long
maintained that any housing finance reform proposal should
adhere to certain key principles. These principles include:
maintaining access to the 30-year fixed-rate mortgage; ensuring
sufficient private capital is in place to protect taxpayers;
providing stability and liquidity so that we can withstand any
future financial crisis; ensuring the smooth transition to a
new finance system; requiring transparency and standardization
in a way that ensures a level playing field for all financial
institutions, especially credit unions and community banks;
maintaining access for all qualified borrowers who can sustain
homeownership; and serving homeowners of the future and
ensuring access to affordable rental housing.
It is clear that the Trump Administration proposal does not
live up to these principles. Today, this committee will examine
why the officials who are our witnesses today are supporting
such a harmful plan.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes for
an opening statement.
Mr. McHenry. Thank you, Madam Chairwoman, and I want to
thank the distinguished panel for being here today. Let me
begin by saying this: This is a powerful opportunity for
bipartisan cooperation. We have a willing Administration who
has engaged in a productive dialogue on housing finance reform
for the long term. Divided government is not ideal for many
things, but it is an ideal moment for difficult policy that
divides both parties. Housing finance reform divides both
parties. There is not a partisan-only coalition that can
produce fundamental housing finance reform. Democrats have
tried it and failed; Republicans, likewise, have tried it and
failed. In order to have a lasting change to our housing
finance system, to put it on a sustainable path for our
taxpayers and for our communities, it is important that we
legislate in a bipartisan way, and this is an ideal moment to
do it.
I am encouraged that Secretary Mnuchin and Secretary Carson
have proposed a long-term solution. It is a positive first step
on a multi-year path toward building a housing finance system
that makes the goal of affordable homeownership more
achievable. And while by no means perfect, it sketches a path
forward, and away from the status quo that puts taxpayers at
risk and prevents competition within the market. Inaction puts
taxpayers at risk. Let me say that again. Inaction, legislative
inaction, regulatory inaction, puts taxpayers at risk.
In January, I reached out to Chairwoman Waters on ideas for
committee hearings that I thought could be bipartisan. This was
one of them. I offered that back in January, and 11 months
later, we are here today, but 11 years ago, we, in the Federal
Government, placed in conservatorship and nationalized after
their collapse, Fannie Mae and Freddie Mac, with over $200
billion in taxpayer bailouts. We don't want to relive that.
This Administration cannot do it alone and put us on a
satisfactory path.
Today, Fannie Mae and Freddie Mac remain a conservatorship,
unreformed, and without competition. Our current economy is
strong. This is the time to do housing finance reform because
of the economic conditions as well. But with an inevitable
downturn at some point in time, and without congressional
action in reform of the GSEs, a bailout of these institutions
is more likely than not. In fact, until Director Calabria took
over, the GSEs had a capital ratio of 1,000-to-1, meaning that
even a small dip in the market would guarantee failure. Housing
finance is too important to be put at that type of risk. Our
housing market has been trending upward for at least the last 8
years, so we may be reaching the top of the housing cycle.
We have serious systemic risk at the GSEs and the Federal
Housing Administration. It is important that we legislate for
the long term. We know it is not easy, but it is necessary. We
can't kick the can down the road. I want to highlight a few
portions of the Administration's proposal that this committee
needs to focus on.
First, a new housing finance system must first set clear
boundaries between the respective roles of the GSEs and FHA.
Second, Congress needs to encourage competition by leveling the
playing field, and creating an open chartering process to
provide a path for other companies to attain these benefits. I
think we can work together and achieve a bipartisan outcome
that creates that competition, that certainty in the
marketplace, and I think this can make the American people
proud and put us on firm economic standing for generations to
come.
And with that, I yield back.
Chairwoman Waters. Thank you. I now recognize the gentleman
from Georgia, Mr. Scott, for 1 minute.
Mr. Scott. Thank you very much, Madam Chairwoman. Welcome,
to the witnesses. Madam Chairwoman, as you know,this marks the
10th anniversary of the passing of the Dodd-Frank Act, and the
tremendous financial crisis that we went through. But there is
no more burning point to show the great failure at this point
than as we look across the country, in every State, in every
community, and it is filled with homelessness. So we have to
take a very serious look at this, and we are hopeful in this
committee that we will do so. We have to focus on certainly
protecting that 30-year mortgage, and we have to ensure that
sufficient private capital is in place to protect our
taxpayers, so there is so much for us to get to. The American
people are depending on us, and I sincerely hope that you three
gentlemen will open our eyes to much of what we are now only
dimly aware. Thank you.
Chairwoman Waters. I now recognize the gentleman from Ohio,
Mr. Stivers, for 1 minute.
Mr. Stivers. Thank you, Madam Chairwoman. As the Members
are all aware, Fannie Mae and Freddie Mac have now been in
conservatorship for 11 years. I have been in Congress for 9
years and I am already on the top row. This is a long overdue
process that we need to deal with. The committee has seen
proposals come and go. We have seen House and Senate proposals,
Democratic and Republican proposals. Our witnesses made it
clear in their written testimony that they prefer comprehensive
reform imposed by Congress, but if not, they intend to proceed
with some administrative reforms.
It is my hope that we can use this hearing as an
opportunity to restart our work that we should have completed
long ago, a bipartisan, comprehensive reform that ensures
Americans can achieve the dream of homeownership, provides
stability to the housing system, and that prevents any future
taxpayer-funded bailouts. This hearing should be the first of
many aimed at proving the skeptics wrong in achieving those
goals.
I yield back the balance of my time.
Chairwoman Waters. Thank you very much. I want to welcome
today's distinguished panel. We will first hear from the
Honorable Steven T. Mnuchin, Secretary of the U.S. Department
of the Treasury. Secretary Mnuchin has testified previously
before the committee, and needs no further introduction.
Welcome.
We will then hear from the Honorable Dr. Benjamin S.
Carson, Secretary of the U.S. Department of Housing and Urban
Development. Secretary Carson has also testified previously
before the committee, and needs no further introduction.
Welcome.
Finally, we will hear from the Honorable Dr. Mark A.
Calabria, Director of the Federal Housing Finance Agency
(FHFA). This is Director Calabria's first appearance before the
committee. He has served as Director of the FHFA since April of
this year. In recent years, he has served on the Republican
staff of the Committee on Banking, Housing, and Urban
Development; worked at the Cato Institute; and most recently,
he served as as Chief Economist to Vice President Michael
Pence. Welcome, Director Calabria.
For purposes of testimony, each of you will have 5 minutes
to summarize your testimony. And without objection, your
written statements will be made a part of the record.
Secretary Mnuchin, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE STEVEN T. MNUCHIN, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Mnuchin. Thank you. Chairwoman Waters, Ranking
Member McHenry, and members of the committee, I am pleased to
be with you today to discuss the Department of the Treasury's
housing reform plan. Last month, my colleagues and I testified
before the Senate Banking Committee after the release of the
plan. The comments and legislative frameworks we have seen from
Members of both parties reflect bipartisan agreement on the
need for legislative action, and on the general principles of
reform. I am hopeful that with some good-faith discussions,
Congress and the Administration will act in a comprehensive
manner to support affordable housing, appropriately tailor the
Federal Government's influence over the housing finance sector,
protect taxpayers from future bailouts, and foster a
competition that will benefit consumers. That is why I was
surprised and disappointed by the title of this hearing, which
asked whether the Administration's plan is an end to affordable
housing.
To be clear, Treasury does not propose, and indeed opposes,
reducing or eliminating the Government-Sponsored Enterprises'
(GSEs') long-standing support for affordable housing. I am
grateful for the opportunity to clarify Treasury's
recommendations here today, and explain how our plan will
preserve support for affordable housing while also improving
the efficiency, transparency, and accountability of the
mechanism for delivering that support. Treasury's plan
advocates for continued government backing for and widespread
availability of the 30-year fixed-rate mortgage loan. And the
GSEs, or their successors, should continue helping to fund
multi-family housing for low- and moderate-income and other
renters.
In addition to this general support for affordable housing,
the GSEs have at least four key statutory mandates to promote
access to affordable mortgage credit for historically
underserved borrowers and renters: one, a duty to serve focused
on three specific underserved markets--manufactured housing,
affordable housing preservation, and rural markets; two, a
requirement to make certain periodic contributions to the
housing trust fund and the capital magnet fund; three, charter
authority to promote access to mortgage credit throughout the
United States, including central cities, rural areas, and
underserved areas; and four, a requirement to purchase FHFA-
specified amounts of certain single-family and multi-family
mortgage loans that support housing for specified underserved
borrowers and renters.
Treasury's plan does not include specific recommendations
to alter the duty to serve the specified underserved markets or
the affordable housing contribution. Treasury seeks to preserve
the national service requirement with some added protections.
With respect to the fourth mandate, the affordable housing
goals, Treasury recommends material changes that would
establish a more efficient, transparent, and accountable
mechanism for delivering tailored support to underserved
borrowers.
Further, the plan recommends that FHFA continue to
coordinate with FHA and Ginnie Mae, who have the primary
responsibility for providing housing finance support to low-
and moderate-income families that cannot be fulfilled through
traditional underwriting to assure an efficient and appropriate
Federal role for housing.
To be clear, Treasury is not recommending a reduction in
support for underserved borrowers. On the contrary, Treasury is
recommending a more effective means of delivering the support.
I look forward to our conversation here today, one that I hope
will continue after this hearing. We welcome your thoughts and
suggestions to address the challenges facing underserved
borrowers and renters nationwide.
Finally, I must emphasize that our recommendations made
clear that the Administration's preference is to work with
Congress to enact comprehensive housing finance legislation.
Legislation could achieve lasting structural reform, and
competitive advantages over the private sector. At the same
time, we believe that reform can and should proceed
administratively pending legislation.
Under the leadership of President Trump, I am proud of all
the work we have done to create conditions for greater economic
growth, more and better opportunities for working families, and
higher wages. I look forward to discussing with you critical
housing finance reform. I hope the members of the committee
from both parties will work with us on passing legislation.
Thank you very much. I am pleased to answer any questions.
[The prepared statement of Secretary Mnuchin can be found
on page 82 of the appendix.]
Chairwoman Waters. Thank you.
Secretary Carson, you are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE BENJAMIN S. CARSON, SECRETARY, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Secretary Carson. Chairwoman Waters, Ranking Member
McHenry, and members of the committee, thank you for the
opportunity to appear before you today to discuss how the
Department of Housing and Urban Development is supporting this
Administration's efforts to reform the nation's housing finance
system. First, like Secretary Mnuchin, I was taken aback by the
title of this hearing.
If we really want to examine the end of affordable housing,
this would be a field hearing in San Francisco or Los Angeles,
two cities at the epicenter of the nation's affordable housing
crisis. Restrictive zoning laws have made the development of
affordable housing prohibitively expensive there, driving up
rent and home prices to some of the highest in the country, and
leading to California being responsible for nearly half of our
nation's unsheltered homeless population. In fact, HUD's latest
data found that California's homeless population increased 16
percent over the past year alone. Were it not for California's
increase, homelessness would have declined nationally. Contrary
to what is happening in California, HUD's housing finance
reform proposal addresses how to best serve affordable housing
needs, while keeping within the principles outlined by leaders
of both parties, including Chairwoman Waters.
We look forward to working with Congress to move this
legislation forward, but I am very confident that we are
starting from a place of significant common ground about what a
future housing finance system should look like. At HUD, we
support millions of families with affordable homeownership and
rental opportunities through the Federal Housing Administration
and Ginnie Mae, providing credit access and liquidity in the
mortgage market. We ought to allow the private market to work,
but in those areas where it can't or won't work, we must make
certain that we continue to target FHA programs to borrowers
not served by traditional underwriting. Our plan preserves and
strengthens FHA's and Ginnie Mae's pivotal roles while
improving the delivery of that support and better protecting
taxpayers.
Historically, serving unmet housing need has been FHA's
most important contribution to the American housing market,
facilitating entry into financially responsible homeownership.
Without FHA mortgage insurance as an option, millions of lower-
and middle-income families would lack access to affordable
mortgage credit.
Take, for instance, a typical FHA borrower. Last year, they
were 39 years old, had a credit score of 666, and purchased a
home for $221,000. First-time home buyers represent 83 percent
of FHA's purchase volume, while 57 percent of the mortgage
endorsements were for low- to moderate-income individuals, and
34 percent were minorities. In addition to helping borrowers
buy their first home, we also want them to stay in their homes.
Our plan calls on FHA to improve its servicing by creating
more flexible loss mitigation processes. We are also working to
get a more diverse base of lenders back into the FHA program;
depository institutions, which represented nearly half of FHA's
lender base in 2010, today represent just 15 percent. To
provide regulatory certainty to lenders so that they will
return to offering FHA loans, we are revising FHA's defect
taxonomy, updating loan level and annual certifications, and
clarifying when HUD and the Justice Department will utilize the
False Claims Act to go after allegations of fraudulent lending.
Another critical piece of our plan is the need to modernize
FHA technology. For decades, FHA has operated on antiquated,
obsolete technology that inhibits its ability to appropriately
manage risk. As part of our proposal, FHA has undertaken a
comprehensive, multi-year modernization effort to bring its IT
infrastructure into the 21st Century.
This is FHA's opportunity to move generations ahead to a
state-of-the-art system that will fully digitize the entire
mortgage process, and align it with industry standards. Our
plan also calls on Congress to eliminate the statutory cap on
the Rental Assistance Demonstration (RAD) program which allows
public housing agencies and owners to leverage private capital
to preserve properties for long-term affordability. Since its
launch in 2012, RAD has proven to be an extraordinary success
story. A report we are releasing this week confirms what we
have long suspected, that RAD is stimulating billions of
dollars in capital investments, improving living conditions for
lower-income residents, and enhancing the financial health of
these critical, affordable housing resources for future
generations.
Madam Chairwoman, housing finance reform is the final piece
of unfinished business remaining from the financial crisis. It
is one of the committee's top priorities, and you have an
Administration committed and prepared to work with Congress to
enact comprehensive legislation. Let's begin that work today,
and Happy Birthday, Mr. Ranking Member.
[The prepared statement of Secretary Carson can be found on
page 74 of the appendix.]
Chairwoman Waters. Thank you very much.
Director Calabria, you are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE MARK A. CALABRIA, DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY
Mr. Calabria. Chairwoman Waters, Ranking Member McHenry,
and distinguished members of the committee, thank you for the
invitation to appear at today's hearing. Chairwoman Waters, let
me also thank you for that kind introduction and welcome to the
committee, as well as thanking you for taking the time to meet
with me very early in my tenure. I found that a productive
meeting, that I hope is the first of many.
Let me also emphasize for the committee, as was mentioned
in my bio, having worked on the staff of the Senate Banking
Committee, I am proud that the last piece of legislation I
worked on for that committee over a decade ago was an update in
modernization of the McKinney-Vento Act, where we expanded
homelessness protections for families. I would also note for
the committee, having been one of the primary staffers on the
Housing and Economic Recovery Act that was the last major
housing finance reform, I will remind the committee that we did
that in a bipartisan way, and we did it in a bicameral way. And
I believe we can do that again today.
Let me emphasize that it is my belief that far too many
Americans today lack what each of us deserves: an affordable
place to call home, whether it is owned or rented. This is a
problem across America in many communities in our country, but
as Secretary Carson pressed upon, it is fundamentally, in many
ways, a local problem.
A fundamental cause of the housing affordability problem
are local policies that make it harder and more expensive to
build new housing. Examples include zoning, land use
restrictions, onerous building codes, and permitting
requirements. These policies disproportionately hurt low-income
families. Our affordability problems, while they can be
addressed here in part, will not be solved until local
governments remove these impediments that limit the supply of
affordable housing in their communities. We should, of course,
applaud those many communities, for example, Minneapolis, that
are upzoning in a responsible manner that will bring more
density, and I recognize that many areas in California are
trying to address this problem as well.
One part of our mortgage finance system can play a role in
this. In fact, all of the parts of our mortgage finance system
can play a role, Fannie and Freddie and the Federal Home Loan
Banks exist to ensure mortgage credit availability throughout
the economic cycle. This mission is critical to supporting
sustainable homeownership, and affordable housing, especially
when the economy is weak and mortgage credit tightens. But in
their current condition, Fannie Mae and Freddie Mac will fail
in a downturn.
As we learned in 2008, when Fannie and Freddie fail,
housing affordability problems get even worse. Together, Fannie
and Freddie own or guarantee $5.6 trillion in single and multi-
family mortgages, nearly half of the market. Yet, until very
recently, they were limited to just $6 billion in allowable
capital. To do the math for you, this--when I walked in the
door, the combined leverage ratio at Fannie and Freddie was
nearly 1,000-to-1.
Last month, Secretary Mnuchin and I agreed to allow the
Enterprises to retain capital of up to $45 billion combined.
This is a significant step forward. Retaining just one
quarter's net worth has improved their leverage ratio by nearly
half. I'm proud to say that in my 6 months, we have doubled the
capital at Fannie and Freddie. But it still stands at nearly
500-to-1. In contrast, our nation's largest banks have an
average leverage ratio of 10-to-1.
Let me put that in perspective. The leverage ratios that we
see at our largest G-SIBs, Fannie and Freddie are leveraged 50
times that. Combined with low capital, credit risk has been
increasing in recent years by the purchases by the Enterprises.
Some risk factors now exceed the levels observed in the years
leading up to the crisis. While average borrower credit scores
are better today, the Enterprises' share of low-down-payment
and high-DTI mortgages are actually higher than they were pre-
crisis.
This procyclical pattern of increasing mortgage risk harms
first-time and low-income borrowers, it makes it easier for
them to become highly leveraged at the top of the cycle, and it
makes it harder for them to keep their home when the cycle
turns. Borrower debt to income is a widely used measure of
ability to pay; it is actually spelled out in Dodd-Frank. It is
adversely impacted in a weak economy when incomes tend to
stagnate or decline, and household debt levels will stay the
same.
Between 2006 and 2008, the Enterprises have nearly doubled
their purchases of loans with debt-to-income ratios greater
than 43 percent, higher than that spelled out in the Qualified
Mortgage rule.
Yes, market wide delinquency serious rates are low today,
but they were low before the crisis last time. They were low in
2004. They were, in fact, low well into 2007-2008. Delinquency
rates today are a function of a strong labor market, and rising
house prices. If these were to turn, the underlying risk in the
system would appear, regardless of loan quality, when there are
defaults when the tide turns. And at the current levels of
capital, let me be absolutely crystal clear, Fannie and Freddie
will fail in a downturn in their current condition. Of course,
it is my objective to get them out of this condition.
Our housing finance system is supposed to serve homeowners
and renters while protecting taxpayers. I believe it has failed
on both accounts. Let me commend my colleagues for coming up
with what I believe are reasonable, thoughtful plans that
present a path out of this. Let me say, these plans are broadly
consistent with my top priorities, which are: first, to cement
FHFA as a world-class regulator so as to ensure Fannie and
Freddie operate in a safe and sound condition; second, to end
the 11-year conservatorships; and third, as required by
statute, to ``foster a competitive, liquid, efficient, and
resilient national mortgage finance system.''
