Senate Banking, Housing & Urban Affairs Committee Issues Testimony From Federal Housing Finance Agency Director Thompson (Part 1 of 2)
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Chairman Brown, Ranking Member Scott, and distinguished members of the Committee, thank you for the invitation to appear at today's hearing.
These secondary market activities are undertaken to support borrowers and renters in the primary market. As government-sponsored enterprises, the Enterprises and the FHLBanks have maintained an obligation to operate in the public interest since their founding. The Enterprises and the
These actions take on greater significance at a time when housing affordability remains a persistent challenge nationwide. While home price growth has moderated from the rapid increases observed in 2020 and 2021, the ongoing imbalance between the robust demand for single-family housing and an inadequate supply has caused prices to rise steadily throughout 2023 and early 2024. Cumulative home price growth over the past four years has been nearly 50 percent at the national level.1 Combined with interest rates that are elevated from the historic lows observed during the COVID-19 pandemic, many aspiring homebuyers have experienced difficulty finding affordable homes.
Renters throughout the country face their own unique challenges, as well. Rising rents in many areas have put pressure on affordability and compounded issues some renters have reported with inadequate property maintenance, unclear or harmful lease terms, and costly and confusing application processes.
Providers of multifamily housing, meanwhile, face continued headwinds in key segments of their operations. While the completion of new units is expected to be robust in 2024, multifamily construction starts are also challenged by elevated interest rates and ongoing concerns regarding the costs of labor and materials.
FHFA is working to ensure its regulated entities take steps to address barriers to affordable and sustainable housing. For homeowners, this work includes efforts to responsibly reduce closing costs, modernize underwriting and home valuation processes, increase efficiencies in loan origination and servicing, and identify products that meet the needs of historically underserved and rural communities. For renters, this work includes efforts to enhance tenant protections, provide access to better information and data, streamline the application process, as well as to strengthen asset management capabilities.
To achieve these objectives, the regulated entities must operate in a safe and sound manner. Safety and soundness considerations are embedded in all aspects of FHFA's oversight of both the Enterprises and the FHLBanks. FHFA conducts rigorous examinations which address a wide variety of financial, market, and operational risks. FHFA also engages in rulemaking to ensure the regulated entities are appropriately managing these risks, such as its recent rule related to Enterprise capital requirements. Additional risk management actions include annual stress testing, counterparty credit risk reviews, and loan quality reviews.
The Enterprises have undergone significant changes to their business models and operations since they were placed into conservatorship in 2008. Reforms that FHFA has implemented over the course of 15 years have strengthened the Enterprises' financial conditions, improved risk management and corporate governance, and better insulated taxpayers from exposure to mortgage credit risk. For example, the Enterprises have increased their combined net worth to over
1 FHFA House Price Index. Available at: https://www.fhfa.gov/DataTools/Downloads/Pages/House-PriceIndex.aspx.
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Together, these past and planned actions are responsible for a healthier secondary mortgage market and housing finance system - which benefits consumers, market participants, and taxpayers.
FHFA welcomes the opportunity to share with the Committee the Agency's perspectives on the mortgage market, the operations and activities of the Agency's regulated entities, and the Agency's priorities for 2024 and beyond.
In
Support for members' housing activities has been the cornerstone of the
Following extensive public and stakeholder engagement, FHFA published its
As FHFA continues to move forward with implementing the recommendations in the Report, the Agency is encouraged by recent actions taken by the FHLBanks resulting from the review. Examples include increased voluntary allocations to their statutorily required Affordable Housing Program (AHP) contributions, improved engagement with non-depository CDFIs, and the development of voluntary programs to better support tribal communities.
2 FHFA, "FHFA Announces Comprehensive Review of the
3 FHFA, "FHFA Releases Report on
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FHFA will facilitate an open and transparent process as it implements many of the recommendations in the Report through guidance and rulemaking. FHFA has already issued guidance for the FHLBanks to execute pilot and voluntary programs and completed a regulatory interpretation indicating how cooperativas, state-charted credit unions in
Forthcoming actions and public engagement in 2024 include clarifying the
Additionally, FHFA remains ready and willing to engage with Congressional stakeholders regarding any potential changes to statute based on the Report's recommendations, including an increase to the minimum AHP statutory contribution and an expansion of the institutions eligible to pledge community financial institution (CFI) collateral.
