5 questions as lawmakers set to probe FHFA, GSE scandals

September 25, 2018 3:52 PM

WASHINGTON — As the House Financial Services Committee prepares to hold a hearing Thursday on oversight of the Federal Housing Finance Agency, the exact focus of the hearing remains somewhat in flux.

The committee’s official announcement of the hearing suggested that it would look at the agency’s role as conservator for Fannie Mae and Freddie Mac. The hearing notice referred to allegations of “waste, fraud and abuse” at the FHFA and the two mortgage giants.

“Specifically, the committee will examine FHFA’s policies and procedures used to supervise Fannie Mae and Freddie Mac, the FHFA’s structure and the need to reform the housing finance system in the United States,” the majority staff on the committee wrote in a memo to committee members Sept. 24.

But the timing of the hearing, as FHFA Director Mel Watt faces an employee's allegations of sexual harassment, has led many to believe that the investigation of his alleged conduct will be a central component of the hearing. That was bolstered by revelations Wednesday that his accuser, Simone Grimes, had been invited by the committee to testify. The hearing is also set to take place on the same day that the Senate Judiciary Committee plans to hold a hearing looking at sexual misconduct allegations against Supreme Court nominee Brett Kavanaugh.

The official docket lists four witnesses for the hearing: Watt, FHFA Inspector General Laura Wertheimer, Fannie CEO Timothy Mayopoulos and Freddie CEO Don Layton.

However, the attorney for Grimes, who alleges that Watt denied her a pay raise after she refused his advances, told American Banker that Rep. Maxine Waters, the ranking Democrat on the committee, has expressed interest in having Grimes testify. The staff for both Waters and Chairman Jeb Hensarling have been in contact with Grimes about the possibility of adding her as a witness.

Observers said it is unclear what lawmakers hope to gain from the proceeding.

“There’s not a variety of outsiders, there’s not a bunch of written materials that have been submitted in advance, there’s not a particular question or controversial question that’s being made and so to me it looks like more like a pro forma meeting where not a lot of things are going to happen,” said Laurence Platt, a partner at the law firm Mayer Brown.

Here are five questions to consider about the hearing:

How much of the hearing will be devoted to the Watt harassment probe?

The committee announced the hearing about two weeks after Politico first reported that Watt was under investigation for allegedly making inappropriate advances toward Grimes.

Lawmakers on the committee might be hesitant to accuse Watt of anything outright. Watt himself was a Democratic congressman from 1993 to 2014, representing North Carolina’s 12^th district.

“This is something that hits close to home, because this is a former colleague of ours who we have served with,” Hensarling said in a recent briefing with reporters. “The individual allegations dealing with Mr. Watt, again that’s not our primary responsibility, but we want to ensure that they are thoroughly and fairly investigated.”

Mark Zandi, the chief economist of Moody’s Analytics, said the topic is bound to be “pretty awkward” for lawmakers, but is also “the elephant in the room.”

“I suspect that someone might venture there, although it’s a charged end,” he said. “You’ve got the Kavanaugh hearing, so that may have some impact on this hearing as well, depending on how the questioning goes.”

Will lawmakers be focused on executive succession plans for Fannie, Freddie and the FHFA?

Timothy Mayopoulos, president and chief executive officer of Federal National Mortgage Association (Fannie Mae), speaks during a Bloomberg Television interview at the Milken Institute Global Conference in Beverly Hills, California, U.S., on Tuesday, May 1, 2018. Mayopoulos discussed the organization's future. Photographer: Patrick T. Fallon/Bloomberg

Patrick T. Fallon/Bloomberg

In July, Fannie announced that Mayopoulos would leave at the end of the year. His departure was announced just days before the release of an FHFA IG report that rebuked him for not disclosing potential conflicts of interest arising from his romantic relationship with the chief legal officer at TransUnion.

Shortly after that announcement, Freddie also announced that Layton plans to step down next year.

“There’s got to be a lot of questions around that,” Zandi said.

With both Mayopoulos and Layton leaving and Watt’s term at the FHFA set to expire in January, the Trump administration is in a powerful position to choose new players that could have a prominent impact on housing finance.