Chairwoman Waters, I share the principles for housing
finance you laid out at the beginning of this Congress. I look
forward to working with this committee as we move forward.
Thank you.
[The prepared statement of Director Calabria can be found
on page 66 of the appendix.]
Chairwoman Waters. Thank you, Director Calabria.
I now recognize myself for 5 minutes for questions.
Director Calabria, you recently announced that you expect to
make a decision very soon about FHFA's proposed capital rule.
This rule would be a key factor in determining whether pricing
of GSE loans will work for a broad base of future homeowners,
or unnecessarily block creditworthy people out of the American
Dream of homeownership. As you know, civil rights advocates and
others have raised concerns that this rule would increase
incentives for Fannie and Freddie to engage in more risk-based
pricing, which would eliminate cross-subsidies that help
minorities and other underserved borrowers obtain mortgages at
affordable rates. There are also concerns that you will require
up to 5 percent capital, which many analysts believe to be too
high.
Will FHA's final rule on capital levels address these
concerns?
Mr. Calabria. Chairwoman, thank you for that question. We
are in the middle of a rulemaking. I hope to be able to
announce within the coming weeks whether we will have to
repropose the rule or not. I very much agree with you. I view
this as perhaps the most important rulemaking that I will
engage in, in my tenure. I think it is incredibly important to
get it right. We have been talking to a number of
constituencies. As you know, there are a number of factors to
balance. I think we are going to try to do our best, and I
think we are getting to a point where this will be balanced. I
feel highly confident that where we will get will maintain
access in affordability but also protect the system.
Chairwoman Waters. Thank you very much. At what level of
capital would you feel that the GSEs are safe to capitalize?
Mr. Calabria. Since we are in the midst of a rulemaking, I
think it is appropriate for me to refrain from giving specific
answers on the rulemaking. Again, we will keep--
Chairwoman Waters. Do you believe that a higher level of
capital would affect the pricing of a mortgage?
Mr. Calabria. I believe that if this happens for all large
financials--let me start again. I believe all large
systemically important financial companies, whether it is
Citibank, or whether it is Fannie Mae, should be well-
capitalized.
Chairwoman Waters. I want you to understand that you have
an obligation to the taxpayers, but you also have an obligation
to ensure broad access to credit for creditworthy borrowers.
Your job requires you to strike an appropriate balance between
these goals; however, based on what I can see from your actions
and comments to date, I am concerned that you are overly
focused on shrinking the GSE's footprint, even if it comes at
the expense of blocking hardworking families out of
homeownership.
So, I would encourage you to thoughtfully consider the
feedback that you are receiving from civil rights advocates and
others about this proposed capital rule, and ensure that these
concerns are addressed in a final rule.
Further, Director Calabria, we met at the very beginning of
your tenure as Director of FHFA. And in that conversation, I
stressed the importance of working to increase homeownership
opportunities for minorities. Sometimes, people conflate
minority homeownership with affordable homeownership, and I
want to be clear that these are two different things. We have
made important strides in opening up affordable homeownership
opportunities, but we still have African-American homeownership
levels at rates lower than when the Fair Housing Act was passed
in 1968, and we have an astonishing racial wealth gap that
reflects this gap in homeownership rates.
Do you agree that FHFA has the responsibility to address
the racial homeownership gap, and not just access to affordable
homeownership generally?
Mr. Calabria. First, let me assure you on your previous
point that we will work with and take in all comments for all
stakeholders, civil rights groups, and others. I can guarantee
you that we will meet with everybody and talk to everybody who
wants to meet with us and do our best to see that those
concerns are addressed. I would emphasize one of the biggest
drivers of the increase in the racial wealth gap during the
crisis was that low-income minority households had higher
leverage ratios going into the crisis and were hurt more in the
downturn.
So, I am committed to making sure we do not see a repeat of
what we went through in 2008, 2009, and 2010. I believe that
was a devastating time for low-income minority communities, and
I am committed to making sure that does not happen on my watch.
Chairwoman Waters. Are you telling me that you have
specific actions that you have taken, and actions that you plan
to take to increase access to homeownership for minority
borrowers?
Mr. Calabria. Let me first emphasize that our emphasis on
homeownership will be on sustainable homeownership. I think it
is critical when we get families into homeownership, that they
are able to stay in homeownership. I don't believe we do
anybody a favor if they just are chairing through and they lose
their house. Foreclosures are devastating--
Chairwoman Waters. Can you use the word, ``minority?''
Mr. Calabria. I can use the word, ``minority,'' but I think
we want to look out for all families, minority people--
Chairwoman Waters. I know you are, but I specifically asked
you about the wealth gap and the problems that we have with
homeownership for minorities. Will you address the word,
``minority?''
Mr. Calabria. If your--
Chairwoman Waters. If it is difficult for you, then I will
yield my time back.
And with that, I will call on the gentleman from North
Carolina, Mr. McHenry, for 5 minutes for questions.
Mr. McHenry. Safety and soundness. Safety and soundness to
our financial system, to the footprint that the three of you
oversee is your primary obligation to us as taxpayers.
Director Calabria, is safety and soundness your primary
obligation?
Mr. Calabria. Correct.
Mr. McHenry. Financial collapse of these institutions on
your watch is nothing that the three of you gentlemen would
seek, I would hope, nor in the interest of American taxpayers.
Let me begin. We have 116 items of reform from the Treasury and
HUD, 116 items. They fall into two different baskets: one that
you can do through administrative action that is within your
right under law that the Congress has written; and the other
requires legislative action. Almost a third of all the
recommendations in the plan were legislative reforms, 18 from
Treasury, and 17 from HUD, from my count.
Given the sheer volume of work that needs to be done to
build a modern housing finance system that the American people
deserve, how important is it that Congress rolls up its sleeves
and legislates here? We will just go across the panel.
Secretary Mnuchin?
Secretary Mnuchin. I think it is very important, and thus,
by far, our first choice.
Secretary Carson. I think it is obviously very important if
we want to be able to have things that are sustained across the
Administration that help the American people.
Mr. Calabria. It's absolutely critical.
Mr. McHenry. Director Calabria, Federal Home Loan Bank
membership was reviewed under Mel Watt's directorship, and
limited. Are you going to seek to have a review of the Federal
Home Loan Bank membership requirements?
Mr. Calabria. We are. Given that there is a large number of
membership questions at different banks dealing with rates and
CDFIs and captive insurers, we decided that we will soon be
doing a request for information on the membership issue writ
large, so we can hear from stakeholders. We can get feedback.
Depending on what comes out of that request for information, we
may or may not do a rulemaking clarifying this, but I think it
is important that we try to solve the membership issue
holistically.
Mr. McHenry. Thank you. Director Calabria, there is a New
York Times piece from September 30th of this year outlining
work done by researchers at the University of Montreal and
Johns Hopkins University about flood risk via the portfolios at
Fannie and Freddie. It outlines that there are some alarming
trends, according to the study, that institutions are passing
off increased flood risk to certain mortgage properties. They
are passing that off to Fannie and Freddie.
Are you familiar with that study?
Mr. Calabria. I have read the underlying study, yes.
Mr. McHenry. Yes. Madam Chairwoman, I ask unanimous consent
to submit for the record The New York Times piece outlining
that study.
Chairwoman Waters. Without objection, it is so ordered.
Mr. McHenry. Thank you.
It is an interesting finding that there is a potential six
$100 billion sets of risks that are pushed off to GSEs from
institutions. You said you are familiar with this. Do you agree
with the premise and/or the conclusion?
Mr. Calabria. While I can probably take some issue with
some of the methodology, I think the overall point of the study
is largely correct and really underlines the importance of
doing effective reform of the National Flood Insurance Program
(NFIP), because I am concerned that if we don't have a
functioning, sustainable NFIP, much of that risk will get sent
to Fannie and Freddie.
Mr. McHenry. Do Fannie and Freddie currently run
assessments of the underlying flood risk for their overall
portfolio?
Mr. Calabria. Not when there is a case if the NFIP is
covering that risk. There is generally an assumption, but this
is something we have started to look at. We are very concerned
about the impact of natural disasters on Fannie and Freddie's
risk profile, especially given the fact that they are 500-to-1
leverage, so even something that goes modestly wrong in the
environment could leave them underwater.
Mr. McHenry. Is there a separate assessment done by Fannie
and Freddie using outside data, or is it only NFIP- and FEMA-
provided data?
Mr. Calabria. If I could follow up with the committee and
get some more actual information on what Fannie and Freddie use
in terms of outside resources, I would be happy to provide that
information.
Mr. McHenry. That would be, I think, useful and helpful so
we understand the risk here if, in fact, there is serious risk.
And what are you doing to ensure that FHA runs these risks,
especially given the question of volatility and the relative
storm sizes that we have had of the last cycle of storms?
Mr. Calabria. We are looking at a lot of the risks. These
happened to be coastal areas. There are many that happen to be
high-priced areas. There tends to be a lot of price volatility
in these areas. We are trying to make sure at this point,
particularly given the leverage at Fannie and Freddie, that
they can withstand any storms that may come.
Mr. McHenry. Thank you.
Chairwoman Waters. The gentlewoman from New York, Ms.
Velazquez, is recognized for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman.
Secretary Carson, last week, your Chief Financial Officer
and your Principal Deputy Assistant Secretary for Community
Planning and Development admitted before Congress that HUD
intentionally missed legally required debt lines that would
have made congressionally appropriated funds available to
Puerto Rico. Let me ask you, where specifically in Federal law
is HUD empowered to unilaterally withhold CDBG-DR funds that
had been appropriated by Congress?
Secretary Carson. As you know, Congress has specifically
mandated that the Secretary of HUD makes sure that funds that
are allocated or provided for certain jurisdictions have the
resources and the capacity to manage them.
Ms. Velazquez. Sir, reclaiming my time, please answer my
question. Your Chief Financial Officer testified before the
Appropriations Subcommittee on Housing that you withheld funds
that were federally appropriated by Congress to Puerto Rico. My
question to you is, where in Federal law you are empowered, HUD
is empowered, to withhold money that was supposed to go to
Puerto Rico?
Secretary Carson. I can't give you chapter and verse, but
it does exist. Congress has specifically said to the Secretary,
you may not issue unless you have--
Ms. Velazquez. Secretary Carson, reclaiming my time, since
you are not going to answer my question.
Secretary Carson. It seemed like an answer to me.
Ms. Velazquez. Reclaiming my time, your staff previously
claimed--
Secretary Carson. Are you looking for an answer or a sound
bite?
Ms. Velazquez. No, no, no, no, no. Let me give you more
background. Your staff previously claimed the agency delayed
grant agreements related to CDBG-DR funds to await an ongoing
audit byt the Office of the Inspector General (OIG). However,
the Inspector General wrote to you in mid-September, and she
stated explicitly, and I quote: ``I did not recommend that the
Department take any specific actions with respect to Vivienda,
including withholding funds delaying finalization of grant
agreements or delaying publishing Federal Register notices.''
So if it was not the Inspector General pushing for this delay,
I wonder if this was politically motivated?
Did anyone at the White House, including the President or
the Chief of Staff, ask you to withhold money that was supposed
to go to Puerto Rico?
Secretary Carson. Interestingly enough, a lot of what we do
is dictated by common sense. If you have a jurisdiction in
which there are three changes of government within a month, and
which has historically had difficulty with financial
management, to put an unprecedented amount of money in there
without the appropriate controls--
Ms. Velazquez. That is not the question here, sir. Your IG
said that they have taken oversight steps in Puerto Rico. You
withheld the money just to Puerto Rico and you know what? The
simple answer to this is the contempt of this Administration
toward the people of Puerto Rico. This is an abuse of power. It
speaks to this Administration's disregard for the people of
Puerto Rico.
Three thousand people died in Puerto Rico under your watch.
And I will ask for your Administration, HUD, to send to
Congress and to this committee every communication related to
Puerto Rico. And you know what, sir? We going to find out what
motivated you to withhold this money for the people of Puerto
Rico. If this was about corruption, as you claimed in the
press, deal with your own corruption when FEMA officials were
arrested in Puerto Rico.
Secretary Carson. We have nothing to hide, so I would be
glad for you to get that information.
Ms. Velazquez. Yes. One way or the other, we going to know
the truth. My next question to you, sir--well, I will yield
back, Madam Chairwoman.
Mr. McHenry. Madam Chairwoman, I query the Chair.
Unparliamentary language when you are accusing somebody
testifying of personal corruption is unbecoming of this
institution, and not appropriate in parliamentary language
before this debate. Members should be admonished to keep their
opinions as opinions, but to accuse a panelist and a Cabinet
Secretary of personal corruption is not becoming.
Ms. Velazquez. No.
Chairwoman Waters. Excuse me?
Ms. Velazquez. Will you yield? I am talking about
corruption, where two officials of FEMA were arrested in Puerto
Rico.
Chairwoman Waters. The time belongs to the gentleman at
this point. Have you finished your point?
Mr. McHenry. Yes.
Chairwoman Waters. The gentleman has finished his point.
Will you yield to the gentlelady from New York?
Mr. McHenry. I am happy to yield.
Ms. Velazquez. Sir, I am referring to two FEMA officials
who were arrested in Puerto Rico, and the excuse that had been
used by this Administration is that they will not let the money
flow to Puerto Rico unless they take steps to make sure that
the money is used with the intended goals. However, the IG of
HUD, in a letter that was sent to the Secretary of HUD, said
that the government of Puerto Rico has complied with everything
that was asked of them. And yet, of the 17 States and
localities that got disaster relief funds, Puerto Rico was the
only one whose money was delayed. Enough is enough. This is
about--
Mr. McHenry. I reclaim my time, Madam Chairwoman. Madam
Chairwoman?
Chairwoman Waters. The time belongs to the Chair. The
gentleman has noted his concerns. They have been responded to
and--
Mr. McHenry. Madam Chairwoman, they have not been responded
to.
Chairwoman Waters. --the gentlelady was referring to the
agency, and if your concern is about language unbecoming a
Member, then you should address that to all of the Members at
any given time. We have all had language that one could
consider unbecoming.
Mr. McHenry. Madam Chairwoman?
Chairwoman Waters. We will move on.
Mr. McHenry. To accuse a Cabinet Secretary of personal
corruption, which is what the gentlelady did, is not becoming
of members of this committee.
Chairwoman Waters. The gentleman is out of order.
The gentleman from Oklahoma, Mr. Lucas, is recognized for 5
minutes.
Mr. McHenry. It is ridiculous.
Mr. Lucas. Secretary Mnuchin, let's return to Treasury's
plan that lays out several conditions to meet before ending the
conservatorship of the GSEs. We have touched on capital
requirements here this morning. I think, in an indirect way, we
have discussed ensuring that there is no market disruption. Can
you expand for a moment on the timeline the Treasury is looking
at to meet these conditions, and to, perhaps, end the
conservatorship?
Secretary Mnuchin. Thank you. It is a pleasure to have a
question on this subject. First of all, I think as we have
addressed, these bipartisan concerns are something that need to
be addressed before we take these entities out of
conservatorship. The first step was, Director Calabria and I
amended an agreement to make sure that the entities could
retain capital. A critical part is to make sure there is proper
capital before we would consider ending conservatorship.
Mr. Lucas. The plan also recommends reforms to protect the
U.S. taxpayer. Could you expand on what reforms are needed to
ensure that shareholders, not taxpayers, bear the losses during
any potential future downturn?
Secretary Mnuchin. I think the first issue is, again, to
make sure we have proper capital, and the second issue is to
make sure that the Director has appropriate reforms and that
there is proper underwriting and proper allocations.
Mr. Lucas. And, again, one more time, you would envision a
time line of this happening--
Secretary Mnuchin. I want to be careful in speculating, but
I would hope that it is over the next 1 to 2 years. And, again,
it could be quicker or longer, depending upon market
circumstances.
Mr. Lucas. Thank you, Secretary.
Secretary Carson, the HUD plan indicates that actions
should be taken to remove barriers to further adoption of
manufactured housing. Like my colleagues here, I am very
sensitive about my constituents too, and manufactured housing
is particularly important in the rural communities that I
represent in Oklahoma.
Can you elaborate on how HUD can move forward in
eliminating those regulatory barriers?
Secretary Carson. Thank you. That has been a subject of
great concern for us. As you know, in rural communities,
particularly, manufactured housing accounts for about 20
percent of all the single-family housing, and yet a lot of the
regulations that have been in place treat manufactured housing
as trailers and double-wides, when, in fact, there has been
tremendous progress made with manufactured housing.
I think at this stage of the game, in many cases, you would
not be able to distinguish manufactured housing from a site-
built home, and they tend to be much more resilient. And,
therefore, it is really an updating that needs to be done and
we have concentrated a lot of effort on that, and are making
extremely good progress. And I think it is one of the areas
where we can make a lot of progress with affordable housing,
because you are talking about things that cost considerably
less than site-built homes.
Mr. Lucas. And for many of my constituents, it is the entry
level housing opportunity.
Secretary Carson. Exactly.
Mr. Lucas. With that, Madam Chairwoman, I yield back the
balance of my time.
Chairwoman Waters. Thank you.
The gentleman from Georgia, Mr. Scott, is recognized for 5
minutes.
Mr. Scott. Director Calabria, following the 2008 financial
crisis, our Financial Services Committee helped enact mortgage
reforms under Dodd-Frank, and I would like to get an
understanding from you of exactly where we are. As I mentioned
earlier in my opening remarks, we are now at the 10-year
anniversary of Dodd-Frank. It doesn't seem like 10 years, but
it is about time we kind of look back and see where we are now
after 10 years in the critical housing area. What is the
current default risk in each of the GSE's portfolios?
Mr. Calabria. First, Congressman Scott, let me say how much
I very strongly agree with you. I think this is an incredibly
appropriate and important time to take a look back. The most
serious delinquency rates for Fannie and Freddie are
respectively 0.67 percent and 0.61 percent. I will note that
these were similar to what they were at the beginning of 2008.
So, again, there is an old adage that the worst loans were made
in the best of times. I think we should keep that in mind
today.
Mr. Scott. Let me ask you, how does that risk compare to
the default risk and the GSE portfolios in the latter stages of
previous economic growth cycles?
Mr. Calabria. Certainly over time, there has been a trend
increase. If one goes back, say, to the 1960s or 1970s, my
recollection is that the default rates were significantly lower
than they were in the last previous cycle. Certainly, the last
cycle was an elevated level of foreclosure, elevated level of
delinquencies; obviously, in the part of all market
participants, but also with the GSEs, and hence, my concern
about if this cycle turns with my concern on whether the GSEs
are ready.
Mr. Scott. It is very good to get your points on this as we
look back after 10 years. Let me follow up with this: There has
been a lot of focus recently on debt-to-income ratio, given the
impending expiration of the QM, or qualitative mortgage patch.
Director, do you feel that the debt-to-interest deal
profile of the DTI profile of the GSEs portfolios, when taken
in isolation, is a good measure for us to determine default
risk?
Mr. Calabria. I would start out recognizing that the debt-
to-income ratio was explicitly mentioned in Dodd-Frank. It is
explicitly mentioned. It is, perhaps, the best measure of
ability to pay, rather than willingness to pay, and so I do
think it is an important factor. I would, of course, be the
first to say that borrower credit and loan to value are
stronger predictors of default, but again, we will note that
Dodd-Frank specifically lists out a set of factors to be
considered within the statute.