Support for Community Development Financial Institutions
The Report recommends that
This recommendation complements ongoing work that FHFA is undertaking in support of CDFIs. In the coming months, FHFA also plans to issue a public request for information on affordable housing and community development collateral. Responses will inform preparation of guidance to the FHLBanks on developing mission-oriented collateral programs that encourage the use of collateral with a strong connection to the housing and community development mission of the
On
4 A CFI is an
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Support for the Affordable Housing Program
The FHLBanks are government-sponsored enterprises with a public purpose. The FHLBanks receive benefits to fulfill this public purpose, including exemption from paying most federal, state, and local taxes, as well as the ability to issue debt in the capital markets at rates slightly higher than those on comparable
An increase in contributions to the AHP would be one of the most significant means of directly increasing the FHLBanks' support for affordable housing. Each FHLBank is required by the Bank Act to contribute annually 10 percent of its net income from the previous year to its AHP. These programs have had a positive impact in promoting the mission of the
The FHLBanks have demonstrated the financial capacity to make a larger AHP funding contribution without adversely affecting their safety and soundness. For example, for the past 12 years, each FHLBank has voluntarily set aside 20 percent of its net income to a restricted retained earnings account which is considered part of the full capital position of the FHLBanks and contributes to their capacity to absorb losses.
The Housing Market and Ongoing Affordability Challenges
The most significant challenges in the housing market today center on the lack of affordable opportunities for both renters and those seeking to purchase or refinance a home.
In the single-family market, home prices have doubled in less than a decade. The strong home price appreciation of the 2012-2019 period, which was in part a correction following the 2008 financial crisis, was followed by extraordinary growth during the COVID-19 pandemic. National home prices rose approximately 11.7 percent in 2020 and 17.8 percent in 2021 - far outpacing wage growth.6 The median sales price increased over
In the multifamily market, rents declined during the first year of the COVID-19 pandemic, as uncertainty generated by public health concerns weighed on the market. From the middle of 2021 through the end of 2022, however, rents grew at a rapid pace, leading to cumulative rent growth of 21 percent at the national level from late 2020 to late 2023. In recent quarters, rent...
5 See 12 U.S.C. 1430(j)(5)(C).
6 FHFA House Price Index. Available at: https://www.fhfa.gov/DataTools/Downloads/Pages/House-PriceIndex.aspx.
7
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...growth at the national level has decelerated and is below the levels observed just prior to the COVID-19 pandemic.8
These rapid increases in home prices and rents are attributable, in large part, to the substantial housing supply shortage throughout the country. Estimates place this shortage anywhere from 1.5 million to 5.5 million units.9 Many of the causes of this shortage are not directly in the purview of FHFA or its regulated entities, but they impact the ability of FHFA and its regulated entities to meet their missions.
Following a period of historically low mortgage rates during the COVID-19 pandemic, mortgage rates rose throughout 2022 and 2023. The 30-year fixed-rate mortgage rate has been above 6 percent for over 18 months, peaking at 7.79 percent in October 2023.10 When combined with high home prices, the impact on mortgage affordability is significant. In late 2019, a borrower purchasing a median-priced home with a 30-year fixed-rate mortgage would pay
Elevated interest rates have exacerbated the lack of affordable housing supply by producing a "lock-in" effect, in which many homeowners with low mortgage rates are reluctant to sell their homes and obtain a new mortgage with an interest rate at current market levels. As of
For the representative (median) loan and borrower, the value of holding the current mortgage rather than refinancing or paying a higher market rate on a new home is over
While housing affordability represents a national problem, the impact of this problem is most acutely felt in local communities. In my capacity as FHFA Director, I have traveled throughout the country and heard about these issues directly from stakeholders, including working families in cities such as
8 FHFA analysis of CBRE data.
9 See "Estimating the National Housing Shortfall,"
10
11
12 Calculated as the net present value of the difference in monthly mortgage payments, comparing the note rate and the prevailing mortgage rate, over the remaining term of the existing mortgage, discounted using the prevailing mortgage rate.