In May, it was also revealed that Fannie’s general counsel, Brian Brooks, had been lobbying administration officials to release the government-sponsored enterprises from conservatorship, Bloomberg reported. The FHFA prohibits Fannie and Freddie from lobbying.

“If true, this violation is more than an outrage, it is a direct affront on taxpayers and the current structure of the federally-back[ed] conservatorship that has allowed Fannie Mae to operate for the past decade,” Hensarling said in a statement. “It is a slap in the face of taxpayers that Fannie Mae thinks it can take their money and blatantly ignore the rules that came with it.”

He also announced the committee would be investigating the allegations.

Brooks stepped down from his post last week to become the chief legal officer at Coinbase.

Will members of the committee accuse the GSEs of 'charter creep'?

Signage in front of the Fannie Mae and Freddie Mac headquarters.

An easy target for lawmakers at the hearing are questions of whether or not the GSEs have overstepped the limits of their charters and interfered too much in the primary mortgage market.

Critics of Freddie Mac’s Integrated Mortgage Insurance pilot program (IMAGIN) and Fannie Mae’s Enterprise-Paid Mortgage Insurance pilot program have argued that because these programs allow the GSEs to participate in private market activities, it reduces competition and threatens private capital from re-entering the market. Freddie debuted its program in March while Fannie released its version in July.

“The real interest for the market should be whether there is push back against Enterprise-Placed Mortgage Insurance as well as talk about administrative GSE reform,” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note.

It is likely that lawmakers on both sides of the aisle will ask about the GSE pilot programs as well as Freddie’s mortgage servicing rights financing, Isaac Boltansky, director of policy research at Compass Point Research & Trading, said in a note.

“The witnesses will counter charges of ‘charter creep’ with arguments that administrative innovation is necessary given the failure of legislative reform efforts,” he wrote.

Will Wertheimer face criticism at the hearing?

Wertheimer, the inspector general for the FHFA, is currently under investigation following reports that she had bowed to pressure from Watt to undercut her oversight of the agency, looked to expose whistleblowers and disparaged staff members who cooperated with investigators, Politico reported in August.

The report added fuel to the argument that the FHFA has limited oversight. In July, an appeals court in Texas ruled that the agency was “unconstitutionally insulated from executive control” since its single director cannot be fired by a sitting president without cause.

Wertheimer is testifying as part of a panel in which she is the sole witness. However, she shouldn’t be expected to engage in questions about FHFA policy, said Platt.

“I don’t think" an inspector general "would get involved in the policy issue of to what extent should the GSEs be engaging in activities that compete with private enterprise,” he said. “That’s not really what IGs do; that’s a policy question. They tend to look more at whether the GSEs did bad things.”

Will Hensarling try to tout one of his GSE reform plans?

House Financial Services Committee Chairman Jeb Hensarling

Representative Jeb Hensarling, a Republican from Texas and chairman of the House Financial Services Committee, speaks to members of the media after unveiling the Financial Choice Act at the Economic Club of New York in New York, U.S., on Tuesday, June 7, 2016. Hensarling today proposed the idea of raising several hundred billions of dollars in additional capital and Washington letting you break free from a litany of burdensome rules, a key provision of his long-shot proposal for scrapping the Dodd-Frank Act. Photographer: Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Previously, Hensarling has been adamant that the only housing finance reform system he would support would be one that would eliminate the government’s role in the mortgage market entirely, but the bipartisan bill he introduced earlier this month suggested that he has softened his views.

“Hensarling historically has been really hostile to the GSEs … but his proposed GSE reform bill that came out a few weeks ago is very balanced,” said Platt. “That suggests to me, rightly or wrongly, that he’s not going to use the hearing as an opportunity to turn the GSEs into a punching bag to fulfill a narrative about why have them.”

While Hensarling is retiring at the end of the year, he still appears invested in reform, and some have suggested that he could be Trump’s pick to head the FHFA once Watt’s term expires in January.

“Given his ties to President Trump, we suspect the job is his if Hensarling wants it,” Seiberg wrote in a Sept. 7 note.

But Hensarling isn’t likely to use this hearing to make his case for the director job, said Zandi.

“If anything he might ask some questions about his own GSE reform proposal that he put forward a week or two ago, so he might get a better sense of what Director Watt and the CEOs think about that proposal,” he said.