Mr. Scott. The very highly respected Urban Institute found,
in a recent study, that borrowers with DTI ratios above 45
percent had higher default rates than those below 45 percent.
Buyers before and during the financial crisis, but--but high-
DTI borrowers have actually had lower default since 2011, as I
am sure you know. With that in mind, is debt-to-income the
right measurement of underwriting quality?
Mr. Calabria. Certainly, with appropriate overlays, I think
you can offset that risk, and if that is where the gentleman is
going, I would certainly be very supportive of Congress
revisiting, having that DTI mandated within the statute. I
certainly think it is past time to re-evaluate the
effectiveness of the Qualified Mortgage rule.
Mr. Scott. Thank you. Secretary Carson, I can't let this
opportunity escape for you to answer us. Do you have, in your
own opinion, a full grasp of the impact of homelessness in this
nation? Do you? And what are you willing to say about it? You
are the person who is at the point of the sphere in our Federal
Government to deal with homelessness.
Secretary Carson. I have had a lot to say about it.
Mr. Scott. Unfortunately, the chairwoman has brought the
hammer down, but I certainly look forward to hearing what you
have to say.
Chairwoman Waters. The witness is requested to provide an
answer in writing for the record.
The gentleman from Florida, Mr. Posey, is recognized for 5
minutes.
Mr. Posey. Thank you very much, Madam Chairwoman, and
Ranking Member McHenry, for holding this hearing today on the
Administration's plans for reforming Fannie Mae and Freddie
Mac. It is an important subject, and I regret that it has
fallen to levels of personally denigrating Secretary Carson,
asking him questions and not allowing him time to answer them.
I and many, Secretary Carson, think you have done an
outstanding job for our country. I have said it before to you,
I don't know why in the world you would take a job with all you
have to lose and nothing to gain. And I know it is for the
betterment of our country and our government and the people and
how the people live in this country and I am eternally grateful
to you. I would like to give you a few moments, if you would
prefer, to respond to the questions that you were not allowed
to answer when they were asked.
Secretary Carson. Yes.
Mr. Posey. You had to be still while they threw some more
insults your way, but if you would like to take time to respond
now, you have that time.
Secretary Carson. Yes. I appreciate that. Obviously, the
reason I took this job is because I feel that our country is in
trouble, and we need to do everything we can to provide the
right kinds of opportunities. HUD, for instance, is an
organization that was largely focused on just getting people
into programs, getting people under roof, and that is not a bad
thing, but I really want to maneuver us to a place where we are
getting people out of programs, and getting people to a level
of self-sufficiency, so we have really aimed at that.
The question that was asked about homelessness, this is a
very serious problem, and one that I think is solvable in our
country. If a place like Tokyo, which has more people than New
York City, can solve homelessness, then certainly we have the
capacity to do so, too. But we really must understand the
reasons behind the homelessness. There is a direct correlation
with the amount of regulatory barriers, home prices, apartment
prices, and homelessness. And we need to be willing to face
that.
We can't solve this problem by just throwing money at it.
We really have to look at the ideology of the problem and deal
with the zoning restrictions, deal with the noise restrictions,
with the density requirements, with all of the many regulatory
barriers that cause the crisis to go where they are. And this
is something that is a problem for Democrats, for Republicans,
for independents, for everybody, and we need to stop making
everything into a political argument, and fussing and fighting
like 3-year-olds and spend time actually sitting down and
talking together.
I looked at the tenets that the chairwoman has placed. They
are exactly the same ones that I agree with, the same ones that
we are working with, and yet we have not been able to sit down
and talk about it. I think we need to be able to discuss these
things. We are intelligent people. We can solve these problems.
Sitting around demonizing each other makes absolutely no sense
whatsoever, and will not result in any progress.
Mr. Posey. Thank you.
You were also--speaking of the word ``demonized''--
demonized for, if I understood the words correctly, making sure
that the money sent was spent as Congress intended for it to
be.
You were cut off before you could explain that.
Secretary Carson. First of all, I would like to explain
that in Puerto Rico, they do have access to $1.5 billion, and
about $2 million of it has been drawn down. So, I don't want
anybody to be under the impression that they are having a
crisis that can't be resolved by utilizing the money that is
already available. Normally, it takes somewhere between a year-
and-a-half to 3 years to spend that much money.
Having said that, the money for unmet needs and mitigation
will be gotten to them as soon as possible in a way that is
safe, with a Federal monitor in place.
And we would do that for virtually anybody. This is the
largest amount of money that has been given to any jurisdiction
in the history of HUD. And I think we have an obligation to the
taxpayers to make sure that it is properly utilized to impact,
in a positive way, the people of Puerto Rico.
Mr. Posey. Secretary Carson, do we have your assurance that
we are doing everything humanly possible, through your agency,
to assist the people in Puerto Rico?
Secretary Carson. Absolutely. And that is one of our
highest priorities.
Mr. Posey. Thank you, sir.
Chairwoman Waters. The gentleman from Missouri, Mr.
Cleaver, who is also the Chair of our Subcommittee on National
Security, International Development and Monetary Policy, is
recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman.
I, actually, am deviating from the affordable housing
issue, because I have two people here--and I would like to deal
with the Opportunity Zones and housing, because I have the
Treasury Secretary and the HUD Secretary.
But because of what we have on our agenda tomorrow, an
examination of Facebook, I am going to deviate a bit. Secretary
Mnuchin, thank you for the response to my letter. And I thank
you for proactively probing the issue of Libra. And I want to
lift just a little section of your letter and ask for a little
bit more on it.
Your letter says FSOC's working group on digital assets is,
``monitoring the development related to the Libra project, is
working to identify and assess potential risks and gaps in
authorities that may require more attention.''
Can you go just a little further on that, Mr. Secretary?
Secretary Mnuchin. Yes, absolutely. And, first of all,
thank you for your interest in this subject. I do understand
the diversion. It is an important subject. And we spent a lot
of time on this, and we look forward to working with you.
I have met multiple times with the representatives of
Facebook. We have told them that we thought that their launch
was premature, that they had not addressed fundamental issues
around money laundering, BSA requirements, and other. We have
set up a subcommittee of FSOC not just to address this, but to
address other crypto assets, and make sure we have the proper
regulatory. We are working on an intra-agency basis, I think,
very effectively. I also concluded meetings last Thursday and
Friday in D.C. with our International Central Bank governors
and finance ministers. This is a discussion that is going on at
the G-20, the G-7, and FSB as well.
Mr. Cleaver. Thank you.
Is the FSOC working group going to assess systemic risk and
apply whatever appropriate regulations are needed?
Secretary Mnuchin. Yes. That will be one of the issues,
amongst many, that we will look at.
Mr. Cleaver. Okay. Your letter implies that the financial
institutions participating in the Libra network may be an
avenue through which FSOC regulates Libra.
Is my interpretation correct?
Secretary Mnuchin. That is correct.
Mr. Cleaver. Do you think that financial regulators have
sufficient tools now to confront the potential systemic risk
associated with Libra?
I don't want to be Cro-Magnon man or troglodytic, but this
kind of frightens me, this whole issue with Libra. It is
unclear whether U.S. and foreign regulators will have the
ability to monitor the Libra market and require corrective
actions, if necessary.
Secretary Mnuchin. I think right now in the United States,
we do have the proper tools. But if we need more tools, we will
come back to Congress.
My concern is more internationally, and we are working
through the international organizations to make sure that they
have the similar standards that we use within the United States
to combat terrorist financing.
Mr. Cleaver. Okay. Mr. Secretary, I was excited about the
Opportunity Zones. I still am semi-optimistic and excited. But
the response has not been what I thought it would be. And it
seemed to me that it was perfect for housing because of the 10-
year period when we are talking about capital gains tax being
forgiven. But it is just not turning out--the activity is not
turning out at a level that I had anticipated. And I don't know
what the national picture looks like, but can you address--is
there a need to tweak it, or what do we need to do to get a
greater response?
Secretary Carson. I think one of the things that will be
helpful is for us to make known to individuals what is actually
happening. You look at some of the projects that are going on
in Miami. In your own area, there is a very nice project going
on across the country, and we are in the process of putting
together, on the website, information so that that can be
disseminated.
Mr. Cleaver. Thank you.
Madam Chairwoman, I ask unanimous consent to insert this
letter from the Secretary into the record.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Cleaver. Thank you.
I yield back.
The gentleman from Missouri, Mr. Luetkemeyer, is recognized
for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
And welcome, panel.
I would like to start with Secretary Mnuchin.
Mr. Secretary, last week, I sent you a letter--I hope that
you were able to receive that--with a group of 28 bipartisan
Members of Congress urging you to request a CECLstudy from the
Office of Financial Research (OFR). The letter outlines the
statutory requirements of FSOC (the Financial Stability
Oversight Council) and OFR, which is to examine issues that
could affect financial stability.
I have discussed this with many members of FSOC. They tell
me they are supportive of that position. Every Federal agency
would do a study, and in order to be able to issue a ruling, it
is required by the Administrative Procedures Act, and yet FASB
has not done that.
To me, this particular accounting standard is probably the
seminal issue of this committee, I think, for this next several
months from the standpoint of what it could do, I believe, to
the economy, the housing industry.
I guess my question to you this morning is, have you
received the letter, and are you willing to ask OFR for a
study?
Secretary Mnuchin. Thank you. I have received your letter.
I appreciate your interest in this subject. It is an important
subject. We have talked about this subject several times at
FSOC. There are certain delays in implementation. And I will be
discussing your request at the next FSOC meeting to see if the
committee thinks we should do this, as you have said. But thank
you for your interest.
Mr. Luetkemeyer. I appreciate that. To me, again, I think
this is an enormous issue. I think it is going to affect these
other two gentlemen here in the way they manage their agencies.
Secretary Carson, you stated a while ago that 57 percent of
the loans that FHA has are low- to moderate-income; is that
correct?
Secretary Carson. Yes.
Mr. Luetkemeyer. What is the total percentage of loans--out
of the loans that are all made this year, what is the
percentage that FHA would be involved with?
Secretary Carson. The total percentage of loans that FHA is
involved with, did you ask?
Mr. Luetkemeyer. Of the total loans made this year, what
percentage would the FHA be involved with? So if there are 100
loans made this year, how many loans would be FHA-involved?
Secretary Carson. I think I would maybe see if Director
Calabria might have the answer to that.
Mr. Calabria. I don't have the number in front of me, but
my recollection of the market share, certainly the first-time
buyer market, particularly FHA, I think is close to half, 40 to
50 percent. They are probably about a third of the overall
market, is my recollection. Of course, we can get the data for
you.
Mr. Luetkemeyer. Mr. Calabria, what is the percentage of
low- to moderate-income for you?
Mr. Calabria. First of all, I think if you want the bigger
picture, you combine Fannie and Freddie and FHA, you are
getting between 80 and 90 percent. And this is really a point
that I would emphasize that is different from pre-crisis.
Almost all of the mortgage risk in the market today is being
backed either directly or indirectly by the taxpayer. And let
me emphasize, I don't believe the taxpayer has ever been more
exposed to the mortgage market at any other time in American
history than they are today.
Mr. Luetkemeyer. Okay. My question, though, is on low- and
moderate-income. Do you have a percentage--85 to 90 percent of
the market is through you two individuals and your agencies.
What percentage of the--Secretary Carson said, well, 57
percent. What do you think the total would be?
Secretary Carson. 34 percent of what we do is for
minorities. And as was mentioned before, low- and moderate-
income, about 57 percent.
Mr. Luetkemeyer. Okay. Would that be the totality, then, of
what you are looking at, Mr. Calabria, for your agency as well?
Mr. Calabria. Yes, although I will certainly emphasize that
the footprint in low- and moderate-income minorities is much
higher in FHA than it is for Fannie and Freddie.
Mr. Luetkemeyer. Okay. What is the source of revenue--what
is the source of income for Fannie and Freddie, g-funds?
Mr. Calabria. Primarily, g-fees with some modest portfolio
earnings. They engage in portfolio activities where, of course,
they will sell debt, buy assets, and earn interest on that.
Mr. Luetkemeyer. Secretary Carson?
Secretary Carson. Our money comes from the financial
activity, the loans that are made, the fees that are collected.
Mr. Luetkemeyer. So if you have to increase your capital,
if you have to increase your ability, especially Mr. Calabria's
position here, and Secretary Carson as well, I guess--have to
increase your position to be able to absorb losses, as we just
said, is 500-to-1--in my world, when I was a banker, I would go
apoplectic as an examiner. This can't happen.
If your only revenue source is g-fees or loan fees, it
would seem to me that you have to raise those fees in order to
be able to handle the additional reserves it is going to take
to handle this. Is that correct?
Secretary Carson. I was just going to say, of the entire
market, FHA is not 50 percent. It is like 14, 15, 16 percent.
Mr. Luetkemeyer. Okay. My question, though, is for Mr.
Calabria. You are going to have to raise g-fees, in my mind, to
be able to raise your capital, is that correct?
Mr. Calabria. I will emphasize that we have been setting g-
fees in the past based on, if you will, shadow an amount of
capital under--
Mr. Luetkemeyer. Thank you.
Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
is recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman.
I would like to actually pick up on this as a question of
setting the g-fees and the profits we have been--where it goes.
Now, prior to the changes that you are in the process of
making for the profits sweep, where did the profits end up?
Mr. Calabria. They were swept to Treasury.
Mr. Foster. So, the U.S. taxpayer got the benefit of those.
Now, after you make the changes, whose pocket does it end up in
at that point?
Mr. Calabria. It builds capital at the GSEs.
Mr. Foster. It is the shareholders of the GSEs that retain
that?
Mr. Calabria. No. It builds capital at the GSEs to protect
the taxpayer, in case the GSEs become insolvent.
Mr. Foster. And the shareholders of the GSEs will then be
able to sell those--
Mr. Calabria. I will note the obligation, so in the letter
agreement that we recently signed, there was an increase of
Treasury's liquidity preference at the same time that there was
an increase in capital. So the taxpayer is being protected
here.
Mr. Foster. But where do the profits--I mean, the GSEs are
very profitable. And depending on where you set the g-fees,
what the mortgage standards that you eventually settle with,
that will have a huge effect on their profitability. And so you
will be in complete control of the profitability of the
successor GSEs or any new competitors as you privatize the
business.
Mr. Calabria. First, let me emphasize, by statute, they
already are private shareholder corporate entities, so there is
no privatization. They already are private. That is what the
law says. I am following the instructions that are given me, by
Congress, to get them out of conservatorship. That is what the
law says. That is what we are doing.
Mr. Foster. Okay. But now when they failed--we all have to
recognize that these would not exist had the taxpayer not
bailed them out during the crisis. And during a comparable
crisis in the future, these entities, or any comparable new
entities that you are contemplating, will be bailed out simply
because you can't let the housing market implode in a
comparable situation, correct?
Mr. Calabria. Correct, which is why it is important to have
strong capital.
Mr. Foster. Right. And it is also why the government has to
figure out how to charge how much for this guarantee?
Mr. Calabria. Congressman, let me assure you, I believe in
the amount of time it would take us to build sufficient capital
to get out, that this body will have significant time to be
able to legislate a different path forward, if you so choose.
Mr. Foster. Okay. My difficulty is that your decision to do
this and other decisions you are making is having a huge effect
on the share prices at which they are traded.
Now, let's talk a little bit about those shares. It was
well-documented in the Senate's permanent subcommittee
investigation that hedge funds, such as Paulson and Company,
designed CDOs and other securitized products to fail and that
these same hedge funds then blocked shares in the zombie GSEs
for pennies on the dollar after the government had bailed out
Fannie and Freddie. And what's more, some of those principals
at those hedge funds, including John Paulson, have served on
advisory committees to the President on this very issue.
My question is, I guess, to Secretary Mnuchin, what sort of
conflict of interest vetting took place to conclude that that
was appropriate?
Secretary Mnuchin. First, let me just explain that the
Treasury has a giant obligation that needs to be paid back.
Mr. Foster. I just want you to describe the conflict of
interest vetting.
Secretary Mnuchin. I understand. But you are saying a
premise that these shareholders are getting a benefit of a
sweep and--
Mr. Foster. Has the trading share price gone up?
Secretary Mnuchin. I don't really look at the share price
one way or another.
Mr. Foster. All right. Could you get back to us on that in
case you are unaware of it?
Secretary Mnuchin. As it relates to any conflicts of
interest at Treasury, we have full--
Mr. Foster. Okay. To the entire Administration and everyone
who is making the decisions about the shareholder sweep, I
guess that applies, too.
Director Calabria, do you have anything to say about that?
Mr. Calabria. Let me first say I very much am on the record
over the years in saying in 2008, what we should have done is
wiped out the shareholders.
Mr. Foster. I agree completely. But that should be your
guiding principle going forward instead of putting more money
in their pockets.
Mr. Calabria. If the circumstances present themselves to
where we have to wipe out the shareholders, we will.
Mr. Foster. I look forward to that.
However, I was concerned that on October 10th, you
participated in an event at George Mason University where you
commented that FHFA was looking at ways for Fannie and Freddie
to increase their return on equity, which would presumably
increase the amount that was eventually going into the
shareholders' pockets.
It is completely unclear to me who you are actually working
for here, when you make that kind of statement.
Mr. Calabria. I am working for the taxpayer, sir.
Mr. Foster. Then why are you concerned about the return on
equity--
Mr. Calabria. Because we need to build--
Mr. Foster. --which ends up in the shareholders' pockets?
Mr. Calabria. Because these entities are leveraged 500-to-
1. It is essential to build capital now before a downturn.
Mr. Foster. If you aren't planning on privatizing them.
Really, I agree completely that we should have and that we
should still wipe out these shareholders, and I look forward to
working with you on that.
Thank you. I yield back.
Chairwoman Waters. The gentleman from Michigan, Mr.
Huizenga, is recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman.
Mr. Calabria, I just wanted to make sure that you were able
to wrap up what your thoughts were on the g-fees that sort of
extended over the last two questionings.
Mr. Calabria. Thank you, Congressman.
I would really emphasize, and I certainly hope that we
never see another downturn to the housing market, but I believe
it is my responsibility as a financial regulator to hope for
the best, but plan for the worst, and having witnessed the
devastation that this impacts on families and communities, that
I think it is absolutely critical to get Fannie and Freddie in
a condition where they can survive a downturn. And that
requires building capital as soon as possible.
Mr. Huizenga. Okay. So, FHA has sort of attempted to grow
its way out of some of the fiscal problems and displaced
private capital, and has expanded, really, taxpayer risk,
correct?
Secretary Carson or Director Calabria?
Secretary Carson. We are not trying to necessarily grow our
way out of risk. FHA really acts sort of as an accordion to
make capital available and credit available in times of
economic distress.
Mr. Huizenga. So it should be countercyclical?
Secretary Carson. Yes.
Mr. Huizenga. Okay. But I think we are not seeing that
right now, are we?
Secretary Carson. I think we are. I think at the time of
the height of the crisis, FHA expanded enormously.
Mr. Huizenga. Sure, yes. I wholeheartedly agree with that.
