President Obama to nominate Rep. Mel Watt as the director of the Federal Housing Finance Agency

Reuters

Reps. Mel Watt and Barbara Lee at a news conference in Cuba, April 2009.

Article Highlights

  • Fannie and Freddie remain under FHFA's control and currently back about half of the US's existing home loans.

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  • The next FHFA director should continue to encourage private capital to replace the growing risk being shouldered by the tax payer.

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  • The government's past enforcement of affordable housing mandates forced industry-wide loosening of underwriting standards.

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The president is set to make a key staffing announcement later today that will have major reverberations for the US housing market. Several sources report that the president will announce Representative Mel Watt as his choice to run the Federal Housing Finance Agency (FHFA).

FHFA regulates Fannie Mae and Freddie Mac. Created in 2008 only months before Fannie and Freddie’s collapse, the FHFA combined the powers of two now-defunct regulatory agencies into one. The idea was to place the regulation of the Government Sponsored Enterprises (Fannie and Freddie) into the hands of a centralized authority with greater powers than the two previous agencies. The greatest of the FHFA’s new powers was the ability to place the GSE’s into conservatorship, which the agency quickly did in September of 2008. This gave FHFA the powers of the Board and management at both Fannie and Freddie.

Fannie and Freddie remain under FHFA’s control and currently back about half of the US’s existing home loans, so the director of FHFA has immense power in the housing market. Edward DeMarco, the current acting director, has worked to protect the interests of taxpayers and taken key steps to encourage more private capital to enter what is currently a government-centered mortgage market.

The Obama administration has had trouble finding a permanent replacement for DeMarco, and any nominee will require Senate confirmation. The Senate should focus on two key areas when considering Watt or any other nominee:

1. The continuation of steps to encourage private capital to replace the growing risk being shouldered by the taxpayer. For example, continuing the congressionally-mandated policy to raise the fees charged by Fannie and Freddie to levels that will allow the private sector to compete.

2. The role the director will play as the regulator of Fannie and Freddie’s affordable housing mandates. The government’s past enforcement of such mandates and other policies are widely credited with forcing an industry-wide loosening of underwriting standards. This led to the accumulation of an unprecedented number of weak and risky mortgages and the ensuing financial crisis.

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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