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“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” said FHFA Director Mel Watt, reversing the policy of his predecessor to reduce the GSEs’ market presence. (Photo: Bloomberg News)
“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” said FHFA Director Mel Watt, reversing the policy of his predecessor to reduce the GSEs’ market presence. (Photo: Bloomberg News)

FHFA’s Watt to Stay Out of GSE Reform Fray

MAY 13, 2014 2:40pm ET
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WASHINGTON -- Federal Housing Finance Agency Director Mel Watt said Tuesday he had no plans to weigh in on pending housing finance reform legislation, leaving it to Congress to decide as early as this week.

 “My guess is that there were many people who expected that I would start talking about reform legislation the minute I got to FHFA,” said Watt, in his first public appearance since taking on the role of director of the agency, which regulates Fannie Mae and Freddie Mac.

In a wide-ranging speech, Watt – a former Democratic congressman from North Carolina -- said his focus was in the “here and now,” and that he would allow any legislative proposal on Capitol Hill to “run its course.”

He instead offered details on changes he plans to make for the government-sponsored enterprises, including keeping guarantee fees at their current level and refocusing Fannie and Freddie on expanding access to credit rather than reducing their footprint in the mortgage market.

He made it clear, however, that he did not see the conservatorship of Fannie and Freddie, which were seized by the government in 2008, as a perpetual state of affairs.

 “I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary,” he said.

Like his predecessor Edward DeMarco, who served as the interim director of the agency, Watt said that the responsibility of how to reform housing finance falls to Congress and the Obama administration, not the FHFA. Statutorily, the agency has the authority to end the conservatorship of the two GSEs, said Watt.

But his priority as the new director, a role he assumed in January, is to ensure there is “a solid plan to continue operations of Fannie and Freddie and the Federal Home Loan Banks so there will be liquidity and efficiency in the housing market and that we continue to operate as we have operated without interrupting housing finance,” he said.

Watt’s appearance at the Brookings Institution comes just days before the Senate Banking Committee is expected to vote on a bill to replace the two mortgage companies with a new secondary market backed by a government guarantee in the case of catastrophic losses.

The likelihood of any housing finance reform bill moving through Congress this year remains questionable given the lack of Democratic support to advance the effort past the committee.

Even with the chances of achieving reform appearing slim, Watt said the FHFA would put its full effort on fulfilling its own mandates, executing its strategic plan and managing the present state of Fannie and Freddie.

His message was applauded by some industry representatives.

“Given the difficulties passing GSE reform legislation as the mid-term elections approach, it is good to see Director Watt looking hard at the tools he has at his disposal to help reform and improve the housing finance system,” said David Stevens, the president and CEO of the Mortgage Bankers Association.  “To be sure, this does not in any way lessen the need for Congress to enact needed reforms, but the director’s comments today indicate that positive change could be on its way in the meantime.”

Watt outlined a number of changes to key issues, such as loan limits and multifamily housing, while leaving aside other more controversial topics such as principal reduction. But he cautioned that his silence on a particular issue did not mean the agency was not still considering it. “It just means we are not ready to talk about it at this point,” he said.

The new director said the agency would not proceed with a plan outlined last fall to reduce the size of the conforming loan limit, citing fears of hurting an already fragile housing market. Instead, Fannie and Freddie will maintain the $417,000 threshold of loans they can buy in most markets.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” said Watt.

Watt put greater emphasis on making credit more accessible to potential borrowers, moving away from the policies of DeMarco, who had sought to reduce Fannie and Freddie’s market presence.

“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” said Watt. “To arbitrarily say that the footprint should be reduced without assuring that there’s a responsible way to make the transition… would do serious damage potentially to the housing finance part of our economy.”

But Watt also rejected making changes to the agency’s Home Affordable Refinance Program, saying that the number of borrowers that would benefit from the expansion would be “small.”

Jaret Seiberg, a policy analyst for Guggenheim Partners Inc., suggested the lack of changes to HARP, which some investors had been worried about, meant keeping “the status quo for existing MBS (mortgage backed securities.)”

                For multifamily housing, Watt also said he would not require the companies to reduce their purchases on those types of loans this year. Last year, the agency forced the companies to cut their multifamily operations by 10%.

“We do expect market competition in 2014 to result in lower multifamily levels for the enterprises, but FHFA will not mandate that the Enterprises prematurely shrink their multifamily footprint,” said Watt.

Additionally, Watt clarified the agency’s top objective for a “Common Securitization Platform,” an effort begun last year as a way to combine Fannie and Freddie’s securitization processes. Watt suggested he would be proceeding slowly on the project, saying the focus should be to “de-risk” it.

 “We found that, because of the many variables involved, the main danger to the CSP effort would be pursuing too many objectives all at the same time,” said Watt. “Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there’s a lot at stake in getting this right.”

Instead, he said the emphasis should be on a “seamless transition” from the current technology used by Fannie and Freddie to issue new securities to a joint venture that operates with one system using new technology.

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