What I am concerned about is how do we make sure we get
private risk back into the system? That is what I am really
trying to drive at.
Secretary Carson. Yes, and one of the things that you
probably noticed in our plan is maybe having some tiered-risk
type phenomena whereby we make the contracts based on the risk
factors that are involved, rather than just having a one-size-
fits-all model.
Mr. Huizenga. I am puzzled by some of my colleagues who
seem to think that we ought to declare everybody has a 720 FICO
score and that we should treat all debt and all mortgages the
same, and there shouldn't be any sort of risk analysis, yet we
are going to castigate you for having risk in there. And it
sounds like a have-your-cake-and-eat-it-too kind of a scenario
in many ways.
And I guess that is what I am trying to drive at, is what
are the key components of a market infrastructure that need to
be in place to incent that additional private capital to enter
into the marketplace?
Director Calabria?
Mr. Calabria. If I could make a point--and I really want to
emphasize that I think the important question that Congressman
Scott asked for QM, part of this is getting the rest of the
regulatory playing field level. So, A, getting to a Qualified
Mortgage rule that works for all lenders. I think it is also
important that the SEC gets to a reg AB that works for
securitization.
And so, part of the reason that so much of the risk has
gone to Fannie and Freddie and FHA is that Fannie and Freddie
and FHA have been exempted from so many of the rules that all
other market participants have to live under. I think it is
critical that we get to a level playing field where smaller
entities, or any entities across the spectrum, can all compete
in a level, fair playing field.
Mr. Huizenga. And that takes greater standardization,
correct?
Mr. Calabria. Correct.
Mr. Huizenga. Okay. I am going to quickly--I have about a
minute-and-a-half here.
Director Calabria, you have said many times your agency
needs to be not only a conservator, but a regulator. And just
how can you accelerate those goals here in the next--because I
am worried--number of areas that Fannie and Freddie are
actively engaged in activities, not necessarily served by the
primary mortgage market and not consistent with what
congressional charters have laid out?
Mr. Calabria. Thank you, Congressman. Really, really great
question.
Let me emphasize, historically the agency within
conservatorship has used conservatorship as a substitute for
regulation. One of the things that we are doing is going
through, for instance, the directives that have been issued in
conservatorship, in thinking about what we need to be able to
do in supervision. We are very close to reviewing and examining
the supervision team. If we need to bring on more resources, we
will bring on more resources. But we need to be able to
strengthen the supervision of the regulatory function at Fannie
and Freddie before they get out of conservatorship.
Mr. Huizenga. And so, it is a natural time to do that
review?
Mr. Calabria. Absolutely.
Mr. Huizenga. Okay. One last thing here in my remaining 30
seconds, just about GSE multifamily lending that Fannie has
been very involved in, this DUS lender model, which is a risk
retention model. And I believe you have some rules that have
been proposed, so I am not expecting answers on that.
But I am curious, what economic analysis did FHA perform to
justify the capital requirements?
Mr. Calabria. There is, as you mentioned, a part of the
capital rule that applies to the GSE's multifamily business,
and we are closely looking at that as we make final decisions
moving forward on what we should do on the capital rule. But as
you have noted, since we are in rulemaking, I can't go into
detail on that today.
Mr. Huizenga. All right. Thank you. I yield back.
Chairwoman Waters. I would like to announce that I intend
to adjourn this hearing shortly after votes are called on the
Floor. That will likely occur around 1:15 today.
The gentlewoman from Ohio, Mrs. Beatty, who is also the
Chair of our Subcommittee on Diversity and Inclusion, is
recognized for 5 minutes.
Secretary Carson. Madam Chairwoman, I request a 5-minute
break.
Chairwoman Waters. You are excused for 5 minutes.
We will recess for 5 minutes.
[brief recess]
Chairwoman Waters. The committee will come to order.
The gentlewoman from Ohio, Mrs. Beatty, who is also the
Chair of our Subcommittee on Diversity and Inclusion, is
recognized for 5 minutes.
Mrs. Beatty. Thank you, Madam Chairwoman, thank you,
ranking member, and thank you to the three witnesses today.
Madam Chairwoman, let me start by saying, I don't know why
any of my colleagues on the other side of the aisle or any of
our witnesses or panelists here today are shocked by the title
of this hearing.
First, let me say, if I could, affordable housing advocates
have broadly criticized your plans to overhaul the housing
finance system, especially the proposal to get rid of
affordable housing.
Also, if I look at the statements that you have made,
starting with you, Mr. Director, that too many Americans lack
what each of us deserve, an affordable place to call home,
whether it is rented or owned. The national problem that exists
in communities across the country is affordable housing.
You then further say, our housing finance system is
supposed to serve homeowners and renters while protecting
taxpayers. Currently, it fails on both counts.
This Administration says the plan will not raise costs of
homeownership or decrease access, but affordable housing
experts disagree with that.
Secretary Carson, you said far too many Americans who seek
reasonably priced rental units or sustainable homeownership
still cannot get their foot in the door. You further say, many
of our nurses, construction workers, police, et cetera, et
cetera, simply can't afford to live around the communities they
serve.
So you will have to forgive me for taking the side of
affordable housing advocates and experts over the words of this
Administration, which has continuously asked to slash the
budget of affordable housing by more than almost 20 percent
every year since coming into office.
Secretary Carson, when the three of you were on the panel
in the Senate, you stated that you do not believe these plans
will increase costs of homeownership or decrease access to
mortgage credit. I can't accept this belief. Because as I have
said before, I have dozens of organizations who have called my
office saying this will do the exact opposite of what you
believe, and will actually raise costs of homeownership and
make it more difficult for creditworthy borrowers to unlock the
American Dream of homeownership.
What analytical data do you have, Secretary Carson? What
studies, cost-benefit analysis, to back up these beliefs? And
have you run any other kind of empirical analysis on the impact
of U.S. mortgage market and the U.S. consumer based on the
reports?
Secretary Carson. Okay. Which specific aspect are you
talking about? Which studies are you looking for?
Mrs. Beatty. In the studies that you all presented to the
U.S. Senate, there were documents in response to President
Trump about your housing proposed plan.
Secretary Carson. I can tell you that the proposals that we
are advocating for are to increase the ability, particularly of
underserved communities, to be able to have housing.
Mrs. Beatty. And let me reclaim my time. I guess what I
want to hear is, not your beliefs or not what you feel. What
did you base it on? Empirical data, analysis? Talk to me in a
way that this is why we are doing it, because this is what the
reports, this is what the data shows. It is the same thing,
that the people were saying the opposite. They come into my
district, my office, and they give me data showing that we have
a real problem here, and thus the reason for the title.
Secretary Carson. The National Association of Home
Builders, for instance, has data demonstrating that the cost of
a single-family house, a new one, has had a 25 to 27 percent
increase.
Mrs. Beatty. Let me ask you this, only because--and I want
others to jump in--the Federal Housing Administration is
responsible, as you probably know, or should know, for nearly
half of all of the mortgages accessed by African Americans and
Hispanics.
Are you recommending moving forward with plans to overhaul
this agency and its functions without empirical data?
Secretary Carson. We have plenty of empirical data. We are
happy to supply that to you. But the point being, one of the
reasons that there is a big wealth gap is because of housing.
And we are looking--
Mrs. Beatty. Do you have a plan that you can submit to me?
Because my time is going to run out.
Let me ask you a last question. Is this plan calling for
GSEs to get out of the business of low-down-payment loans? Yes
or no? All three of you, quickly.
Secretary Carson. We are.
Mrs. Beatty. Yes or no. Just yes or no. My time is
clicking. Come on.
Secretary Carson. I can't answer it yes or no.
Mrs. Beatty. How about you, Secretary Mnuchin?
Secretary Mnuchin. That is a decision of the Director. I
don't supervise him.
Mrs. Beatty. And he refuses to answer or doesn't have an
answer.
Thank you. I'm sorry. My time is up.
Chairwoman Waters. The gentleman from Ohio, Mr. Stivers, is
recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman.
And I want to thank you for holding this hearing. We are,
as I said in my opening statement, 11 years into the
conservatorship of Fannie Mae and Freddie Mac. We have seen
reform proposals from the House, from the Senate, from
Republicans, and from Democrats, and I think it is time that we
try to do some bipartisan work together.
I want to ask the witnesses a few questions. Have all of
you had a chance to see Chairwoman Waters' housing finance
reforms principles? A couple of you have commented that you
already support them.
Secretary Mnuchin. Yes, we do support them.
Mr. Stivers. You are the only one who hadn't said, Mr.
Secretary, so thank you.
All three of you, can you just affirmatively tell me that
you actually are okay with the principles that the Chair has
put out?
Secretary Carson. Very much so.
Mr. Calabria. Yes.
Mr. Stivers. Thank you. So, all three of you have said you
are okay with the principles that the Chair has put out. And,
again, from your written testimony and what I have seen of your
previous comments, do all three of you prefer a congressionally
worked-out, bipartisan housing finance reform proposal to
administrative action?
Secretary Mnuchin. That is correct.
Mr. Stivers. Can you all three comment?
Secretary Carson. Yes. Obviously, as I said earlier, if we
have something that is worked out on a bipartisan basis and--
Mr. Stivers. That was my question, yes, bipartisan.
Secretary Carson. And since we agree on the basic
principles, that should be possible if you take the politics
out of it.
Mr. Stivers. That is where I am trying to go.
Director Calabria?
Mr. Calabria. Let me say yes. And also, I don't envision
myself doing anything administratively other than carrying out
the law as it is written today.
Mr. Stivers. Thank you, Director.
Would the three of you and your teams be willing to work in
a bipartisan working group on housing reform, with Republicans
and Democrats from this committee?
Secretary Carson. Absolutely.
Secretary Mnuchin. Not only would we be willing to, we want
to, both across the House and the Senate, so we can get
legislation to the President to sign.
Mr. Calabria. We would be delighted to.
Mr. Stivers. Thank you. So in 2 minutes, we have
established that, frankly, you all three agree with the
principles that the chairwoman has laid out on housing finance
reform--I also don't have any problem with the principles--and
that you prefer congressional action, and that you are willing
to work with us.
I know that is going to make some of the skeptics around
town feel like it is not true. But I think really we agree on
more than we disagree on. We all want to look out for housing
availability and affordability, and we all want to protect the
taxpayers, whether that is Republicans or Democrats. Regardless
of where we are from, we bring our own unique perspectives
based on the geography we represent, and the people we
represent, and those economic and housing conditions.
But I do believe that we can work together to make
meaningful bipartisan reforms of our housing finance system.
And this is the only piece is that left undone from the crisis.
We have an obligation to the citizens of the United States to
work in a bipartisan, bicameral basis with the Administration
to actually try to come up with things.
Like I said, I think the chairwoman's principles are
acceptable to me. I am willing to start there and work.
And I would ask the chairwoman to please take this offering
of trying to work together, and let's see if we can't do
something, because it is time to make something happen.
Not only are taxpayers on the hook right now, but we aren't
doing everything we can do to make affordable housing work for
people and take away the differences between populations. I
know that there is, in some minority communities, including the
African-American community, a lower percentage of homeownership
than I want, than you want, and than I think these witnesses
want.
I think we can and should try to work together. And I am
hopeful that we can, and I am going to roll up my sleeves as
the ranking member on the Housing and Insurance Subcommittee--I
know there is a lot more than in the name, but let's focus on
the housing piece--and let's try to make something happen. And
I want to work with the three of you and your teams and the
Chair and Republicans and Democrats.
And I appreciate you being here today. I know there are,
sometimes, tough questions, but I know the three of you believe
in making the housing system and the housing finance system in
the United States the best in the world, the most affordable
and available in the world for the American Dream. And I want
to work with you and the members of this committee, Republicans
and Democrats, to make that happen.
Thank you for your commitment, and thank you for your
willingness to do that.
I yield back the balance of my time.
Chairwoman Waters. Thank you. The gentleman yields back.
The gentleman from California, Mr. Vargas, is recognized
for 5 minutes.
Mr. Vargas. Welcome. And again, thank you very much, Madam
Chairwoman, for this hearing.
I do want to again thank the gentleman for his words there.
I think that they were very appropriate. Thank you.
I do have to say, though, we do have a little bit of short
memories around here. I do recall to the ranking member, it
might be instructive if we go back and take a look at the
record of some of the comments that were made in previous years
about the Director of the CFPB from your side of the aisle and
to take a look at the words that were said and just to make it
even on both sides. I think that would be--
Mr. McHenry. And if the gentleman will yield, I think that
is a fair analysis, a fair and level-headed analysis, something
that we should all note, including me, and I thank you for
raising that.
Mr. Vargas. Thank you.
And then I would like to ask, talking about both sides, it
is interesting--I get to walk a lot of precincts, and talk to a
lot of people. And the American Dream is still the same, most
people want a safe place for themselves, and for their family.
They want their kids to do a little bit better than they did.
And most people want to own a home.
I think that is changing in California, the type of home.
Not a single-family detached home, but now an attached product,
especially millennials, they are looking at different types of
living arrangements. I think that is all very appropriate. But
it is still the same. They want a place of their own.
And they also don't understand why, when things get a
little rough and tough in the economy, and they have a hard
time paying for their home, they don't get bailed out and the
big banks do. Why don't they get the help that the banks got?
And they don't think that's fair.
To that point, I am not confident that the administrative
changes that you want to make here are fair.
Director, I do want to ask you directly this, if I could
read it, and if you could comment about it. You talked a little
bit about it already.
But this is with regard to your appearance on CNBC. You
mentioned companies' common shareholders is the GSEs and a part
of the discussion now underway, a comment that took place while
they were surprised, I guess, by what you said. And this is
what I would like you to comment on. ``Director Calabria's
comments on CNBC on the sidelines of a major industry gathering
were somewhat rushed as he tried to explain the nuances behind
the notion of public offering for companies that already have
shares outstanding. Holders of the common shares were never
wiped out. Whether we can do some kind of conversion with
preferreds or whether they would get par, it is way too early
to figure that out. As a reminder, the plan that rushed Fannie
and Freddie into conservatorship, as the financial system,
melted down in 2008, and subsequent amendments gave the
Treasury Department warrants representing about 8 percent of
each enterprise payable as senior preferred shares.''
In other words, they are concerned about who is going to
get bailed out, once again. And that is my concern, too.
Could you comment on that? And I will give you some time to
comment on that.
Mr. Calabria. Thank you, Congressman.
And let me very strongly, forcibly say I agree with you.
None of this is unfair. I would have preferred to have
inherited a fair situation when I walked in the door. I
inherited a mess.
My responsibility under the statute is to fix Fannie and
Freddie. You have two options in conservatorship: You either
fix them, get them out, or you take them into receivership. The
option of endless limbo is not an option under the statute.
I would prefer that I had a fair situation to enforce. I
believe Fannie Mae and Freddie Mac got bailed out and
homeowners did not. That pisses me off to this day. Just as I
am mad about all of the other bailouts. And I am committing to
you today that my number one objective is to see that we never,
ever have to bail Fannie and Freddie out again.
Mr. Vargas. I would also caution you, though, that Fannie
and Freddie, the GSEs, have allowed many people to own homes
who would not have had homes before.
If you look around the world, the 30-year mortgage with the
fairly low down payment is what has allowed a lot of Americans
to own homes. And it is not around the world. Every country
doesn't have them. In fact, it is very unique almost to our
country. And I hope we don't destroy that in the process.
I do want to give the Secretaries an opportunity to comment
on that if they wish.
Secretary Mnuchin. First of all, you have my commitment--I
have been around the housing market for 35 years, and I can
assure you, I very much support the 30-year market and want to
make sure we do this.
But I would also just comment on your previous issue. We
have made no decision as to whether they would exit by
conservatorship on receivership. And I would just comment that
I represent the largest creditor, which is the U.S. Government,
and we would need to be a part of any decision.
So, again, we are focused on how to make them safe and
sound and recapitalize them, and then we can figure out the
process of raising exterior capital.
Secretary Carson. I, too, am very much against the whole
bailout issue and the too-big-to-fail issue, which is why a lot
of this revision is being done. But also recognize the
importance of the American Dream and people wanting to be able
to own a home.
Mr. Vargas. Thank you.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman.
And the title of today's hearing is revealing. The title
is, ``The End of Affordable Housing? A Review of the Trump
Administration's Plans to Change Housing Finance in America.''
While this suggests that my friends on the other side of
the aisle believe that any effort by the Administration to
reform housing finance will increase housing prices and
disadvantage low- and middle-income borrowers, in reality, the
proposals set forth by the Administration lay the groundwork to
protect taxpayers, retain the 30-year mortgage, improve
efficiencies in the mortgage market, and lower prices for
qualified borrowers.
By pushing back against common-sense reforms to housing
finance, the Democrats are endangering the very low- and
middle-income citizens they claim they want to protect.
Unreformed GSEs will lure Americans to buy homes beyond their
means and then default, with foreclosure as the result. That is
not helping low-income Americans at all.
We have seen this train wreck before.
Democrats' opposition to meaningful housing finance reform
will take us right back to where we were prior to the financial
crisis. For years, the government's policy was to drive up
mortgage indebtedness above what the market could naturally
sustain.
For example, let's rewind the tape back in 2003, when this
committee held a hearing on ways to improve regulatory
oversight of the GSEs. And during that hearing, then-Ranking
Member Barney Frank said this: ``I think it is clear that
Fannie and Freddie are sufficiently secure so they are in no
great danger.'' He continued, ``Fannie Mae and Freddie Mac do
very good work, and they are not endangering the fiscal health
of this country.''
Well, how wrong he was. Let's not let this conversation
about housing finance reform end the same way. It is alarming
that the Enterprises' shares of low-down-payment and high debt-
to-income mortgages are now higher than before the financial
crisis.
But I would suggest that what is even more alarming is that
the Democrat Majority today is defending this state of affairs.
George Santayana said, ``Those who cannot remember the past are
condemned to repeat it.''
The Administration's proposals seek to place our housing
finance system on a stable, sustainable path and protect us
from another housing crisis, and I applaud our panel for their
leadership.
Now, my first question I want to ask relates to the credit
risk transfer issue to Secretary Mnuchin.
The Treasury report calls on the GSEs to continue to engage
in a diverse mix of economically sensible credit risk
transfers, including by increasing reliance on institution-
level capital. Unfortunately, current capital rules hinder
banks' willingness to take on more credit risk from the GSEs.
Bank capital rules based on Basel III simplified structured
finance approach are grossly misaligned with GSE credit risk.
The SSFA was intended to cover all lending, including unsecured
debt, as Basel III was trying to make sure that banks are not
making unsecured subprime loans.
However, the Enterprises make secured prime loans and thus
capital charges can be as high as 5 times what banks expect to
lose in the worst of recessions. With capital charges like
that, it does not often make economic sense for banks to take
on more risk from the GSEs despite their desire to do so.
Secretary Mnuchin, do you agree that international capital
rules adversely affect our private banks' willingness to take
on credit risk from the GSEs? And will you commit to working
with the bank regulators on FSOC to explore ways to better
tailor capital rules so that the private sector may assume more
credit risk from the taxpayers?
Secretary Mnuchin. Yes, and yes.