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...about multigenerational families living in homes that are far too small in order to make ends meet.
Therefore, FHFA and its regulated entities are prioritizing actions that encourage affordable, sustainable housing opportunities in the single-family and multifamily markets.
Cost Reductions and Efficiency Gains in the Mortgage Origination Process
In recent years, FHFA and the Enterprises have been engaged in efforts to explore sustainable cost-saving measures with respect to mortgage closing costs. These efforts are reflected in the FHFA Conservatorship Scorecard, which discusses potential steps to lower consumer transaction costs in a safe and sound manner, as well as in the Enterprises' Equitable Housing Finance Plans.
In obtaining a mortgage, many borrowers must use their limited available cash resources to pay closing costs, in addition to any equity contribution necessary to meet the Enterprises' loan-tovalue (LTV) ratio requirements. In many cases - particularly for first time homebuyers and working families such as first responders, teachers, and emergency aid personnel- closing costs can determine whether they can afford to buy a home or refinance their mortgage.
The impact closing costs can have on refinance activity is evident within the Enterprises' portfolios. Despite record-low interest rates generating a surge in refinance activity in 2020 and 2021, Enterprise data as of the year-end 2022 suggests that more than 1.8 million low to moderate income borrowers who live predominately in underserved communities were unable to benefit, and many of these borrowers had significant equity. Currently, nearly 1.2 million, or approximately 4 percent of borrowers, have mortgage rates greater than the current market rate, of which more than 8 percent were borrowers with very low incomes.13 These borrowers with higher mortgage rates disproportionately reside in low-income and underserved communities. Lowering closing costs in a responsible manner would enable many of these borrowers to refinance their mortgage when they may not have otherwise been able to do so.
Closing costs can also have a greater impact on lower income borrowers. In a sample of approximately 1.1 million conventional home purchase loans acquired by
Appraisals and Home Valuation Modernization
While lenders have historically used traditional appraisals for third-party verification of home values, the Enterprises and the industry have developed alternatives such as appraisal waivers, inspection-based appraisal waivers, and hybrid appraisals. These options have helped minimize appraiser capacity challenges, reduce turn times, and lower borrower costs while promoting fair, equitable, and accurate valuations.
13 FHFA analysis of Mortgage Loan Integrated System.
14
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Appraisal waivers for certain lower-risk loans have been a longstanding option for Enterprise loans that save consumers the cost and time of obtaining a traditional appraisal. The Enterprises will not enforce representations and warranties (reps and warrants) on the value, condition, and marketability of the property for lenders that deliver loans with an appraisal waiver.
In 2022 and 2023, respectively,
These inspection-based waiver programs can save borrowers over
In addition to appraisal waivers, hundreds of thousands of loans have been tested using hybrid appraisals over the last seven years. This process leverages cutting-edge technology, participating appraisers, and the same stringent property data standards and third-party workforce as inspection-based appraisal waivers. The cost of hybrid appraisals is closer to that of traditional appraisals, but lenders report quicker turn times, which is particularly important when appraiser capacity is under pressure. Hybrid appraisals allow participating appraisers to focus their time and resources on the market analysis, and Enterprise pilot results demonstrate a greater visibility into property characteristics, a reduction in errors, and much more consistent and accurate reporting.
FHFA and the Enterprises have also engaged in substantial efforts to address issues of appraisal bias, with an emphasis on improving the data that is available to analyze home valuations. In the three years since the Property Appraisal and Valuation Equity (PAVE) interagency task force was created, FHFA has been a leader in leveraging appraisal data to further fair valuations for all borrowers.
In
FHFA is also working with the
In
15 FHFA, "FHFA Publishes New Uniform Appraisal Dataset Appraisal-Level Public Use File,"
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This day-long workshop was attended by a wide array of industry stakeholders including lenders, appraisers, appraisal management companies, consumer advocates, and other federal agencies. FHFA and the Enterprises are currently reviewing the feedback and identifying next steps.
