What started as a dry, lame-duck session hearing on the Federal Housing Finance Agency in the Senate Banking Committee on Wednesday, got heated when U.S. Sen. Elizabeth Warren, D-Mass., went guns blazing after the FHFA director.
Warren, an outspoken progressive and a likely candidate for the 2016 Democrat presidential nomination, went on the attack during FHFA Director Melvin Watt’s first hearing before the committee, saying that he’s never done anything to help homeowners who are underwater and facing foreclosure.
The hearing started benignly enough, with Watt's prepared remarks delivered in a measured tone. That soon ended, when Warren took the mic.
Warren is known for aggressively grilling witnesses, but this was an unusual case of a “blue on blue” attack, as Watt is a former congressional Democrat and Obama appointee, and considered a strong advocate for affordable housing and homeowner assistance.
This is likely a preview of what’s to come with Warren assuming a more-prominent Senate leadership role, as well as an effort to boost her reputation among 2016 voters as standing up for homeowners.
“Five million families lost their homes during the financial crisis and millions more are still struggling,” Warren said, prefacing her questions to Watt. “According to the latest data from CoreLogic…another 5.3 million homeowners remain underwater on their homes. And people are continuing to lose their homes every day in foreclosure.
“We talk a little bit about the law here, now one of your duties under the law. One of your duties is to conserve the assets of Fannie and Freddie, but another duty given equal importance by Congress … is to implement a plan that seeks to maximize assistance for homeowners and take advantage of available programs to minimize foreclosures,” Warren said.
She went on to recite that Congress explicitly included reduction of loan principal as an option for the FHFA to use.
“Principal reduction is often a win-win that both helps Fannie and Freddie and helps a family,” she said.
She cited a 2013 Congressional Budget Office study found that even a modest principal reduction plan for Fannie and Freddie mortgages could help 1.2 million underwater homeowners, prevent 43,000 defaults and save Fannie and Freddie about $2.8 billion.
“The Treasury Department has found that principal reductions could save Fannie and Freddie nearly $4 billion and help half a million homeowners stay in their home,” Warren said. “It has been six years since Congress created FHFA and in all that time your agency has never, not once permitted a family to reduce its principal mortgage through Fannie or Freddie.”
A clearly frustrated Warren continued.
“I’ve asked about this repeatedly and you’ve said you’d look into allowing Fannie and Freddie to engage in principal reduction; you said it again today,” Warren said. “You’ve been in office for nearly a year now and you haven’t helped a single family, not even one, by agreeing to a principal reduction. So I want to know why this hasn’t been a priority for you. The data are there.”
Watt appeared a little shaken by the line of attack.
“It’s probably an overstatement to say it’s not been a priority,” Watt stammered. “It’s just a very difficult issue. The reason it is difficult is because we are looking for exactly what you said – a win-win situation. We have to do this in a way that is responsible, otherwise we just reduce principal for everybody across the board…is not what anybody I think is advocating for, so then we have to decide what is a responsible way to do that—”
Warren cut him off.
“Chairman Watt, you have had a year to do that, you have known for five years before that what the problem was, we have two studies coming out showing that Fannie and Freddie could make money by doing this,” she said. “In the meantime you have done the reps and warranties, the buyback policy, private mortgage insurance rules, a whole list of tough technical things, and I applaud you for doing that, but people have lost their homes in the last year and every day that you delay more families lose their homes. There are 5.4 million families out there underwater so I want to know when are you going to have an answer on this?”
Watt stammered in response.
“We are going to have an answer sooner – it won't be as long as it has been…” he said.
Warren interjected, “How many more people have to lose their homes before we get there?”
Watt said that he couldn’t or wouldn’t take responsibility for what happened in the five years before he assumed the director’s chair at FHFA.
“But you’ve been there a year,” Warren interrupted.
“It’s not a year yet. And we are doing some things that really, may not call themselves principal reduction. But we are giving a lot more flexibility through the Neighborhood Stabilization Act,” Watt tried to say.
Warren seemed exasperated.
“But they are not principal reduction, let’s just be serious about this,” she said.
Watt wouldn’t cede ground.
“But they are principal reduction if we facilitate the transfer of loans to other entities that do principal reduction and allow them to do principal reduction, that is principal reduction,” Watts said. “It is not across the board principal reduction...”
Warren again interjected.
“Indeed, how many families has it affected?” she demanded.
“It has affected a number of—”
Warren cut him off.
“We have 5.4 million families outstanding with underwater loans and we‘ve got two principle studies showing what would happen if Fannie and Freddie would engage in principal reduction,” she said.
Before her time expired, Warren also attacked Watt for pursuing borrowers for deficiency judgments.
She cited a 2012 FHFA inspector general study that found that of the 35,000 borrowers it pursued and “hammered on” who owed a collective $2.1 billion, FHFA recovered just $4.7 million, or less than one quarter of one percent.
“This is not a program producing money for Fannie and Freddie but it is causing a lot of pain for families who were already victims,” she said.
Earlier in the day, Warren submitted a letter to Watt, which can be read here.