Mr. Barr. Thank you.
Secretary Carson, private mortgage insurance (PMI), can
help borrowers with small down payments and help them prudently
get into houses and stay there without putting the taxpayers at
risk.
What role does your plan contemplate shifting some of the
risk from the FHA to private mortgage insurers?
Secretary Carson. We very much want private mortgage
insurers to become a significant part, particularly after the
GSEs exit conservatorship; particularly in smaller communities
and in rural communities, they can play a very substantial
role. And we are looking at ways to make it even easier for
them.
Mr. Barr. I appreciate that. I think PMI is a good solution
for both affordability and for protecting the taxpayer.
Finally, Director Calabria, private label securitization.
What is, in your mind, the ideal proportion of mortgages held
by GSEs and FHA versus portfolio lending and private label?
Mr. Calabria. I do think we need to see more diverse
sources of capital. At least when I studied economics, I
learned that duopolies and monopolies were not good for
consumers. And I think bringing in more competition to this is
critical.
I don't want to say there is an exact percentage, but I
think there needs to be a wide range of sources of capital.
Mr. Barr. I think leveling the playing field on regulations
to encourage more portfolio lending and more private
securitization is the right way to go, and I applaud you for
moving in that direction.
Mr. Calabria. Absolutely.
Mr. Barr. I yield back.
Chairwoman Waters. Thank you.
The gentleman from Florida, Mr. Lawson, is recognized for 5
minutes.
Mr. Lawson. Thank you, Madam Chairwoman.
And I welcome the witnesses to the committee today.
Secretary Carson, this question goes to you. And you
probably understand what I am going to say. You had the
opportunity to visit in my district with the housing conditions
that exist, especially in the Jacksonville area. But my concern
has been, one of the things that we talked about then, and I
subsequently filed a bill, for setting up housing IRAs for our
young people, deferred IRAs so that they could save in those
IRAs on a tax deductible basis until they accumulate enough
capital which can be capped maybe at $20,000 or more so that
they can use those funds for a down payment.
The reason why I talk about that and have you elaborate on
it is so many of the young people today don't see buying a home
as an option. And I live in an area where a lot of them rent
and I get a chance to talk to them. They don't see how they are
going to get ahead with student loans and other things that are
pressing on them coming out of school.
What are your opinions on the deferred IRAs for down
payments only, except in emergency situations, but to be used
for a down payment on homes?
Secretary Carson. Thank you for your interest in that. That
happens to be a great interest of mine as well.
I think we need to entertain all of the ideas. That is one
of the reasons that we are really pushing the self-sufficiency
programs, where people can accumulate money and not be
penalized in terms of their rent going up, and then that can go
into an escrow and that can be used for a down payment or other
things of that nature.
IRAs, whatever mechanism that we can use, is very much
appreciated, because, as you know, homeownership is the
principal mechanism of wealth accumulation in this country. And
one of the reasons that the wealth gap has deteriorated
significantly is because a lot of people, particularly in the
minority community, and particularly in the African-American
community, had their credit ruined. And as a result of that,
you see the homeownership rate decrease. We are looking at ways
to ameliorate that situation.
Mr. Lawson. I will see if the Director wants to comment on
that.
Mr. Calabria. I absolutely agree. I guess I should say, in
between some of my stints in government, I did some work with
the Consumer Federation of America's America Saves Initiative,
and I am a very big believer. I would say I think it would be
appropriate if there were another route of tax reform at some
point, having a universal savings account, I think, could be
very helpful in terms of helping, particularly low-income
households save.
Mr. Lawson. Okay. And I look forward to continuing to work
with you as this legislation is being developed.
And with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you.
The gentleman from Colorado, Mr. Tipton, is recognized for
5 minutes.
Mr. Tipton. Thank you, Madam Chairwoman.
I would like to be able to speak somewhat to the issue of
the GSE's portfolios and the guaranteed businesses while they
have been in conservatorship.
I do appreciate the comments made by my colleague, Mr.
Scott, in regards to the passage of Dodd-Frank, where prior to
it, we had loans that had been made with no documentation or
loans with riskier product features, such as negative
amortization.
Director Calabria, how can we ensure that the GSEs continue
to be able to avoid such products moving forward as Fannie Mae
and Freddie Mac exit from conservatorship?
Mr. Calabria. First, I think it is important to make sure
that GSE borrowers enjoy the same consumer protections that
other borrowers have and so that therefore we allow the QM
patch to expire and replace it with a set of consumer
protections that works for all borrowers. So, that is the most
critical.
Foremost, making sure there is the capital there to support
the risk. Obviously, all financial institutions, including the
GSEs, exist to take some degree of risk. The real question is
having the capital there to support that risk so that they can
engage in increasing opportunities, but also try to make sure
that we have better procedures in place and making sure that
the underwriting is there, making sure the products don't come
back, and making sure that the safety and soundness is there.
Mr. Tipton. That speaks a little bit to what you had spoken
about during your testimony on the 500-to-1 leverage ratio?
Mr. Calabria. Yes, let me--even if every single loan that
Fannie and Freddie made were pristine, they would still fail at
that amount of leverage.
Mr. Tipton. Great. Thank you for that.
The ability of the customer to be able to repay speaks
really to the health of our financial system. And we need to be
able to make sure that the borrowers are taking only what they
can handle in terms of payments.
Secretary Carson, you had mentioned about the loan
insurance, to be able to have that as well.
But when we are talking about your predecessor, Director
Mel Watt, he made some fairly risky programs during his tenure,
while he was in office.
How would the Administration's proposal make the GSEs more
risk-averse, and also, how would preserving the risk aversion
priorities currently in place over the long term?
Mr. Calabria. Let me emphasize that I believe that any
reduction in the footprint could be quite modest where we are
dealing with--it is true with any sort of insurance program
where it is the tail of the distribution and quite frankly the
sort of--any sort of reduction of risk would really be loans we
don't want to get families into, particularity at this point in
the cycle.
I think it is important to keep in mind that this has been
a long housing recovery. I think the vast majority of house
price appreciation is behind us, and what we really need to be
able to focus on is, how do we prepare families? How do we
prepare Fannie and Freddie? How do we prepare the economy for a
potential turn in the housing market?
Mr. Tipton. Secretary Carson, Secretary Mnuchin, do you
have anything to add to that?
Secretary Carson. I agree.
Mr. Tipton. Okay. Thanks. We have a lot of voices in the
industry right now, and across the aisle, who are questioning
the timing of the Administration's proposal.
And, Director, you just noted that right now, in terms of
the current default rates, it is 0.67, 0.61 percent. We have a
pretty healthy economy right now, so why is the
Administration's proposal needed now?
Mr. Calabria. If I can paraphrase President Kennedy, ``The
time to repair the roof is when the sun is shining.'' And right
now, our housing market and our economy is strong. This is the
time to do it. I fear that if we don't do it now, we will not
be able to make these reforms in a time of stress.
Mr. Tipton. Great.
Do you have any comment on that, Secretary Carson?
Secretary Carson. No, I totally agree. When is a better
time to fix it than when things are good? Absolutely.
Mr. Tipton. I appreciate the comments, and I appreciate the
Administration's position in terms of trying to be able to
reform Fannie Mae and Freddie Mac. Some paths are simply not
sustainable. I think every individual--we want people to be
able to have a home, but we also need to be able to make sure
that we are not putting people in homes that they cannot
afford, to make sure that we have a sustainable system, when we
are talking about being able to build that wealth. And the
primary residence is obviously the biggest wealth that most
people are able to accumulate in their lifetime. It is
important that we have a system that is not going to be
punitive, that is not going to put people into a position to
where they will lose those dollars in--in the event of--
ultimately what will happen in business cycles, we will see
economic downturns. They will come.
And I wholeheartedly agree, let's fix the roof while the
sun is shining. I applaud the Administration's proposals to be
able to try and address this, and I appreciate you gentlemen
being here today.
I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from Michigan, Ms. Tlaib, is recognized for
5 minutes.
Ms. Tlaib. Thank you, Madam Chairwoman.
An investigation in metro Detroit found that about 40
percent of people in protected classes experience unlawful
differences in treatment by housing providers. This unlawful
discrimination is usually hidden. It is not like we are going
to find signs that are posted on doors of homes that say,
``Don't rent to Black families,'' or ``No Muslim families,'' or
``No LGBTQ+ families allowed.''
Yes or no, Secretary Carson, do you believe that landlords
or property owners or housing providers anywhere in the United
States have ever engaged in discriminatory practices against
protected groups?
Secretary Carson. Of course they have, and we strongly
oppose that.
Ms. Tlaib. Yes or no, Secretary Carson, do you believe
there should be some level of protection to prevent or stop
discrimination that is rarely explicit nowadays?
Secretary Carson. Of course, there should be.
Ms. Tlaib. So, Secretary Carson, under your leadership, HUD
proposed a rule to make substantial changes to disparate impact
standards under the Fair Housing Act. The rule would make it
harder for families facing housing discrimination to seek
justice by shifting the burden of proof onto them.
Can you explain why the agency charged with enforcing the
Fair Housing Act is proposing to make it more difficult for
plaintiffs to bring forward housing discrimination claims under
the disparate impact standard?
Secretary Carson. I can probably explain it best by giving
you an example.
If Congress decided that they wanted to raise the minimum
wage to $15 an hour, the people who would be most impacted
would be low-skilled individuals. And a lot of those low-
skilled individuals would be in the minority classes, and
therefore, they could bring a disparate impact suit.
We want to make sure that obvious cases of discrimination
can still be addressed appropriately. In cases where something
is not obvious, we want to apply logic and common sense to it.
Otherwise, everything could become a disparate impact case.
Ms. Tlaib. But the burden of proof would be so much--the
complete intention is to show that the impact of the act or the
structure that is in place that is discriminatory against the
families, like the disparate impact helps with going after
those that are going to hide that discrimination.
Again, Secretary Carson, it is not like they are putting
signs up anymore. It is not like we are going to find emails. I
mean, sometimes we do. But disparate impact allows people
access to that justice to show housing discrimination.
I am disagreeing with your example, in that you are showing
that it is--because most of the claims that are coming forward,
you still have a huge burden to show that kind of disparate
impact. It is not as easy as it claims. I have had a number of
clients and residents who have come forward. And we have lost
more Black homeownership in Michigan than in any other State.
We have seen actual shifting of homeownership away from
communities that are struggling. And we do believe it is
stemmed around a lot of housing discrimination. And there
should be equal access to bring those claims forward.
I just strongly disagree with kind of the analysis that you
bring forward, and really advise your Department to push back
against getting rid of disparate impact, almost making it
impossible, Secretary Carson, to bring a housing discrimination
claim.
But, Director Calabria, we know that a quarter of the
mortgages provided by the Government-Sponsored Enterprises must
be allocated to low-income borrowers, as I know has been
discussed.
The Treasury Department claimed that in order to protect
taxpayers and make housing more affordable, the Federal Housing
Finance Agency should bring in private lenders to foster
competition in the financial system.
Any time, Director, fostering competition is being brought
up or used, it results in the Enterprises getting richer at the
expense of ordinary people.
Director Calabria, these private lenders also have an
obligation to make a quarter of the mortgages they back to low-
income borrowers?
Mr. Calabria. All of the private lenders who originate
mortgages and, therefore, sell them to GSEs, are indirectly
impacted by the housing goals, because the loans that are
bought have to meet the housing goals.
So, again, let's say you were a lender who sold 100 percent
of your loans to Fannie or Freddie, you would, on average, be
meeting those housing goals. Again, indirectly, it impacts the
originators and servicers who deal with Fannie and Freddie.
Ms. Tlaib. And what my residents would ask you is about
accountability. How do we make sure? How can we make sure these
private market participants are beholden to the American home
buyers rather than shareholder profits?
Mr. Calabria. I think that is a great question. I have no
ability to regulate the counterparties to Fannie and Freddie. I
regulate directly Fannie and Freddie. And so, our
accountability is making sure that when Fannie and Freddie meet
those goals, they can only meet those goals by having the
entities that they buy from, essentially, on average, meet
those goals.
Ms. Tlaib. And just lastly, Director, just always remember
you are also creating a structure. So even if you don't, you
are creating a structure that allows it.
Mr. Calabria. I appreciate that. Thank you.
Ms. Tlaib. Thank you so much, Madam Chairwoman.
Chairwoman Waters. The gentleman from Texas, Mr. Williams,
is recognized for 5 minutes.
Mr. Williams. I thank all of you for coming here today, and
I know I have asked both the Secretaries the question when they
have been here in the past, but this is the first time I have
had the opportunity to ask the third panelist, Director
Calabria, are you a capitalist or you a socialist?
Mr. Calabria. I am a pretty ardent capitalist.
Mr. Williams. Thank you for that. I look forward to working
with all of you and to working with you over the next few years
as a partner in the housing finance reform. There is a problem,
however, with the affordable housing in this country, but it
isn't because of any of the recommendations laid out in these
last two reports. Excessive State and local regulations, land
use restrictions, outdated zoning laws, and parking mandates
are just a few things that increase the cost of developing new
affordable housing units and have prevented supply from meeting
demand.
Secretary Carson, regardless of what is done
administratively to the housing finance system, will it make a
difference to the affordable housing stock if State and local
governments do not address this root cause of this issue?
Secretary Carson. No. In order to be effective, it is going
to require a combination of Federal, State, and local
jurisdictions, and a lot of the problems obviously are local
regulations. Eighty percent of the regulations are local in
nature and many of them are archaic, and instead of people
replacing one regulation with another one, they come up with
something better, they just layer it on top and we have become
a very complex labyrinth to get from point A to point B, and
each one of those arms of that labyrinth is an expense as well
as creating more time lapse.
Mr. Williams. GSEs are in a worse financial state now than
they were before the financial crisis. Even after the GSEs
retain $45 billion in earnings over the next 18 months, they
will still be drastically undercapitalized, as we have heard,
for their $5.5 trillion in assets.
Secretary Mnuchin, what do you believe is the appropriate
capital standard for the GSEs and do you think that they will
be able to raise the amount of capital from the private sector?
Secretary Mnuchin. In regards to the first issue, again, I
defer to the Director's analysis before we comment on it, but I
do believe that the GSEs can raise a very significant amount of
capital from the private sector, so we do anticipate the
combination of retention and third-party capital raise. There
will be sufficient capital to get to the new standards.
Mr. Williams. Good. Okay. The GSEs clearly have significant
market advantages because of their congressional charters and
other statutory privileges. There have also been several things
the GSEs have done while in conservatorship that have further
increased their competitive advantage over private sector
participants. And you briefly touched on this earlier,
Director, but as we move forward in this process, can you
elaborate on how the Administration plans to level the playing
field so the potential market entrants can fairly compete with
Fannie and Freddie in a reformed housing finance system?
Mr. Calabria. Thank you, Congressman. I think this is
critical. I want Fannie and Freddie to be successful and
effective, but I want them to be successful and effective
because of good management, good business practices, not
because they are held to lower standards than everybody else.
I mentioned earlier for the Qualified Mortgage rule, I
believe CFPB is making significant progress on that, and I
believe that was mentioned in the Treasury report as well. I
have had a number of conversations with other regulators. I
have talked to the SEC about reforming Reg AB, and talked to
the bank regulators about trying to get some relief. We have
really seen difficulty in making bank portfolio loans,
particularly for community banks, so I think additional
community bank relief is critical to being able to get the
mortgage market to move again. So, all of this coordination is
a number of things that we are working on.
Mr. Williams. Good. One last question, Director, you stated
that one of the critical changes needed, prior to the end of
the conservatorship, is strengthening the powers of the
regulator. What changes are needed to the FHFA to ensure it is
equipped to be a regulator in a post-conservatorship world?
Mr. Calabria. One of the powers I have asked for, and I
know that it is being discussed within the committee, is we all
remember, especially post-Cap One, the transition to the cloud,
so the Federal Reserve and other bank regulators have
significant authority under the Bank Service Company Act to go
in and look at service providers. Fannie and Freddie are
transitioning into the cloud. Having all of that mortgage data
in one space is very concerning to me. I have no authority to
go in and do the same thing that the Federal Reserve and others
can do to make sure that the cybersecurity threats that may
threaten Fannie and Freddie are not severe. So, that is one.
I would like chartering authority like every other
regulator. I think it is important to bring competition to the
marketplace, and I would like greater discretion--if you want
to know what I would like under capital standards, simply look
at Section 38 of the Federal Deposit Insurance Act. If you can
give me that, I would be delighted.
Mr. Williams. Good. Well, competition is good.
Mr. Calabria. Absolutely.
Mr. Williams. And none of you have touched on this, but I
will go ahead and do it and say, Astros in six.
Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Casten, is recognized for 5 minutes.
Mr. Casten. Thank you, Madam Chairwoman.
Secretary Mnuchin, I would like to turn to Rusal, an
aluminum company largely owned by Russian oligarch Oleg
Deripaska. As you know, in April 2018, the Treasury Department
sanctioned Deripaska and Rusal as part of a targeted strategy
against oligarchs believed to be close to Putin and were
designed to punish him for subverting western democracies.
The Treasury Department lifted those sanctions in December
2018. Mr. Deripaska, as you know, is detailed in the Mueller
report to have financial dealings with Paul Manafort, who is
now in jail. Earlier this year, the Associated Press reported
that Manafort began collecting $10 million a year in 2006 from
Deripaska to advance Putin's interests in western governments.
On June 20, 2016, Mr. Manafort was named Trump's Campaign
Chair. Less than 2 weeks later, on June 7th, he asked an
overseas intermediary to pass the following message along to
Deripaska, ``If he needs private briefings, tell him we can
accommodate him.''
Two-and-a-half-years later, sanctions were lifted, and
shortly after that Rusal announced it was investing $200
million into a project in Kentucky. In April of this year, you
testified in this committee that you delisted those sanctions
against Rusal because, ``The company approached us, not the
oligarch. The company approached us, a large group of people.''
Was Senator McConnell among the people who approached you?
Secretary Mnuchin. I am not really sure what this has to do
with housing reform, so I am--
Mr. Casten. Sir, the trust in our financial system depends
on the entire system.
Secretary Mnuchin. Again, I am happy to answer it.
Mr. Casten. Okay.
Secretary Mnuchin. I don't see the relevance to housing
reform, but no, I have never spoken to Mitch McConnell about
that, other than when we briefed the entire Senate, Republicans
and others--
Mr. Casten. Prior to lifting the sanctions?
Secretary Mnuchin. --on the sanctions.
Mr. Casten. Did Secretary Chao approach you to lift those
sanctions?
Secretary Mnuchin. No, he did not.
Mr. Casten. Did any Member of Congress, House or Senate,
approach you with respect to lifting those sanctions?
Secretary Mnuchin. Not that I can recall, but we had
extensive discussions with many people on what we would be
doing about lifting the sanctions.
Mr. Casten. Did Craig Bouchard of Braidy Industries
approach you about lifting those sanctions?
Secretary Mnuchin. I am not even sure I am aware of who
that is, so no.
Mr. Casten. Braidy Industries is the company that is a
substantial beneficiary of that investment in Kentucky.
Secretary Mnuchin. Like I said, I am not aware of who that
is.
