A four-hour hearing that featured Sandra Thompson, director of the Federal Housing Finance Agency (FHFA), testifying before the U.S. House of Representatives’ Financial Services Committee on Tuesday saw some pointed moments as lawmakers took aim at recent moves deployed by the agency.
In particular, Thompson spent much of the hearing defending changes made by the FHFA aimed at reconfiguring the pricing grids of the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The moves were made to better align with the risk guidelines defined in the Enterprise Regulatory Capital Framework.
Such maneuvering included the much-maligned loan-level, debt-to-income ratio-based upfront fees that were derided by the real estate and mortgage industries. These fees, after immense pressure from industry stakeholders and Congress alike, were eventually rescinded by the FHFA. Other controversial costs remain, such as higher fees for second home loans, which many criticized for their enactment during an already down period for real estate.
Thompson acknowledged the recent difficulties faced by the housing market, including affordability challenges, elevated mortgage rates and historically low resale inventory. But she also cited the FHFA’s role as regulator and conservator of the GSEs, emphasizing the agency’s job in ensuring their safety and soundness, especially from a capital standpoint and in defending them from risky transactions. She characterized housing finance as “a complex issue” and noted that “the pricing grids underpinning [the GSEs’ capital] framework are not easily digestible.”
“Unfortunately, certain media reports have distorted basic facts by painting an incomplete and misleading picture of these pricing updates,” she said. “These media reports often make the fundamental mistake of assuming that the pricing grids previously in place were perfectly aligned with the risks faced by the enterprises. I would like to dispel that myth. In fact, the pricing grids in effect prior to these updates had not been updated in many years and were not fully reflective of the capital framework with which the enterprises are required to comply.”
The changes made by the FHFA, while unpopular, were necessary updates “to both help creditworthy first-time homebuyers limited by income and wealth and to enhance safety and soundness by better aligning upfront fees with the risk exposures and the capital required to be held against these exposures,” Thompson said. The updated framework will let Fannie and Freddie build up their capital cushions, lessening the taxpayer risk since being placed into conservatorship in 2008.
“First, the updated pricing framework supports American homeowners by eliminating the upfront fees for many creditworthy borrowers — first-time homebuyers with lower incomes, for example — and does so by increasing the fees on products that are less central to homeownership, such as second homes or vacation homes,” Thompson added. “These targeted changes promote homeownership that is both attainable and sustainable. Second, the updated pricing framework enables the enterprises, both of which are taxpayer-supported, to build capital in a safe and sound manner.”
Thompson also sought to dispel what she described as a misconception about the FHFA’s pricing changes — a misconception that has dogged the agency all the way to the House.
“I want to be very clear on one key point, and one that bears repeating. Under the new pricing framework, borrowers with strong credit profiles are not being penalized to benefit borrowers with weaker credit profiles,” she said. “That is simply not true.”
Republican lawmakers have introduced multiple bills centered around the supposed damage that the FHFA’s new pricing frameworks could do to high credit-score borrowers.
“Fundamentally, it is wrong to support those with a history of financial irresponsibility by punishing Americans who have worked diligently to earn a high credit score,” House Majority Whip Tom Emmer, R-Minn., said at the hearing.
“The FHFA tells us that it had to make these changes based on its capital rule,” Emmer added. “My constituents in Minnesota know that any capital rule that says the safer thing to do is to borrow beyond their means is a bad one that fundamentally needs to be rethought.”