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FHFA hearing: GOP fear housing policy headed for Crash 2.0

Democrats say affordable housing, more lower-down policies needed

Federal Housing Finance Agency Director Mel Watt testified before the House Financial Services Committee at a hearing entitled “Sustainable Housing Finance” on Tuesday morning, and faced a tough grilling on the direction of the FHFA on housing policy.

The purpose of this hearing was to receive an update from the FHFA on measures FHFA has taken as conservator of Fannie Mae and Freddie Mac, the FHFA’s current Strategic Plan for the GSEs, and the current financial condition of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

However, it quickly turned to a debate on whether housing policy from Washington is going back down the road of perilous practices.

Democrats said policies in the past year are necessary to expand housing opportunities to lower income and challenged borrowers.

Republicans, meanwhile, said the administration is adopting dangerous policies that risk another housing crash that will put taxpayers on the hook for billions.

Watt also faced a tough grilling from the new Congress on whether adequate steps are being taken to encourage additional private capital in this market and what additional actions FHFA has taken as regulator of Fannie Mae, Freddie Mac and the FHLBs.

Watt’s full written testimony to the committee can be read here

One notable item, Watt said that he expects to have a decision on what to do about g-fees by the end of March. 

Committee Chairman Jeb Hensarling, R-Texas, said the FHFA and housing policy is heading back down the path that led to the housing crash.

“Memories are clearly short among Washington’s ruling class because they are repeating the same mistakes that caused the 2008 financial crisis in the first place,” he said. “Contrary to the fable told by the left, the root cause of the financial crisis was not deregulation but dumb regulation. Regulations and statutes that either incented or mandated financial institutions to loan money to people to buy homes they ultimately could not afford to keep. Exhibit one, Fannie and Freddie’s affordable housing goals. 70% of all troubled mortgages were backstopped by Fannie, Freddie and other federal agencies.

“And contrary to the fable of the left, it ultimately wasn’t Wall Street greed that brought down the system. Of course, there is greed on Wall Street.  When hasn’t there been? But there is also something known as Washington greed; greed for power to command and control huge swaths of our economy. Greed to have Washington allocate credit within our society as opposed to ‘we the people’ in a free and competitive, transparent and innovative market.”

Hensarling said that within the last 12 months FHFA has announced three different policies that are harmful to transitioning us to a sustainable housing finance system that protects both homeowners and taxpayers – suspending a g-fee increase, adopting 97% LTVs and funding what he called housing slush funds.

“FHFA is leveraging the taxpayer balance sheet – one that is clearly awash in red ink – to lock in a near government monopoly,” he said. “Next, in a race to the bottom with FHA to become the nation’s largest subprime lender, FHFA has announced that it will begin to allow the GSEs to buy mortgages with as little as 3% down. As history repeats itself, historically prudent underwriting standards are yet again being thrown out the window.

“Finally and most recently, FHFA has announced it will begin siphoning off taxpayer funds from Fannie and Freddie in order to begin filling government housing slush funds. All the while Fannie and Freddie remain ridiculously leveraged and continue to threaten hard working American taxpayers,” he said.

Hensarling argued that the best affordable housing program is a healthy economy, not a doubling down on what he called “failed Obamanomics.”

Rep. Scott Garrett, R-N.J., and chairman of the subcommittee on capital markets and GSEs, said that while it’s unlikely, he wants housing to be a priority in the new Congress, and he sees the FHFA moving into risky territory with loose lending standards, government subsidized home prices and other risky practices, the kind which led to the housing crisis in 2008.

“Lowering down payments, preventing risk-based guarantee-fee pricing and funding the housing trust fund will only make it harder to reform these entities and quite possibly lead us down the path of another multi-billion dollar taxpayer bailout, Garrett said. “These decisions bring to mind the old saying, ‘those that don’t learn from history are doomed to repeat it.;  Subpar underwriting standards, taxpayer-subsidized pricing and encouraging people to buy homes that couldn’t afford them were the main causes of the last crisis; please don’t let these decisions lead to the next one.

Rep. Maxine Waters, D-Calif., the ranking minority member of the committee, said she is pleased with Watt’s directorship, and that efforts to lower LTV ratios and fund affordable housing funds are moves in the right direction.

“With Fannie Mae and Freddie Mac now having paid the government $225 billion dollars – which is $38 billion dollars more than the Treasury invested during the crisis – I think it’s fair to say that our actions to prevent a total collapse of our housing market has been a resounding success. If we closed the GSEs without putting in place a viable alternative – as my Republican colleagues would do – we would likely re-enter a recession,” Waters said. “And Director Watt, your actions demonstrate that you are fulfilling your statutory mandate to preserve a liquid, competitive and national housing market.

“Similarly, the FHFA has finally abided by another statutory mandate – to fund the Affordable Housing Trust Fund. This one action will help improve – especially in my district – the availability and affordability of rental housing. There are 7.1 million American households for whom safe and decent housing is neither affordable nor available – a situation made worse due to Republican attacks on public housing and voucher programs,” she said. “But by complying with your statutory obligation to allocate a tiny percentage of Fannie Mae and Freddie Mac’s profits to these Funds, we have the chance to improve the lives of millions of American children, families, people with disabilities and the elderly.”

Rep. Frank Lucas, R-Okla., raised questions about the FHFA’s new rule to limit membership in the Federal Home Loan Banks. He said it would have an adverse impact community lenders and rural areas.

The proposed rule would revise the FHFA’s existing membership regulation to require that members maintain a commitment to housing finance — and that only eligible entities gain access to bank advances and the benefits of membership. 

Members would be required to maintain 1% of assets in home mortgage loans and maintain 10% residential mortgage loans ongoing

Watt agreed that it was a controversial move, and that FHFA has received 1,300 comments – an unprecedented amount – most of which are against it.

 “What’s the problem you’re trying to fix with this rule?” Lucas asked.  

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