First Lien/Clear Title Requirements
Recently, the Enterprises have explored ways to reduce the costs associated with confirming clear title, which is one of the larger components of closing costs. Similar to the reps and warrants that lenders make to the value, condition, and marketability of a property securing a loan, the Enterprises require mortgage lenders to make reps and warrants that the loans they deliver are free of title defects. To further minimize risk to the Enterprises, a third-party verification of clear title must be obtained. Lenders can satisfy this requirement through the use of a lender's title insurance policy or, for certain transactions, an Attorney Opinion Letter (AOL).
The vast majority of loans currently delivered to the Enterprises include a lender's title insurance policy, which is distinct from any title insurance policy that a borrower may choose to purchase. A lender's policy insures the lender's interest in the property, and the policy terminates when the loan is extinguished through refinance, payoff, or foreclosure and covers the risk of any defect, lien, or encumbrance on title.16 By contrast, a borrower's (or owner's) policy insures the borrower's ownership interest in the property, does not terminate upon refinance of the mortgage lien, and covers a claim of an interest in title.17
Refinance transactions present lower risks of title defects than purchase transactions. In the case of borrower's title insurance, the policy at the time of purchase remains intact through the refinance. In the case of lender's title insurance, any subsequent changes to title can and should be identified by the borrower through an affidavit signed at closing, which lists all actions taken by the borrower that could have an impact on clear title. The Enterprises do not require borrower's title insurance, but the cost of the lender's title insurance policy is typically borne by the borrower.
In recent years, improvements in the searchability of title records have made title-related issues relatively rare, and losses due to those issues are low. The title insurance industry has reported that title issues have been substantially reduced over the past two decades, with approximately 75 percent of title searches resulting in no significant title defects. Additionally, according to information from the
16 Lender's title insurance covers any defect or lien or encumbrance on the title, unmarketable title, real estate taxes, encroachments, lack of access, violation or enforcement of law or ordinance if notice is recorded in the public record, invalidity or unenforceability of the secured instrument, forgery or lack of authority, or lack of priority.
17 Borrower's title insurance covers a claim of an interest in title (including a lien or easement), forgery or lack of authority, unmarketable title, forced removal of improvements or correction of a violation of law or a restrictive covenant, or inability to obtain a building permit or occupy as a single-family residence, if the claim is based upon an event, condition or instrument dated prior to the policy effective date.
18 NAIC, "
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...
Lenders have options for confirming first-lien position and clear title, and the Enterprises permit safe and sound alternatives to title insurance to meet this objective. AOLs, for example, are legal opinions prepared by attorneys that provide professional determinations regarding title to a property and the priority of the mortgage lien.
In the context of refinances, where borrowers incur closing costs upfront with the intention of realizing savings in the long run, the Enterprises are examining whether those upfront costs can be responsibly reduced so fewer borrowers conclude that they simply cannot afford to refinance. In 2024, FHFA approved a
This pilot seeks to evaluate whether the widespread digitization of real estate records and technological advances that have improved the process of confirming marketable title can result in lower costs for borrowers who already own their homes and will continue to reside in them.
Under the terms of the pilot,
Given that borrowers are typically responsible for paying the cost of a lender's title product, FHFA's expectation is that average savings for each loan sold under the pilot would range from
19 ALTA, "ALTA Reports Full-Year, Q4 2022 Title Insurance Premium Volume,"
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Importantly,
This pilot will be limited in scope and duration and is designed to test these concepts in a lowrisk environment. Accordingly, the pilot will be limited to refinance transactions with an LTV ratio below 80 percent, in a handful of states. No lenders or vendors have been approved for this pilot to date, and any approval will be contingent on the vendors or lenders having the financial and operational resilience to serve as a reliable business partner to the Enterprises. FHFA has not made a determination regarding whether the pilot will be expanded or converted to a permanent policy, or what the parameters of any such policy would entail. Consistent with the Agency's data-driven approach, FHFA will carefully review the data and share information learned from the pilot to identify the risks and benefits before determining any next steps.