Mr. Casten. Did anyone associated with Braidy Industries
approach you about lifting those sanctions?
Secretary Mnuchin. Again, I don't--as I have testified
before, we lifted these sanctions because we negotiated an
agreement--
Mr. Casten. Just a yes or no is fine. I am just asking
whether you understand. I get to that because of the news from
this last week. Last week, it was reported that in December of
2018, largely contemporaneous with your decision to lift
sanctions, there was a seizure of documents from Terra
Services, Ltd. This is a London-based company owned by Mr.
Deripaska, a real estate firm that he controlled. That raid has
been described as being, ``in connection with the special
counsel investigation,'' that, of course, being the one led by
Mr. Mueller. This raid is substantially contemporaneous with
the Treasury Department's lifting of sanctions and you
appreciate, I am sure, how bad this all looks.
The question is, did you have any knowledge of the raid or
the preparation for the raid at the time you were making a
decision to lift those sanctions?
Secretary Mnuchin. Again, I find it interesting that when
we are here to discuss housing reform, you are trying to grill
me on something that happened months ago.
Mr. Casten. Sir, I would reiterate, sir, that if you can
isolate risk in the financial sector, Lehman Brothers would
still be here today. I am concerned about whether or not people
trust that the Treasury Department is acting in the best
interest.
Yes or no, did you have knowledge of the raid or the
preparation for the raid at the time you decided to lift the
sanctions?
Secretary Mnuchin. No, I had no basis of knowing about the
raid or involvement with the special counsel.
Mr. Casten. And in any of the answers that you have given
me, can I assume that your lack of knowledge can be applied to
the entire Treasury Department? Were there people in the
Treasury Department that you believe would have been
knowledgeable?
Secretary Mnuchin. Of course, you can't assume that. I am
not making representations for what is obviously a thousand
people within the Treasury Department. Again, we are--
Mr. Casten. Okay. One final question--
Secretary Mnuchin. If you have these concerns, we would be
happy to discuss them with you at the appropriate time.
Mr. Casten. Okay. So one final question, and I appreciate
your willingness to share, will you commit here today to ensure
that the employees of the Treasury Department, under your
control, will comply with any congressional subpoenas relating
to these matters?
Secretary Mnuchin. What I will assure you is that we will
follow the law--
Mr. Casten. They are congressional--
Secretary Mnuchin. --as reviewed by our general counsel.
So, as I think you know, we have already received subpoenas
that we did not think were legal and, again, I will refer them
to my general counsel and they will be reviewed, but I can
assure you that we will always follow the law. That is our
intent.
Mr. Casten. Let's hope so.
I yield back.
Chairwoman Waters. The gentleman from Arkansas, Mr. Hill,
is recognized for 5 minutes.
Mr. Hill. Thank you, Chairwoman Waters. And I appreciate
Secretary Mnuchin, Secretary Carson, and Director Calabria
being here today. This is a very important topic. I appreciate
you reprising your presentation to the Senate. You can tell all
the interest that we have on this topic in the committee.
About a year ago, I wrote an Op-Ed about how Fannie Mae and
Freddie Mac have been violating--this is my view--violating
their charters, misleading Congress, and misleading investors
dating back to the 1980s, so I am always very suspicious of
reform ideas since the 1980s, the 1990s, and the 2000s have not
delivered very successfully on those.
The agencies have entered into new activities and product
offerings including, but not limited to, mortgage insurance,
lines of credit to nonbanks, and buying mortgage servicing
rights. These concerns have raised questions regarding the
proper role in the overall housing market, which we have talked
about today.
Additionally, the GSEs continue to grow their footprint by
increasing the loan limits, allowing mortgage subsidies for
second homes and increasing caps for multi-family lending.
Director Calabria, as you look at this issue now that you
are our head of the regulatory body, how are you going to
ensure that the GSEs stay within their charters?
Mr. Calabria. Thank you, Congressman. Let me emphasize, I
think this is always a critical concern. Any time a player in
the marketplace has considerable market power, they try to
leverage that and other lines and I think that is something we
always have to be cautious of. Fannie and Freddie have the
ability to essentially put anybody out of business that they
could directly compete with, so it is certainly a very large
concern of mine.
The Housing and Economic Recovery Act of 2008 set up a new
structure for product approval. This was a big concern going
into the crisis and we will be doing a rulemaking. I am
disappointed that it is 11 years later, and there has not been
an established rulemaking on this before I got there, but we
will be setting up a rulemaking to have a very clear process to
make sure you see--
Mr. Hill. I thank you for that. I think you should echo
former OMB Director, and former Governor of Indiana Mitch
Daniels' admonishment that if it is in the yellow pages, it
doesn't need to be done by the government. So, I urge you to be
very disciplined in looking at that process.
You have referenced in your testimony on page 3 that your
job is to remove the GSEs from conservatorship by
reorganization, rehabilitation, or winding up their affairs. I
take it from the Treasury report and the HUD report that there
is this bias towards recapping and releasing. Those are my
words, not your words, but it gives the appearance that the
implication by what has been said is that we are going to
release these entities, they are going to raise capital with a
reduction in the sweep, renegotiate the preferred stock
arrangement, and then they are going back out into the
marketplace.
Director Calabria, do you support recapping and releasing
Fannie Mae and Freddie Mac?
Mr. Calabria. I do not support simply putting them back out
there the way they were before the crisis. I will say I very
much share Secretary Mnuchin's earlier point that no decision
has been made yet on moving forward. I do believe that I have a
responsibility in the interim to help build capital at these
Enterprises.
Mr. Hill. Secretary Mnuchin, would you like to comment,
please?
Secretary Mnuchin. Yes. I would just say that I don't agree
with your characterization of a bias. I think, as I have
testified earlier, we have the option to take them out through
conservatorship or we have the option to go through
receivership. We have not had any discussion and my sense is,
what we do agree on is that they need more capital and we would
hire appropriate advisers to determine what is in the best
interests of the taxpayer.
Mr. Hill. Good, so you are open minded about these various
models of substitution that might be proposed; in other words,
we have proposals to have a mutual that is a utility, a
nonprofit that is a utility, a government that is a utility, or
we have the recap and release with competition where Director
Calabria has congressional authority to charter new entities,
you are open to considering all of these options?
Secretary Mnuchin. Again, I would say that our number one
objective is to make sure we meet the housing goals that have
been outlaid, and to protect the taxpayers, and we will look at
whatever the best alternative is for that.
Mr. Hill. Thank you, Mr. Secretary.
Secretary Carson, earlier this year when you testified, I
recommended that FHA Commissioner Brian Montgomery testify
before our committee, and I still hope that our Chair will
encourage the FHA Commissioner to come and discuss FHA's book
of business. I am concerned it has deteriorated in loan quality
over the last couple of years, that FICO scores are lower, that
debt-to-income ratios are higher, and that is concerning to me.
And also, Director Calabria has mentioned the that GSEs are
competing with FHA for the same first-time home-buyer market.
Secretary Carson, do you agree that the GSEs should not
compete with the FHA in the first-time home-buyer market, in
the secondary market?
Secretary Carson. I think the GSEs have a different mission
target than FHA does. Can they both work within that sphere? Of
course, they can, but I think one is more specialized. It is
sort of like a cardiac surgeon and a urologist. They both can
probably operate on your heart, but I think you would probably
rather have the cardiac surgeon.
Mr. Hill. Thank you. We will put you down as an expert
witness on that.
I yield back.
Chairwoman Waters. The gentlewoman from Virginia, Ms.
Wexton, is recognized for 5 minutes.
Ms. Wexton. Thank you, Madam Chairwoman, and thank you to
the distinguished gentlemen for coming to talk to us today
about this important topic.
Secretary Carson, FHA currently charges a flat fee for
mortgages that it backs, but your plan for housing finance
reform recommends a risk-based pricing structure for FHA loans.
Advocates have expressed concerns that this could fundamentally
undermine FHA's mission to serve underserved borrowers by
charging higher premiums to those who can least afford them.
Has HUD evaluated the effects of risk-based pricing on
borrowers throughout the credit spectrum, specifically what
would the effective tiered pricing be on the least wealthy
Americans whose credit scores are below 650?
Secretary Carson. Yes. This has been a subject of great
conversation. We have looked at the different scenarios. We
feel that if we just have a one-size-fits-all model, it has a
tendency to attract the highe- risk people into that pool, and
in the long run could actually elevate the cost for the low-
income individuals.
Ms. Wexton. You didn't answer this question, but would the
premium or would the fee be higher for higher-risk individuals
and lower for lower-risk individuals?
Secretary Carson. Yes.
Ms. Wexton. Has HUD conducted a fair housing analysis to
determine if protected classes of borrowers would be
disproportionately impacted by this new policy?
Secretary Carson. Protected classes would also undergo the
same type of credit risk analysis and would have the fees
appropriately scheduled for them.
Ms. Wexton. Are you saying that the fees would not be based
on their risk; it would be based on whether or not they are a
protected class?
Secretary Carson. No. Fees are based on risk whether you
are a protected class or not.
Ms. Wexton. Has HUD conducted a fair housing analysis to
determine what the impact of this would be?
Secretary Carson. I would be happy to send that information
to you.
Ms. Wexton. Did HUD conduct such an analysis?
Secretary Carson. Of course, we have looked at the various
scenarios, and we have that information.
Ms. Wexton. Okay. And does the information show that
protected classes are disproportionately impacted by these
risk-based fees?
Secretary Carson. No, they are not.
Ms. Wexton. Okay. If you would share that analysis, that
would be fantastic. Thank you.
Secretary Carson. Absolutely.
Ms. Wexton. Also, Secretary Carson, HUD's plan for housing
finance reform recommends that Congress establish FHA, VA, and
USDA as the sole source of low-down-payment financing for
borrowers not served by the conventional mortgage market.
Are you recommending that Fannie and Freddie get out of the
business of backing low-down-payment loans?
Secretary Carson. I think it would be good if we have
segments of the housing finance market focus on particular
mission targets. That doesn't mean that there won't be some
overlap.
Ms. Wexton. If FHA, VA, and USDA essentially have a
monopoly on these low-down-payment loans, wouldn't that crowd
out private sector participation in those loans?
Secretary Carson. The private sector could decide which
segment of the population they want to specialize in. No one
would try to tell them what they could or could not do.
Ms. Wexton. And that would probably disproportionately
impact some less creditworthy protected classes as well, would
it not?
Secretary Carson. It depends. Some people in the private
mortgage insurance market might decide that they want to focus
primarily on low-income, high-risk individuals, which probably
is not going to be the financially best move for them to make,
but maybe they might feel some social obligation to do that. We
wouldn't preclude them from doing that if they wanted to.
Ms. Wexton. I have not found social obligation or social
desires to be a big motivating factor among most of these for-
profit companies.
Secretary Carson. I think that is right.
Ms. Wexton. Secretary Carson, I see I only have about a
minute left, so I wanted to give you a chance to apologize for
comments you made during a meeting with HUD staff last month
where you described transgender women as, ``big hairy men.''
Secretary Carson. First of all, I didn't describe
transgender women that way. I was relating a story that a
women's group told me about big hairy men who are not
transgendered women, by the way, coming into their facility and
having to be accepted because of the rules that were in place.
Ms. Wexton. What was the women's group that told you this
story?
Secretary Carson. It was a group from Alaska.
Ms. Wexton. What was their name?
Secretary Carson. I don't remember.
Ms. Wexton. Okay. Could you get that for us, please? So,
you don't feel the need to apologize for those comments?
Secretary Carson. No. I think this whole concept of
political correctness--you can say this, you can't say that,
you can't repeat what someone said--is total foolishness, and
it is going to destroy our nation, and we need to be more
mature than that.
Ms. Wexton. Very good. Thank you very much.
I yield back.
Chairwoman Waters. The gentleman from Georgia, Mr.
Loudermilk, is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. And I thank
all three of you for being here.
Secretary Carson, Secretary Mnuchin, you have both been
here before. You are aware of the theatrics that go on here
and, Director Calabria, I appreciate you being here. Sometimes
I am amazed myself with what happens here. There is a popular
television commercial out there about these young people who
are in the middle of a horror show and they have an opportunity
to run away from this terrible incident by jumping in a running
car, but they choose to go behind chainsaws ahead and then run
to a cemetery.
I often relate that to Congress as it seems like when we
find ourselves in the middle of a really bad situation, some of
us look for the running car, and others just keep wanting to
run to the chainsaws to make the situation worse and worse. And
I appreciate what you are trying to do with the reforms of the
GSEs. You are looking for that running car. To me, the economy
is that running car that we can jump in and use the strength
and the power of this economy to make changes going forward and
make the economy strong.
In my hometown in Bartow County, Georgia, we just posted in
August the lowest unemployment rate in the history of that
county. To give you an example, in 2010 unemployment was 12.2
percent. In August of 2018, it was 3.8 percent. This year, it
was 3.5 percent. We are seeing manufacturing return. However,
we are also seeing some problems associated with a strong
economy.
One is the jobs that are made available. We just don't have
skilled workers getting into those jobs. In fact, I held a
skilled jobs fair at the beginning of this month where we
brought employers in and we put the invitation out to every
high school in our district, every high school responded, and
over 400 students showed up to get matched with employers who
will do apprenticeships, so we are addressing those.
The other issue I am hearing from employers that is a big
problem is the lack of entry level homes for the employees they
are bringing in. In fact, my son-in-law and my daughter are
looking for a home and he said, basically, anything in that
starter home level in our area of Georgia from $140,000 to
$180,000 is sold by the time it hits the market, and it sells
for more than the asking price of the home.
And so we are trying to find some ways to address that, but
what it is doing is, it is pushing those new employees to
either take long commutes from other communities because they
can't find the affordable housing in our area, let me say
entry, level housing or they are moving into multi-family
housing, which is creating a supply-and-demand issue there
which is causing apartment complexes and other multi-family
homes prices to go up.
I appreciate, Dr. Calabria, the efforts to retain capital,
because we do need to have that rainy day fund if and when we
do get into the next financial crisis. I think that is a good
business decision. I think that is a good running car to be in.
My concern is--and I know this rule was proposed by your
predecessor--if we make that a permanent rule after we are out
of conservatorship and things are going again and that is a
permanent rule, is the requirement for multi-level family or
multi-family dwellings to be double that of a single family?
The concern I have is, could that actually further impact the
availability of these homes that are really needed in our parts
of the country?
Mr. Calabria. Thank you for the question, Congressman.
Certainly, we want to make sure fundamentally with a well-
thought-out, strong capital rule that means that Fannie and
Freddie are there during stress time so that they can provide
that credit. I will remind the committee, if you go back and
look in 2008, before they fell, 2009, 2010, Fannie and Freddie,
pulled back from the marketplace. They focused on saving
themselves. I think any for-profit enterprise would have
largely done the same, so we need to make sure that they are
strong going into a stressed environment so they can continue
to be there. We certainly are not looking to penalize multi-
family or single family relative to each other, but just to
make sure that the risk-based capital standards reflect the
relative risk and, unfortunately, the multi-family portfolios
at Fannie and Freddie largely came through the crisis well,
with much stronger underwriting there, but again, making sure
that the risk and the capital there is balanced is where we are
going.
Mr. Loudermilk. People can add to this, but I just want to
make sure that by doubling the retainings from the multi-
family, it doesn't create an unbalance there to further the
crisis.
One other quick question in the final seconds I have, there
has been a prohibition against the GSE's lobbying while they
are in conservatorship. I want to make sure that we continue
that going forward. Will you support a ban on lobbying Congress
by the GSEs?
Mr. Calabria. I think it depends on how it is structured.
Even Fannie and Freddie have First Amendment rights, so I just
want to make sure that we respect those.
Mr. Loudermilk. Thank you.
I yield back.
Chairwoman Waters. The gentlewoman from North Carolina, Ms.
Adams, is recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman, and I thank you
gentlemen for being here today. First-time home buyers have
traditionally been the driving force of the housing market and
these borrowers traditionally rely on low-down-payment
mortgages to purchase their homes. In fact, over the past
several years, nearly 80 percent of first-time home buyers with
mortgages purchased homes using low-down-payment products.
Director Calabria, can you please speak to how the FHFA
will ensure that borrowers continue to have access to
affordable, prudent low-down-payment mortgage options?
Mr. Calabria. We will certainly continue to make sure that
they are sustainable, that when we get people into
homeownership, they are there to stay, and I do think, of
course, down payments are part of the question as is DTI, FICO,
and borrower credit scores. But we want to make sure that we
get borrowers in to stay, and I commit to you that is what we
will be trying to do.
Ms. Adams. Thank you for that commitment.
And for each of you, if you could just answer yes or no it
would be helpful, should the Federal Government play a role in
ensuring access to affordable housing and affordable loans?
Secretary Mnuchin?
Secretary Mnuchin. Yes.
Ms. Adams. Thank you.
Secretary Carson. Yes.
Ms. Adams. Okay, great.
Mr. Calabria. And, of course, we should do it in a
responsible manner.
Ms. Adams. Okay. Do the GSEs play a role in ensuring access
to affordable housing and affordable loans?
Secretary Mnuchin. Yes.
Secretary Carson. Of course.
Mr. Calabria. Yes.
Ms. Adams. Okay. Great.
Secretary Mnuchin, your plan for housing finance reform
proposes to replace the current affordable housing goals with a
fee that would fund affordable housing programs, and while you
provide extensive details on other recommendations in your
plan, you provide no details on the size of this fee or what
kinds of affordable housing programs the fee would fund, or how
you would expect this would be an adequate replacement for the
affordable housing goals.
It is clear that you are punting a little bit on key
details of your plan when it comes to affordable housing, but
affordable housing cannot be an afterthought in the debate on
housing finance reform; it has to be at the center.
Can you please tell us why you have decided not to spell
out key details of your own plan on affordable housing?
Secretary Mnuchin. Thank you for that question. First, as I
said in my opening testimony because I wanted to clarify, we
want to make sure that there is affordable housing. I think it
has been misinterpreted that we are looking to replace the
goals with a fee. That is one alternative that has been
proposed. That is not necessarily our only alternative. What we
are saying is that in the affordable housing goals, we want to
make sure they are accountable. We want to make sure that the
community groups and the communities are getting the benefit of
that.
So, it is really more about accountability, and we look
forward to sitting down on a bipartisan basis and figuring out,
how we do not have less affordable housing, if anything,
hopefully, we could have more affordable housing and people
better served.
Ms. Adams. You do have some details, then?
Secretary Mnuchin. We have views, absolutely, but we would
sit down on a bipartisan basis and want this resolved because
it is not just Treasury.
Ms. Adams. Okay. Thank you, sir. Let me move on. Over the
summer, the GSEs made several concerning changes to the
affordable lending products, Fannie Mae's HomeReady and Freddie
Mac's Home Possible. Previously, these programs had income
limits of 100 percent of the area median income, and now the
income limits are 80 percent.
Director Calabria, are you concerned that these changes
will deprive consumers of mortgage options and potentially lock
them out of the conventional market?
Mr. Calabria. I think it is important that we make sure
that Fannie and Freddie's affordable housing efforts are well-
targeted. For instance, the statutory framework as affordable
housing goes builds on income, most of the programs are
targeted at credit and, of course, while credit history and
income are positively correlated, they are actually only
weekly.
