Republicans criticized the government overseer of Fannie Mae and Freddie Mac in a congressional hearing Tuesday, pushing back against his recent efforts to promote home ownership through the bailed-out mortgage giants.
“You’re once again putting people into homes that they can’t afford to keep,” House Financial Services Chairman Jeb Hensarling told Mel Watt, director of the Federal Housing Finance Agency that acts as the government caretaker for Fannie and Freddie.
Watt, an Obama appointee who took over the FHFA in January 2014, has taken a number of steps to clarify and ease the terms under which Fannie and Freddie extend credit. The two government-sponsored enterprises increase liquidity in the secondary mortgage market by buying loans from lenders and packaging those loans into government-backed securities to sell to investors.
Republicans objected Tuesday to many of those moves, saying that they risk provoking another financial crisis. They attributed the 2008 financial crisis to the failure of risky loans guaranteed by government agencies pursuing affordable housing goals.
“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,” said Rep. Scott Garrett, a New Jersey Republican.
Hensarling asked Watt to explain three decisions in particular: Halting an increase in the fees the GSEs charge for government-backed insurance on securities, a move to back loans with down payments as low as 3 percent of the value of the mortgage, and a December decision to have Fannie and Freddie contribute to affordable housing trust funds that Republicans say are nothing more than slush funds.
“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,” said Jeb Hensarling, chairman of the House Financial Services Committee.
Watt defended his efforts to expand credit access, stressing that his agency intended to see that only responsible borrowers get loans.
“You should never make a loan to someone you anticipate cannot repay it,” Watt said at one point during the hearings.
“We are in the risk business, and there’s no way to get away from risk,” Watt acknowledged in an exchange with Rep. Blaine Luetkemeyer, R-Mo.
Yet Watt argued that the FHFA had measures in place to ensure that Fannie and Freddie would not take on the levels of risk that led to their nearly $200 billion bailout that began in 2008.
A loan with just a 3 percent down payment can be as safe as one with a 10 percent down payment, Watt argued, “when you pair the down payment with other compensating factors.” Those factors include requiring borrowers to go through loan counseling, obtain private mortgage insurance or have higher credit scores.
The former North Carolina congressman also denied the charge leveled by Republicans that offering mortgages with 3 percent down payments would put Fannie Mae and Freddie Mac into competition with the Federal Housing Administration, which insures low-down payment loans mostly used by first-time home buyers. “We are not in competition with FHA,” Watt said. “We are trying to provide liquidity in the market.” He acknowledged, however, that lenders would go wherever necessary to get the best deal from the government.
Contributing to the affordable housing trust funds, Watt argued, was required by the law as the cash flow position of Freddie and Fannie improved.
In a dialogue with Rep. Mick Mulvaney of South Carolina, Watt said the Republican-led Congress could stop putting money into the housing funds if it wanted. “Don’t expect me to disregard the law and do it for you,” he added.
A final decision regarding the fees charged on insurance on securities, Watt said, would come “hopefully” by the end of the quarter.
