Discussion: (0 comments)
There are no comments available.
View related content: Housing Finance
Melvin L. Watt was sworn in on Monday as director of the Federal Housing Finance Agency, leaving Congress after a distinguished two-decade career as a Democratic member of the House of Representatives from North Carolina. As the federal regulator for Fannie Mae and Freddie Mac, Mr. Watt effectively controls the two companies and thus has considerable sway over the housing market — and, as a result, faces enormous expectations from people who cheered the 2013 change in the Senate rules that made possible his confirmation.
These advocates are looking to Mr. Watt to direct the two government-controlled firms to make mortgages more broadly available to families with imperfect credit, to write down loan balances for underwater borrowers (those who owe more than their homes are worth), and to refinance still others into low-interest rate loans. These actions would mean increased risks and lower income for Fannie and Freddie, and thus for taxpayers, who own 79.9 percent of the two companies and have an additional $188 billion stake in the form of preferred shares. In other words, housing advocates are looking for Mr. Watt to have the companies effectively undertake government spending using his regulatory authority rather than doing so through a vote of Congress.
Mr. Watt replaced Edward J. DeMarco, a career civil servant who had served as acting director since 2009. Mr. DeMarco had come under withering criticism from the Obama administration and its political allies for refusing to take these steps to the extent desired by the president. Mr. DeMarco, for example, allowed Fannie and Freddie to refinance borrowers whose mortgages the two companies already guaranteed even if the homeowner in question was riskier than would have been allowed under normal underwriting guidelines. After all, Mr. DeMarco reasoned, the companies’ guarantee meant that they (and thus taxpayers) were already at risk.
Nearly 2.9 million homeowners have refinanced under the program approved by Mr. DeMarco through August 2013, with over 5 million homeowners receiving assistance through loan modifications, either through government agencies or from their lender (that is, from the mortgage servicer acting on behalf of the owners of the loan). Moreover, one million to two million more homeowners thought to be eligible for existing programs have not yet applied for a lower-interest-rate loan and could still be helped.
While the Obama administration’s efforts to avoid foreclosures were long seen as falling woefully short of the president’s promises at their start in 2009, the programs together have finally become successful enough that the administration no longer releases its monthly scorecard of results late on Friday afternoons, as had long been its custom.
Under Mr. DeMarco, the Federal Housing Finance Agency also went after banks that had sold bad loans to Fannie and Freddie and thus caused some of the losses that required the taxpayer bailout. He has wrung billions of dollars of compensation from a host of banks, including a $5.1 billion payment from JPMorgan.
Mr. DeMarco drew the line, however, at allowing Fannie and Freddie to help riskier borrowers with loans in private-label securities they did not already guarantee, and at having the firms take part in a Treasury proposal to write down loan balances for underwater borrowers using money from the Troubled Asset Relief Program to cover some of the costs. For principal write-downs, Mr. DeMarco’s staff provided a detailed analysis showing that taxpayers could come out behind “if as few as 3,000 borrowers decided to stop making payments in the hopes of qualifying for debt forgiveness.”
Critics saw this as pound-foolish. Even if it saved taxpayers money (which Mr. DeMarco’s critics contested as well), they saw his decision as retarding the economic recovery by prolonging the overhang of housing debt that deterred consumer spending.
Ultimately, Mr. DeMarco took seriously his congressional mandate as conservator for Fannie Mae and Freddie Mac. In effect, he saw his role as making sure that Fannie and Freddie continued to operate and support the housing market but refused to use them for housing-related stimulus — this was a prerogative for Congress and the president, and not for an unelected (and in his case, not even Senate-confirmed) regulator.
This was a highly principled stand, consistent with the law, and taken against immense pressure. It is ironic that Mr. DeMarco’s refusal to circumvent the checks and balances of our constitutional system under which Congress holds the purse strings was harshly criticized by the Obama administration, when the president himself is a former law professor.
Mr. DeMarco recognized as well that it was for Congress to decide the future of Fannie Mae and Freddie Mac — the two firms have congressional charters, so their disposition ultimately requires legislation, whether to sell off the government stakes or wind the enterprises down as part of a new housing finance system. In the meantime, however, he set in motion a strategic plan under which Fannie and Freddie have taken steps that will facilitate any of the housing finance proposals being considered by Congress, notably including instructing the companies to develop a common securitization platform that will standardize mortgage-backed securities and eventually allow others to compete with Fannie and Freddie or even supplant them.
Mr. DeMarco further instructed the companies to wind down the investment portfolios that generated profits for shareholders but left taxpayers exposed to risks, and to set up mechanisms to bring in private capital to take on housing credit risk ahead of the taxpayer exposure. Mr. DeMarco provided leadership when there was a vacuum.
Mr. Watt takes over as the regulator at a time when there is much discussion of housing finance reform but not yet a bipartisan path forward. Meanwhile, Fannie and Freddie have become immensely profitable, with projections that they could generate about $20 billion in annual earnings. This is money that Mr. Watt effectively can spend on his own authority by directing the two companies to undertake actions that intentionally reduce their incomes — the sort of thing for which Mr. DeMarco was battered for standing up against.
Indeed, Mr. Watt has already put on hold a 0.1 percent increase in the insurance premium previously announced by Mr. DeMarco under which Fannie and Freddie would have charged more for the guarantee they provide on mortgage-backed securities — an additional charge that would have protected taxpayers but translated into higher mortgage interest rates.
Mr. Watt has not indicated his intentions for additional actions to be taken by Fannie Mae and Freddie Mac in support of the housing market. Moreover, Mr. Watt has a reputation as a thoughtful legislator, and has considerable knowledge of financial market policy from his time on the House Financial Services Committee.
There is every reason to believe that he will continue the strategic plan put in place by Mr. DeMarco. Still, it is not hard to imagine a situation in which the prospect of a former Democratic congressman with the authority to spend $20 billion a year provides an impetus for Republicans to look to move forward more rapidly with housing finance reform.
There are no comments available.
1150 17th Street, N.W. Washington, D.C. 20036
© 2014 American Enterprise Institute for Public Policy Research