We are actually in a situation historically where high-
yield credit, lower-income borrowers have been cross-
subsidizing worse credit in higher-income borrowers, and so one
of the things that we are trying to make sure of is essentially
to make sure that the affordable housing products that are
provided are well-targeted within the goals to low-income
families.
Ms. Adams. Great. Thank you very much.
I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from Ohio, Mr.
Davidson, is recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman. And I thank our
witnesses. Thanks for the work you do on behalf of our great
country and the skill with which you do it. It has been an
honor to see you all at work in your roles, and really just for
the benefit of folks back home in Ohio who are concerned about
affordable housing as well. It is not just on the coast where
affordable housing is of concern.
In rural communities, we often face shortages, and part of
that is due to just population density, even though the cost of
living is much more manageable in Ohio. But when you look at
the size of the balance sheets that we have within Treasury,
that we have within the various components, I am just curious,
what percentage of that balance sheet is comprised of things
the market would produce, market risk versus essentially
subsidized programs that would never actually be produced in
the market?
Director Calabria?
Mr. Calabria. Thank you. Let me really emphasize, as
someone who grew up in rural America, the importance of making
sure that credit is available there. I will also note that I
have been going around and seeing the Federal Home Loan Banks,
and I recently visited the Cincinnati Federal Home Loan Bank. I
want to make sure that I get outside of Washington, but more
directly to the question, we are looking at it very closely,
whether it is the conversation between the GSEs and the FHA or
between the private market. We don't want any gaps, but we do
want to look at, where can the private sector pick up this
business and provide it so that no one is left out?
Mr. Davidson. Thank you.
I don't know if we will have an easy quantitative answer,
but that highlights the problem to me.
To me, if you think about the composition of the balance
sheet, we begin with underwriting and some things just wouldn't
pass an underwriting test. They really wouldn't. They only
exist because there is a Federal program that intentionally
targets this. We decided as a country collectively to pass a
law that said we are going to do these things. The market
wouldn't produce these things and my concern goes to how those
things filter through the balance sheet and then wind up on the
back end, perhaps in a credit risk transfer.
When I look at the efforts to delever the balance sheets
and put that risk back out into the market, and I think back on
the housing crisis, people in the financial sector have been
demonized because they structured these mortgage-backed
security products in a way that was full of bad product and not
enough good product, and it seems to me that non-market-based
risk shouldn't enter the market.
It should be held on the Federal Government's balance sheet
because the only reason it exists is because the Federal
Government decided to create it. And as we look to delever that
balance sheet and we use the product called a credit risk
transfer for the benefit of folks at home, Director, could you
please explain what a credit risk transfer is?
Mr. Calabria. Certainly. What the GSEs will often do is
they will have a pool of loans which they end up calling the
reference pool and they will sell a credit risk into the
marketplace. They have over 200-some investors in the
marketplace. Some of these are insurance companies, and other
types of investors, and they will essentially take the credit
loss, so if this reference pool doesn't perform, the credit
loss is transferred to the investor.
It does allow us to get some market signals, so the bids
that we see on credit risk transfer are an indication of what
market participants think about the underlying risk of the
reference pool. So, I think we are learning a lot from that
process and having a better insight on risk and, of course,
within conservatorship, this was an important way to get some
of the risks outside of the GSEs.
Mr. Davidson. Thank you for that. When we look at selling
that product, right now my concern is that this isn't really
retained on the Federal Government's balance sheet. In fact,
some might propose what to me would be an absolutely horrible
idea, which is to protect the taxpayer, to sell it off into the
market, to keep the good stuff on the government's balance
sheets and effectively keep the lean meat on the government's--
sell the fat and fillers out into the market and that is a
recipe for disaster. This should never enter the market because
the market would never actually produce it. They wouldn't even
do the underwriting to let this happen in the first place.
As I look through the recommendations, Mr. Secretary, I
just would ask that you consider the structure, the purpose
that these entities even serve, because even now at 3.5 percent
of unemployment with the economy booming, record low
unemployment, wealth and prosperity on the rise at every income
level in the United States of America, we are actually
providing bigger Federal housing subsidies than back right
after the crisis when we had a shortage of affordable housing
at a different level.
We had 10 percent unemployment, and unfortunately the trend
isn't for less Federal housing subsidies; it is for more. And
so, we are continuing to load up these balance sheets with bad
products. I just ask that you protect the market by making sure
that doesn't wind up in the credit risk transfer pool so that
people in the financial sector can do sound on the front end
and on the back end and the government can contain the problem
that they are, in fact, creating.
Thank you.
Chairwoman Waters. The gentleman from California, Mr.
Sherman, is recognized for 5 minutes.
Mr. Sherman. We currently have a system that is the envy of
the world, with ordinary working people able to buy, who borrow
hundreds of thousands of dollars at pretty low rates. We have a
system that has produced $300 billion of profit for the Federal
Government, and has paid back the Federal Government $109
billion more than was necessary at the beginning of the crisis.
It works. It produces huge profits. It produces low
interest rates. It is a far better real estate finance system
than any I am aware of anywhere in the world. It has one giant
flaw. There is no way to make a billion dollars for a private
individual. There is no way to get stock options for a private
individual. It works for everybody except the one-hundredth of
the top 1 percent. This is working so well that you couldn't
get Congress, not even Congress which often makes stupid
mistakes, to approve spinning these entities off. They are, in
effect, government entities.
Secretary Mnuchin, do you believe that you can spin these
entities off without an Act of Congress authorizing that?
Secretary Mnuchin. Yes, we do, but let me just make a
comment.
Mr. Sherman. No, no, I have a limited amount of time. You
had your opening statement; this is my 5 minutes. I hope very
much that you don't. It would be a terrible mistake and
anything Congress--but let's move on.
You have said that we are not going to lower the conforming
loan limits as part of your plan. I have so many worries about
this. You wouldn't deny the Federal Government a backstop to
loans over a certain amount as long as that amount isn't the
applicable conforming loan limit? In other words, you are not
planning to back into a decline in the conforming loan limit by
saying, well, certain loans under that limit will still
conform, they just won't get a backstop. I shouldn't worry
about that, should I?
Secretary Mnuchin. No. That is not the case.
Mr. Sherman. Good. Thanks.
Director Calabria, one out of six mortgages relies on the
QM patch. The patch is set to expire very early in 2021, and
the tendency, particularly in my branch of government, is to
deal with things like that a day before the thing is going to
explode. Can I be confident that business will have plenty of
advance notice if there is a change in the QM patch?
Mr. Calabria. I will certainly endlessly nag the CFPB to
get it done in time.
Mr. Sherman. We just had them here, and I nagged them, too,
so I am helping you out.
Okay. We have a Federal system. The decision as to whether
to have rent control is a decision made by States, and in my
State is delegated to cities, and I would hope that we wouldn't
try to use the power that you gentlemen have to tell California
and various cities what kind of rent control they should have,
especially when you are making a loan at the beginning, and you
know what the rents are when you make that loan, and the loan
has to be a good loan based on the rents that exist when you
make the loan.
So, the opportunity to raise those rents higher may be very
beneficial to a real estate investor, but are not necessary for
you to determine that the rent will pay the mortgage.
Secretary Mnuchin, is there going to be some effort to
penalize multi-family apartment home purchasers if they happen
to be in a city that allows certain types of rent control?
Secretary Mnuchin. I think the answer is that rent control
has worked for very long periods of time, and I think the real
question is, if there are substantial changes to rent controls
that, really--and this is the Director's responsibility--that
the GSEs have to properly underwrite the credit of those loans.
Mr. Sherman. But it will be an underwriting issue--
Secretary Mnuchin. Correct.
Mr. Sherman. --not a use of the power of the Federal
Government to go with one system rather than the other?
Secretary Mnuchin. Absolutely not.
Mr. Sherman. And as I pointed out, it shouldn't be a big
underwriting concern because you are making the loan based on
the rentals that exist when you make the loan. Nobody is making
a loan and saying, well, it is a terribly imprudent loan, but
when you raise the rent some future day, it is going to--
Secretary Mnuchin. I would just comment that there could be
a credit issue, for example, if these are 30-year loans and
people don't reinvest capital to keep the buildings correct,
there could be--
Mr. Sherman. I look forward to 30-year apartment loans.
And I yield back.
Chairwoman Waters. The gentleman from North Carolina, Mr.
Budd, is recognized for 5 minutes.
Mr. Budd. Thanks to each of you for being here. This
hearing was titled by the Majority as, ``The End of Affordable
Housing.'' So to each of you, is there anything in the
Administration's housing reform plan that would end affordable
housing or that would call for the end of affordable housing?
Yes or no?
Secretary Carson. Absolutely not. In fact, our highest
priority is to provide affordable housing.
Secretary Mnuchin. I tried to clarify that in my opening
statement and I would give the Chair and others the benefit of
perhaps they didn't understand certain aspects of the plan.
Mr. Budd. Director Calabria?
Mr. Calabria. No.
Mr. Budd. Thank you.
And, again, a yes or no from each of you, will the
Administration's plan lock Americans out of 30-year fixed-rate
mortgages or result in the loss of investor confidence in our
housing investments?
Secretary Mnuchin. No.
Secretary Carson. No.
Mr. Calabria. No.
Mr. Budd. Thank you.
Is the goal of affordable housing better advanced through
the convoluted system we have of today's goals, quotas, and
set-asides, or could it be better served through a new housing
finance system with a more efficient, transparent, and
accountable mechanism for delivering tailored support?
Secretary Mnuchin. It would be better served.
Secretary Carson. The latter.
Mr. Calabria. I have yet to see a government program that
couldn't be made better.
Mr. Budd. Thank you.
Director Calabria, this question is for you and, for the
record, I really appreciate your hard work on serving as a
conservator of Fannie and Freddie and as a regulator of the
Federal Home Loan Bank system. You have been exceedingly
transparent on what your intended course will be and on every
step you intend to take, so, again, thank you.
I understand you are in the middle of a comprehensive
review of pilots and special programs at Fannie and Freddie,
and I value this work, because in a couple of areas I worry
that the GSEs are operating in ways that compete directly with
the primary mortgage market. Take for example, Freddie Mac's
mortgage insurance pilot called, ``IMAGIN,'' and Fannie Mae's
mortgage insurance pilot called ``EPMI.'' Should entities in
conservatorship be operating pilot programs that directly
compete with the private sector, and if not, would you explain
to this committee why you are opposed?
Mr. Calabria. First, let me say as a top line issue both in
and outside of conservatorship, I fully expect the GSEs to live
within their charters and we will take a very direct--if it is
not on the page, they are not doing it. That is the way the law
is. Within conservatorship, the focus on any sort of pilots or
efforts, in my opinion, is to be focused on getting out of
conservatorship, and that has to be the primary focus of
strengthening these companies and getting us ready for
potential downturn in the housing market.
Mr. Budd. Could you elaborate on that a little more? In
what ways do you see them as competing against the market? I
just want to drive that point home, if you could help me with
that?
Mr. Calabria. We will be reviewing all existing pilots to
make sure that they are consistent with exits of
conservatorship.
Mr. Budd. So the main priority, if you would say it again,
would be to get out of conservatorship?
Mr. Calabria. Absolutely.
Mr. Budd. Thank you. Again, continuing with you, Director
Calabria, what are the impacts on taxpayers and home buyers of
FHA's expanded market share since the financial crisis, and how
has FHA's attempt to grow its way out of fiscal problems
actually displaced private capital and expanded taxpayer risk?
Mr. Calabria. Is this question on FHA, can I clarify?
Mr. Budd. It was for FHA.
Mr. Calabria. We certainly want to make sure that FHA and
the GSEs are competing in a way that is not counterproductive.
I think it is important to keep in mind--I would call what the
GSEs historically have done is a little ``skimming of the
cream,'' if you will, off of FHA, taking the better risk away
from FHA. That forces FHA to have to raise premiums and
potentially threatens the viability of FHA, so I do think there
is a way that I can make sure that my friend across the street
is not being undermined by what Fannie and Freddie are doing.
Mr. Budd. Thank you.
Final question, in your view, what sort of countercyclical
role should FHA play in the market?
Mr. Calabria. I think it is important to keep in mind that
FHA, Fannie and Freddie, and the Federal Home Loan Banks were
actually all created to be countercyclical. They really should
be the support there in times of stress, they should be there
to put a floor under the market. My view is they should not be
leading the charge of lendings over the cliff; they should be
there to be the net to catch the market when it goes south.
Mr. Budd. Thank you, and thank you to each of you.
And with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you. The gentlewoman from
Pennsylvania, Ms. Dean, is recognized for 5 minutes.
Ms. Dean. Thank you, Madam Chairwoman, and thank you for
holding this important hearing on the question again of the
lack of affordable housing, the need for more affordable
housing, and the reforms that the Administration seeks. I thank
the Secretaries and the Director for being here.
And this is something very important in my district, in
suburban Philadelphia. The lack of affordable housing across
the spectrum of folks who need affordable housing, so maybe--I
know I am at the end of the line here, but I would like to go
back and just define the scope of the problem. I will start
with you, Director Calabria. Your second line in your
testimony, I read with interest: ``Too many Americans lack what
each of us deserves, an affordable place to call home, whether
it is rented or owned.''
Could you help us understand the scope of the problem, the
specifics, whether it is rental, home purchases, seniors, rural
areas, or underserved? Give us the scope of the problem.
Mr. Calabria. It is really across-the-board. We have seen,
for instance, in California the increase in homelessness and,
of course, it is happening in many other places as well. We
have seen an inability to afford rents. This, to me, has
broader economic problems as well. Your ability to move
somewhere, your ability to move to a New York or a Los Angeles
to be able to advance in your career is threatened if you can't
find a house to live in. Of course, I am sure you could talk to
any of your junior staff or interns about their difficulty in
finding affordable housing when they come to Washington.
So, it impacts your career, it impacts the stability in
your life. It is difficult to keep a job if you don't have
stability, so to me, this is a real crisis that is all-
encompassing.
Ms. Dean. It is a core crisis. By the numbers, some of the
data that we have seen here show that only one in four people
eligible for rental assistance or low-income housing assistance
actually receives it. Does that match your data?
Mr. Calabria. Correct.
Ms. Dean. How do we expand and reach out to the other
three-quarters of the folks who are suffering under this
problem specifically? How do we do it?
Mr. Calabria. To me, I think that there are three
fundamental constraints going on here, at the risk of
alliteration, my three L's: land; labor; and loans. I think we
do need broad-based reform and zoning entitlement processes in
many areas in the country to try to speed that up.
Second, on labor, we have a distinct shortage, especially
of trade contractors. We don't have enough plumbers in this
country, don't have enough electricians, don't have enough
carpenters. Fill of the money you want out of it, if you don't
have somebody there to swing that hammer, it is not going to
get built, and we need to focus on that. Of course, my
responsibility is the lending side or the loan side, and I
think that is an important piece of the puzzle, but I would
really emphasize that we need to fix all three of these.
Ms. Dean. I appreciate that. Is it your ambition to make
sure that we do reach out and get the whole host of folks who
need affordable housing?
Mr. Calabria. Absolutely.
Ms. Dean. Secretary Mnuchin, is that your ambition also
that we would use government wisely and in a limited way to
make sure that we are reaching all of those who need
homeownership assistance?
Secretary Mnuchin. Yes, and I think, again, there appears
to be bipartisan support on the need for better affordable
housing.
Ms. Dean. But nowhere in your testimony did I hear you or
Secretary Carson talk about the gap, the three-fourths of
people of absence of units and housing. I heard all of your--I
read with interest your issues about reform, making sure we are
more efficient.
Mr. Secretary, you said you are recommending more efficient
means of delivering that support. How about more abundant means
of delivering that support? Are you interested in doing that?
Secretary Mnuchin. I personally think that is a good goa,l
and we would work with Congress to do that. Again, that is part
of the reason why our preference is to do congressional
legislation and to sit down on a bipartisan basis to agree on
these things and how to do it.
Ms. Dean. Secretary Carson, is it your ambition that we
expand our resources to make sure we get everybody affordable
housing?
Secretary Carson. Absolutely. It is one of our highest
priorities, and that is why, this past spring, we had the
display on the national mall.
It is not a lack of innovation, it is not a lack of
entrepreneurship; it is an abundance of barriers that prevent
us from being able to use it, and we need to use all of our
resources and work together to remove those barriers because we
are smart people. We can do it.
Ms. Dean. My concern is that it seems to me that a lot of
the reforms are really an attempt to privatize, to say this is
not the government's responsibility.
Back to the Director, you said twice, and I heard you
clearly, that in their current condition, Fannie Mae and
Freddie Mac will fail in a downturn. Is it your ambition to
shore them up?
Mr. Calabria. That is my ambition, for that not to happen.
Ms. Dean. Is it your ambition to shore them off or spin
them off, Mr. Secretary?
Secretary Mnuchin. Again, it is both. We would never spin
them off without shoring them up.
Ms. Dean. So, shore them up and about get rid of them?
Privatize?
Secretary Mnuchin. Shore them up and--again, they are
private, but keep them privatized, yes. Get them out of
conservatorship and out of receivership.
Ms. Dean. In the face of three out of four people who need
efficient, affordable housing, that is your ambition? That is
the trajectory you are hoping to take Treasury?
Secretary Mnuchin. Again, I think there are two different
issues. Affordable housing is part of this issue, but is a
broader government issue.
Ms. Dean. Thank you, Madam Chairwoman.
Chairwoman Waters. The gentleman from Tennessee, Mr.
Kustoff, is recognized for 5 minutes.
Mr. Kustoff. Thank you, Madam Chairwoman, and thank you for
convening today's hearing. And thank you to the witnesses for
appearing.
Director Calabria, I think Secretary Carson earlier today
was asked about manufactured housing, which is also important
in my district of Memphis and West Tennessee. In the Housing
and Economic Recovery Act of 2008, there is a duty-to-serve
provision that singled out the availability of credit for
manufactured housing as an underserved area that Fannie Mae and
Freddie Mac are required by statute to make a concerted effort
to address.
As it relates to the duty-to-serve provision, the
Administration's housing finance plan proposes to replace that
duty to serve with a more efficient, transparent, and
accountable mechanism and to transfer some of these activities
to HUD. Could you explain how this would work with respect to
manufactured housing with both rural personal property, chattel
loans, et cetera?
Mr. Calabria. Let me emphasize, and I will note that
several years ago, I ran the manufactured housing program at
HUD, so I'm very familiar with it, and I do think for much of
America, manufactured housing is the most affordable option,
and I think we can make a lot of advancements to bring down the
cost of housing via manufactured housing, so I'm committed to
that.
I can't speak to the details of what Treasury's envisioned.
I will leave that to Secretary Mnuchin to discuss, but I do
think that we can continue to make sure that Fannie and Freddie
have an active involvement in manufactured housing and do it in
a way that is safe and sound.
Mr. Kustoff. In other words, the GSEs' statutory duty would
not be diminished?
Mr. Calabria. It is in law today, and I have every
intention, as long as it remains in law, to actively carry it
out.
Mr. Kustoff. Thank you very much, Director.
Secretary Carson, it is good to see you again.