Through its new
The use of technology and computer models is not new to the mortgage market; credit scores and automated underwriting systems, for example, have been used for many years. More recently, the Enterprises have updated their automated underwriting systems to streamline the mortgage process while ensuring responsible lending, leading to faster approvals and reduced risk. Specifically, the Enterprises improved their systems to consider more information from thirdparty validation services, like income, assets, employment, rental payment history, and evaluation of borrower cash flow information (all with borrower permission) to assess borrowers' creditworthiness. This allows lenders to approve qualified borrowers faster, while better ensuring borrowers can afford the loans they obtain.
However, as technology advances at an increasingly rapid pace, it is vitally important to ensure that it is fair, safe, transparent, and accurate. Technology has the potential to remove human bias and make mortgage processes fairer - as long as stakeholders commit to ensuring the new technologies are grounded in safety and soundness and free from bias. It is also critical to protect consumer privacy, and these risks must be well understood by regulators and the market.
In pursuit of these efforts, in
FHFA's second TechSprint, taking place in
FHFA is committed to approaching AI and ML issues with transparency, accountability, fairness, and equity, while mitigating any risks associated with the new technologies.
Equitable Housing Finance Plans
The Equitable Housing Finance Plans (the Plans) produced by Fannie Mae22 and Freddie Mac23 are a critical component of their mission-driven activities. These Plans are designed to complement initiatives outlined in FHFA's strategic plan,24 aimed at promoting the safety and soundness of the Enterprises while fostering housing finance markets that offer equitable access to affordable and sustainable housing. Through actions taken under their Plans, the Enterprises have supported 1.8 million families in 2023, almost double the impact from the first year of their Plans.
The Enterprises are producing tangible, positive results from the actions described in these Plans. For example, the Plans have supported the growth of Special Purpose Credit Programs (SPCPs), supporting over 17,000 families since the initial publication of the Plans. While SPCPs have been available since 1976, meaningful use and delivery of loans under SPCPs have only occurred recently. In 2023, the Enterprises collectively purchased nearly 15,000 loans originated through both lender-sponsored SPCPs and their proprietary SPCPs. This has supported homeownership for many borrowers in underserved communities.
Both Enterprises have also expended significant effort to encourage multifamily property owners to report positive rental payments to credit bureaus. Both Enterprises partnered with multiple vendors who are responsible for collecting positive rent payment data from participating multifamily property owners and formatting the data for dissemination to credit bureaus. This initiative supported close to 735,000 renter households, many of whom were able to establish...
20 For a thematic summary of the TechSprint, see: FHFA, "FHFA's Velocity TechSprint: An Analysis of Key Themes in Data Digitization and Technology Innovation in Mortgage Originations,"
21 FHFA, "FHFA Announces 2024 Generative AI in Housing Finance TechSprint,"
22
23
24 FHFA, "FHFA Strategic Plan: Fiscal Years 2022-2026." Available at: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA_StrategicPlan_2022-2026_Final.pdf.
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...credit scores for the first time. Given that historically underserved communities are commonly both renters and credit invisible, these initiatives aim to reduce this demographic's gap in accessing traditional financing resources. In addition to the positive rental payment programs, many mortgage loan applicants with thin credit files have benefited from the cash flow assessment features in the Enterprises' automated underwriting systems.
education curriculum. Both Enterprises have counseling services available to assist potential applicants with housing preparation and to assist homeowners facing hardships to avoid foreclosure.
The Enterprises also undertook a renewed focus on the Latino community in 2023.
FHFA has long included fair housing and fair lending considerations as part of the exercise of its regulatory authority in the rulemaking process.
In
25 FHFA, "FHFA Issues Notice of Proposed Rulemaking on Fair Lending Oversight,"
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...engaging with the public to ensure the actions and goals of the Plans remain effective in advancing access and sustainability in a safe and sound manner.
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(Continues with Part 1 of 2)
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Original text here: https://www.banking.senate.gov/imo/media/doc/thompson_4-18-24.pdf
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Senate Banking, Housing & Urban Affairs Committee Issues Testimony From Federal Housing Finance Agency Director Thompson (Part 2 of 2)
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