The new security will help pave the way for the future of the housing finance sector, said FHFA Director Mel Watt.
The new security will help pave the way for the future of the housing finance sector, said FHFA Director Mel Watt. Credit: Bloomberg

WASHINGTON — Only eleven months after cheering Federal Housing Finance Agency Director Melvin Watt's confirmation, Senate Democrats are fed up with the pace of reforms at the agency.

In a sometimes-tense hearing before the Banking Committee on Wednesday, several top Democrats, including Sens. Elizabeth Warren, D-Mass., Robert Menendez, D-N.J. and Jeff Merkley, D-Ore., had tough questions for Watt.

For example, both Warren and Menendez pressed Watt on why he hasn't allowed principal reductions on loans owned by Fannie Mae and Freddie Mac.

The issue has been a hot-button topic since Watt's predecessor, Edward DeMarco, opposed principal reductions at the government-sponsored enterprises in 2012. Supporters of the policy continue to argue that reductions would help underwater borrowers and reduce foreclosures, while critics say the policy would impact considerably fewer homeowners at this stage.

"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," Warren told Watt, noting that 5.3 million families are still underwater. "Why has this not been a priority for you?"

Menendez, meanwhile, added that "time is of the essence" to help borrowers through principal reductions.

Watt acknowledged that the agency "has not taken responsible principal reduction off the table" — perhaps not surprising given he was supportive of targeted reductions when he served as a Democratic congressman from North Carolina. But he repeatedly deflected criticisms from lawmakers about timing, calling the problem "perhaps the most difficult that I have faced as director."

Watt was more forthcoming on another issue of whether the FHFA would allow the GSEs to fund two affordable housing trust funds that could be used by low-income borrowers and renters.

The National Housing Trust Fund and the Capital Magnet Fund were established under a housing law in 2008, but DeMarco suspended funding soon after the GSEs were placed into conservatorship.

Housing groups and Democratic lawmakers have pushed for the GSEs to fund the trust funds, arguing they can assist struggling borrowers. Watt said the FHFA would have a decision soon on that issue.

"There are specific statutory provisions that indicate when the contributions to the housing trust funds can be suspended. Those statutory provisions have not changed," said Watt. "But that doesn't mean that circumstances that triggered the determination may not have changed, and that's what we're evaluating at this point."

It's possible that Watt is leaning towards turning the funds back on, which would be a boon for progressives and housing advocacy groups. Housing and Urban Development Secretary Julian Castro said last month that he and Watt have been discussing the issue and that he was hopeful the funding would kick in soon, according to media reports.

"If you can find a way to fund it, it would practically be helpful for thousands and thousands of people," said Sen. Jack Reed, D-R.I.

Merkley, meanwhile, appeared frustrated with Watt for the FHFA's failure to crack down on force-placed insurance. The issue made headlines in 2011 when mortgage borrowers were hit with hefty premiums, often after they defaulted and went into foreclosure. Force-placed insurance is purchased by the servicer when a struggling homeowner fails to maintain coverage on the property.

The FHFA's inspector general recommended this summer that the FHFA sue banks and force-placed insurers for inflating prices and causing losses.

"I'm not satisfied yet that homeowners are getting a fair shake," Merkley said.

When Watt said he was looking into the issue, Merkley accused him of offering "excuses."

"These are predatory practices and you're in a position to help stop it. I'm asking you do so," Merkley said.

GOP lawmakers also had some tough questions for Watt on Wednesday, including concerns about the risks involved with new plans to expand credit. The FHFA announced a proposal last month to allow borrowers to put down as little as 3% on GSE-backed loans.

"I'm troubled that you would reduce borrower home equity after the problems we've seen, so early," said Sen. Mike Crapo, R-Idaho, ranking member on the panel, pushing for more information about how the agency plans to mitigate any increased risk from the change.

Watt said that the agency would release additional details about lowering the minimum downpayment for certain borrowers in early December, including giving specifics about others steps that would be taken to reduce risk.

"The problem is that the downpayment itself is not necessarily a reliable indicator of whether somebody will pay a loan," Watt added. "If they have good credit, if they have housing counseling... and know how to be responsible homeowners — those can mitigate the perceived increased risk."

The FHFA director also told Sen. Mark Warner, D-Va., that the agency is in an ongoing discussion about how the GSEs can better evaluate creditworthiness, including reviewing the accuracy of traditional credit scores calculated by FICO.

"We are thinking about it on an ongoing basis — not only whether it would be advantageous to have competition in the credit score area, but whether Fannie and Freddie through their own processes could evaluate creditworthiness. And they do, using things other than credit scores," said Watt.

He added: "It's a daily part, an hourly part of our regular process, because if you can't accurately evaluate the ability of a borrower or prospective borrower to repay, we have real trouble."

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