Secretary Carson. Absolutely. You, too.
Mr. Kustoff. I had the honor to have you in Memphis just a
few weeks ago as it relates to Opportunity Zones, and in
Memphis we have 32 Opportunity Zones, of course, which were
created under the Tax Cuts and Jobs Act.
The area that you visited in Memphis was a development
called Union Row, which is a $950 million project that is going
to include apartments, hotels,and retail and grocery stores. In
the remarks that you made at that event, you mentioned the
importance of local community involvement and also added
benefits such as rising property values.
How do you see Opportunity Zones as a way of addressing
affordable housing in Memphis and, of course, I know you also
made an affordable housing stop in Memphis before you went to
that Union Row project.
Secretary Carson. Yes. A lot of the Opportunity Zones
across the country, the initial starting point might be, for
instance, like in St. Louis, an abandoned foundry, and then as
they begin to build out, they have to build workforce housing
and a lot of the workforce housing, of course, is going to be
affordable housing. And we have tailored some of our programs
to be able to take advantage or allow builders to take
advantage of some of our grant programs.
Instead of just, for instance, a single multi-family unit,
we used mixed-purpose units so that they can put commercial
units on the first floor. Those are the kinds of things that
obviously not only provide housing, but also provide jobs, and
of course, they tend to fertilize the area so that other people
want to come in and take advantage.
Mr. Kustoff. Thank you, Secretary Carson.
Secretary Mnuchin, one thing that I did not mention, the
Opportunity Zone in Memphis that was created that I just
described, Union Row, is an area with some degree of blight. Of
course, in your role as Secretary of the Treasury, you are
responsible for certifying these Opportunity Zones. Can you
describe, if you can, the impacts on the blighted communities
that we are seeing across the country and how Opportunity Zones
are addressing those?
Secretary Mnuchin. First of all, the Opportunity Zones
were--the States had the ability to designate Opportunity
Zones, and if they fit certain requirements, we certified them.
We think that the States are better able to determine where
these are appropriate, but yes, I think for the areas that you
have described, they have been very beneficial, not just for
housing, which is a big part of this, but also for new
businesses and businesses being relocated.
Mr. Kustoff. Thank you.
I thank the witnesses, and I yield back.
Chairwoman Waters. The gentleman from Illinois, Mr. Garcia,
is recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you very much, Madam
Chairwoman. And I thank the panelists for being here today.
Inadequate affordable housing is a major issue that people
in Chicago face, especially the working-class families that I
represent on the southwest and northwest sides of the City.
Rents in America have steadily increased, while working-
class people have seen their wages remain stagnant. Rents in
the U.S. have gone up by 13 percent while the median household
income for renters went up one-half of 1 percent. The
homeownership market isn't any better, particularly for
communities of color who were hit hardest by the housing crash
and had the most foreclosures and devastation to recover from.
That is why the role of the GSEs and FHA are so critical in
helping communities regain wealth and homeownership.
I think we are on the same page, but for the record, if you
could answer yes or no, the three of you, you also support
promoting affordable housing, correct?
Secretary Carson. Yes.
Mr. Calabria. Yes.
Mr. Garcia of Illinois. And you believe that government
plays a role in achieving housing affordability?
I will take it across-the-board.
Secretary Carson. Yes.
Mr. Calabria. Yes.
Mr. Garcia of Illinois. Across-the-board, thank you. In a
recent report from the Administration, the FHA noted that its
plan seeks to, ``ensure the FHA and taxpayers are properly
compensated for riskier loans,'' and this is something that was
raised earlier by Representative Wexton. Part of that plan
involves introducing tier-based pricing and FHA-guaranteed
loans.
I would like to ask Secretary Mnuchin, if he would also
share the information that I think you committed to
Representative Wexton with me, because we are interested in
that also.
But Secretary Carson, tier-based pricing would constitute a
change from FHA's current policy, which currently maintains a
flat fee without respect to the credit rating of the applicant,
correct?
Secretary Carson. Yes.
Mr. Garcia of Illinois. Thank you.
That is disappointing to me. That seems to run counter to
the model that has governed FHA for decades. The cross-
subsidization of loan applicants with stronger credit with
those without creates a risk pool that enables FHA to provide
loan guarantees regardless of credit.
So what you are proposing, tier-based pricing, is basically
risk-based pricing undermining the entire model that allows FHA
to back loans for lower-income families with less credit.
Secretary Carson. Risk-based obviously means you take the
people who are higher-risk individuals and you charge them a
bit more. People who are low risk and have developed a very
good credit line will have a smaller premium--
Mr. Garcia of Illinois. So those who have struggled
financially, economically, are going to be charged more--
Secretary Carson. It depends on how--
Mr. Garcia of Illinois. --if their credit is reflective of
that experience?
Secretary Carson. It depends on how you determine the
credit and the credit risk.
Mr. Garcia of Illinois. Let me switch gears.
Secretary Mnuchin, the Treasury recently recommended that
FHFA should revisit the GSEs underwriting criteria for multi-
family loans in jurisdictions that adopt rent control laws or
other impediments to housing development.
Secretary Carson, your agency noted that rent control laws
interfere with local housing markets. Both of you are
suggesting some type of penalization for areas that enact rent
control laws, is that the takeaway, and what other impediments
might you be referring to?
Secretary Mnuchin. I may have commented on this earlier.
First of all, I think rent control has worked in many markets
for long periods of time. I think the comment was, in certain
markets, there are some very, very drastic changes to the rent
control laws, and they may have credit implications for
underwriting. So, that was the purpose of that.
Secretary Carson. And there are multiple impediments, not
just the rent control. There are wetlands, historical lands,
height restrictions, density restrictions, and zoning
restrictions. By the time you add all of those up, it becomes
extremely substantial. And that is what is increasing the price
so much, particularly when you look at renters. Between 2001
and 2017, the number of families who are significantly burdened
in terms of renting has gone up by 45 percent.
Mr. Garcia of Illinois. Generally speaking, you can say
that. But also, local officials tend to know their communities
best.
Thank you very much. I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. I would like to announce that
votes have been called.
I intend to recognize the following Members, and then we
will adjourn the hearing.
Mr. Gonzalez, Ms. Ocasio-Cortez, and Mr. Rose.
The gentleman from Mr. Ohio, Mr. Gonzalez, is recognized
for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. I
certainly appreciate you holding this hearing.
I am under no illusion about the difficult challenges that
the witnesses face in attempting to successfully reform our
housing finance system and GSEs, while not disrupting the
housing market.
One thing is clear, though: Congress has an obligation to
work with the Administration and forge a bipartisan path to
responsibly address the challenges being discussed today.
Director Calabria, you have testified about the current
leverage ratio being around 500 to 1, while big banks are now
levered around 10 to 1. In your view, what is the proper target
for the Enterprises to be leveraged?
Mr. Calabria. A lot less. But I think ultimately, the GSEs
represent the same sort of risks to the financial system as
other SIFIs, and I think they should be in that ballpark.
Mr. Gonzalez of Ohio. Thank you.
One of the things that we have talked about before and that
I frankly read, is there is a concern that this plan could be
seen as a bailout for the preferred equity holders. And I guess
my question would be, what is the functional difference between
holding the reserves, let's say, in a dedicated account at the
Fed versus--where we can watch them, we know exactly where the
cash is, what it is doing and what it is not doing, versus
having it on the balance sheet?
Mr. Calabria. First of all, let me really emphasize that
until they are out of conservatorship, dividends aren't being
paid. These aren't payouts to shareholders as we retain
earnings. I want to be very clear about that. We are building a
buffer to protect these entities in times of loss.
Secretary Mnuchin has said, we haven't gotten to the point
of deciding what the next route is, so again, that could be an
option.
Mr. Gonzalez of Ohio. Okay. Again, what is the functional
difference? What is the difference, in your mind, between
having a dedicated account at the Fed versus at the GSEs,
Secretary Mnuchin?
Secretary Mnuchin. I just want to clarify, again, although
the Treasury is not being paid cash, the amount that we are
deferring in cash that will stay in our liquidated preference
will go up. So there is no difference, from my standpoint,
between having cash in the bank and having an obligation that
is owed to us.
Mr. Gonzalez of Ohio. Gotcha. And then, Director Calabria,
you have talked a lot about--and I think is 100 percent right--
that at the current leverage ratio, there is no way these banks
could sustain any sort of meaningful downturn.
Could you put some clarity around that? Specifically, how
big of a downturn, what sort of stress tests are you running,
and where should we be concerned?
Mr. Calabria. Sure. I think that they are a bit of an
underestimate. Our most recent Dodd-Frank DFAST stress test
that was performed for Fannie and Freddie showed that if you
had a downturn similar to the last one, you would have to put
in, in excess of $40 billion. And again, I don't see how you
get that money back. So, these are not small numbers we are
talking about.
Mr. Gonzalez of Ohio. Yes. Thank you for that.
And then, Secretary Mnuchin, when talking with local
stakeholders, they have expressed support for responsibly
ending conservatorship and efforts to capitalize GSEs. However,
they have expressed some concern about limiting Fannie and
Freddie's ability to offer cashout refis, second homes,
investment properties, and reviewing overlap between the GSEs
and FHA, specifically low-down-payment, high debt-to-income,
and high loan-to-value loans.
Preventing the GSEs from offering these products could
limit consumer choice and specifically, in regard to FHA,
overlap will shrink liquidity at the bottom of the market.
Can you talk about why you recommend these changes and how
you view these proposals would benefit the consumer, the
taxpayer, and the overall economy?
Secretary Mnuchin. Again, we are suggesting these be looked
at. Just as an example, to take cashout refis, we are not
saying to eliminate cashout refis, but obviously when borrowers
take cash out, it creates a riskier loan. It used to be this
was one of the great savings mechanisms. So, we want to make
sure that as the FHFA sets credit, they look at a cashout refi
differently than they look at a purchase money mortgage.
Mr. Gonzalez of Ohio. Fantastic. Thank you.
And I yield back.
Chairwoman Waters. The gentlewoman from New York, Ms.
Ocasio-Cortez, is recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you, Madam Chairwoman.
And thank you to our witnesses for coming today.
Secretary Carson, it is good to see you again.
Secretary Mnuchin, releasing Fannie and Freddie from
conservatorship is one of your top priorities, correct?
Secretary Mnuchin. I would say housing reform is one of my
top priorities. And, again, we have not predetermined whether
they go through conservatorship on receivership.
Ms. Ocasio-Cortez. Okay. I see here from a Washington Post
article, ``Fannie Mae and Freddie Mac should be privatized,
Secretary of the Treasury nominee says.'' And it says here that
you stated that privatizing Fannie Mae and Freddie Mac is,
``right up there on the top 10 list of things we are going to
get done.''
Do you recall that?
Secretary Mnuchin. I do. That is accurate. Again, I was
just referring to--we do believe they belong in the private
sector. That could be through conservatorship or through, as I
said, other resolution mechanisms.
Ms. Ocasio-Cortez. I see. I understand.
Are you aware that the same day you made those comments,
Fannie Mae's share price increased by 46 percent and Freddie
Mac's share price jumped by 43 percent?
Secretary Mnuchin. I was. And I think it was clear the
market didn't understand my comments and what they implied.
Many times, there is very little liquidity and markets are not
efficient.
Ms. Ocasio-Cortez. I see.
Just to clarify for the record and for the confidence of
the American people, Secretary Mnuchin, would you, your spouse,
or any beneficiary of your assets, including your 15 disclosed
trusts, stand to receive any financial gain from your plan
surrounding the exit of Fannie Mae and Freddie Mac from
conservatorship?
Secretary Mnuchin. Today, no, I have divested all of my
assets. And other than--no, I have divested all of my assets. I
have no reason to believe I have anything to gain.
Ms. Ocasio-Cortez. Okay. Was there any gain from the
increase in that share price following those remarks?
Secretary Mnuchin. I am not aware of it.
Ms. Ocasio-Cortez. Okay.
Director Calabria, you have also made clear your intentions
to release Fannie Mae and Freddie Mac from conservatorship,
with or without congressional action, to provide an explicit
government guarantee. And you have already taken steps in that
direction by allowing the GSEs to build capital.
There are serious concerns that if you proceed with this
plan without Congress, there would be a serious loss of
investor confidence, which could result in an unforeseeable
disruption to the housing market.
Have you heard any of those concerns from domestic or
global investors?
Mr. Calabria. Thank you for that question, Congresswoman.
Let me clarify, this is less my intent than my obligation.
I am following the law. The law requires me either to fix them
and get them out or put them in receivership.
We have certainly heard from a select number of Wall Street
firms that would like us not to do that. To be very clear, if
the choice is on one hand, I follow the law, or on the other
hand, I don't follow the law because Wall Street doesn't like
it, I am going to follow the law.
Ms. Ocasio-Cortez. Going back to concerns about disruption
of the housing market, what are some of those disruptions that
have been raised?
Mr. Calabria. I think a number of investors, particularly
on the asset side of the management market, don't want to see
changes in interest rates, because that would undermine their
holdings. I think they would like an explicit guarantee.
I guess I should say that in my long years of dealing with
Wall Street, I haven't met anybody on Wall Street who doesn't
want to take the upside and leave the taxpayer with the
downside. That is my consistent experience in working in these
areas.
So, to me, I think Wall Street is about taking the upside
and the downside.
Ms. Ocasio-Cortez. With the information you provide in your
testimony, I would like to discuss a matter of rent with you.
In the 14th District of New York, an average renter earns about
$20 an hour, but they don't earn enough to afford a one-bedroom
apartment at fair market rent. Families are looking for
stability as household incomes can't keep up with the rising
costs of rent.
First and foremost, I want to ask, for someone making about
$45,000, what do you think is fair rent for them to pay?
Mr. Calabria. If we use the HUD standards, where it is 30
percent of your income, that is one standard. Of course, there
are fair market rents that are set at 40 percent. Again, these
are HUD standards. We can argue whether those are too much or
too little. I would fully agree with the overall premise of, we
have a lack of affordable rental housing, not only in New York
but in many areas of America. I will note that when we recently
changed the multi-family caps, we increased the percent of
affordable--
Ms. Ocasio-Cortez. I'm sorry. I just need to grab a number,
because I am running out of time.
Mr. Calabria. You want a number of what I think somebody's
rent should be? I think that ultimately should be between them
and their landlord.
Ms. Ocasio-Cortez. Making about $45,000-a-year, ballpark.
Mr. Calabria. I don't think I should be deciding--
Ms. Ocasio-Cortez. Do you know anyone who makes $45,000,
and kind of what their rent is?
Mr. Calabria. That is a little more higher income than
somebody paying 45--are you saying 45 in income or 45 in rent?
Ms. Ocasio-Cortez. No, somebody making $45,000 a year. What
is a ballpark--
Mr. Calabria. Let's say if you were a friend of mine and
you were making $45,000, what I would suggest to you
personally--not as a government official--is I would be happy
to say that you probably shouldn't spend more than $15,000 tops
on your rent.
Ms. Ocasio-Cortez. Thank you very much.
Chairwoman Waters. Mr. Rose, you are recognized for 5
minutes.
Mr. Rose. Thank you, Chairwoman Waters. And thank you for
calling this hearing.
Before I begin today, I want to reiterate my colleague, Mr.
Luetkemeyer's, call for FSOC to ask for a study on CECL. I do
believe that would be important.
I agree with many of my colleagues today that housing
finance reform is both welcome and long overdue. As has been
said many times today, the time to reform our housing finance
system is when times are good, not when our system is in a time
of crisis.
One thing I have noticed in my brief 10 months here in
Congress is that too often, we let the perfect be the enemy of
the good. The proposals put forth by HUD and Treasury represent
a positive first step on the long path towards reforming our
housing finance system.
There are 116 itemized reform recommendations between the 2
reports. Promoting competition and eliminating redundancies
between the GSEs and FHA and protecting taxpayers from future
bailouts is good policy. It is responsible governance.
The relatively stable housing market we have right now will
not last forever. I think we all agree it never does. It stands
to reason that members of this committee will not agree on
every single recommendation, but we cannot afford to let the
perfect be the enemy of the good.
I hope we can put partisanship aside so we can make our
housing finance system more resilient before we reach another
crisis.
One issue I was pleased to see addressed in HUD's housing
finance reform plan was that of manufactured housing.
Manufactured housing is incredibly important to the 6th
District of Tennessee, which I am proud to represent. According
to the Manufactured Housing Institute, in the United States,
manufactured homes account for 7.1 percent of occupied housing
units. In Tennessee, they account for 10.5 percent, and in my
district, 13 percent.
Secretary Carson, I appreciate your continued attention to
the HUD programs that serve manufactured housing, and comments
you have made in prior testimony about the need to make
adjustments to the Title I and Title II programs to better
serve manufactured housing.
I am concerned that the volume of manufactured home loans
being supported by FHA continues to decline, however. Among the
Administration reforms mentioned in HUD's report is the need to
publish updated Title I standards that address regulatory
burdens of participating in the program.
Secretary Carson, what updates would improve the Title I
program and what can be done, either legislatively or
administratively, to expedite these updates?
Secretary Carson. We have greatly expanded the manufactured
housing office to look at all of the issues that would
facilitate not only the construction but the safety measures
associated with them, combining some of the updates to
accelerate the process. And we will continue to do that, fully
recognizing that this is one of the major players when it comes
to reducing the cost of housing, not only in the rural areas
but throughout the nation.
That, coupled with looking at modular housing and other
newer techniques, we have impanelled a group of people to look
at all of the newer techniques and assess those. And
manufactured housing is a huge portion of that.
Mr. Rose. Thank you, Secretary Carson.
Director Calabria, can you give me an update on the chattel
loan pilot program that the GSEs included in their Duty to
Serve (DTS) plans?
Mr. Calabria. Thank you. We are currently reviewing that.
The GSEs have requested modifications to their current DTS
plans. And so we are going to put those out, have some
listening sessions, and get some comments back. But we are
currently under review for that.
Mr. Rose. What is being done to ensure that the pilot
programs discourage cherrypicking the best loans so that the
pilots are not significantly disruptive to the other market
players?
Mr. Calabria. Thank you for that. I think it is an
incredibly important question.
My objective over time is that either pilots prove
themselves to be successful and then they grow--I think it is
problematic if you have long-running pilots to which select
industry players have access that others do not have. I think
they should be open to all if they work. If they don't work,
then we intend to end them.
So, again, I would agree that I think where we need to go
is to figure out how this is a program that everybody else can
participate in on a level playing field, if that makes sense.
Mr. Rose. Finally, Dr. Calabria, there is one final concern
I would like to raise with you. And it is one that I hear often
back home. You and I have discussed the issue before, and that
is to rein in excessive compensation packages, especially at
the GSEs, and especially while they are still in
conservatorship.
Could you say a word about that?
Mr. Calabria. We recently, I guess a couple of months ago,
made some changes to compensation practices at GSEs to better
align them to be in a conservatorship.
Mr. Rose. Thank you. I yield back.
Chairwoman Waters. Thank you. I would like to thank our
witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is adjourned.
Thank you very much.
[Whereupon, at 1:32 p.m., the hearing was adjourned.]
A P P E N D I X
October 22, 2019
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