Housing industry asks $5 trillion question: what does Watt want?

WASHINGTON Mon Apr 14, 2014 9:39am EDT

Representative Mel Watt testifies before the Senate Banking, Housing and Urban Affairs Committee confirmation hearing to be the regulator of mortgage finance firms Fannie Mae and Freddie Mac on Capitol Hill in Washington June 27, 2013. REUTERS/Yuri Gripas

Representative Mel Watt testifies before the Senate Banking, Housing and Urban Affairs Committee confirmation hearing to be the regulator of mortgage finance firms Fannie Mae and Freddie Mac on Capitol Hill in Washington June 27, 2013.

Credit: Reuters/Yuri Gripas

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WASHINGTON (Reuters) - The U.S. housing industry has waited three months to find out how Mel Watt will govern taxpayer-owned mortgage companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), and has been frustrated by his silence.

The former 11-term congressman from North Carolina, who took over the agency that oversees the two enterprises in January, has not delivered an annual strategic plan, which would usually be public by now.

"We have yet to see or hear Watt's vision for housing finance," said Clifford Rossi, a former banker and risk executive at Freddie Mac who is now a finance professor at the University of Maryland. "He is still getting up to speed."

Not only has Watt's reticence surprised the industry, but it has disappointed some lawmakers who had hoped for guidance on housing legislation.

As director of the Federal Housing Finance Agency, Watt has tremendous influence over Fannie and Freddie, which own or guarantee about $5 trillion in U.S. mortgages. Banks, credit unions, homebuilders, real estate brokers and would-be homeowners all have a stake.

Sources inside and close to the FHFA say they believe he is largely comfortable with the current direction of the two companies and they do not expect to see dramatic changes.

At a private reception for him on February 27, Watt, who declined to be interviewed for this story, jokingly described his routine as "meeting all day and reading all night."

In his sole policy action, just days after taking office in early January, he set aside a decision by his predecessor to increase the loan fees Fannie Mae and Freddie Mac charge. Watt said he wanted to thoroughly review the proposal, which could curtail mortgage availability.

The companies, which were seized by the government in 2008 after losses from investments in risky loans brought them near collapse, purchase mortgages and package them into securities for investors, which they offer with a guarantee. Providing liquidity to the mortgage market ensures wide access to 30-year, fixed-rate loans.

Watt, who recently addressed the FHFA's staff at a town-hall style meeting, will provide what may be the clearest signal of his intentions in a so-called scorecard, which provides targets and specific plans for the mortgage companies. The scorecard is usually released in the first quarter, and the delay is one factor that has concerned the industry. The FHFA declined to comment on when it may be released.

The scorecard will reveal whether Watt seeks to reduce Fannie and Freddie's footprint, since it will lay out what fees the agency will charge and the size of loans they can guarantee, which can impact the cost and availability of mortgages.

Talks on overhauling the housing finance system have intensified on Capitol Hill in recent months, but analysts say it could take years for legislation to be enacted. That would leave Watt with unusual power in the meantime to call the shots on both long-term strategy and daily management decisions for the two companies at the heart of the U.S. housing finance system.

LOW WATTAGE

Lawmakers working on overhaul plans have solicited ideas from the Obama administration, banks, trade associations, consumer advocates and Watt's agency.

But when asked to provide input, Watt declined, leaving some lawmakers in the dark who had previously hoped he would position himself as a go-to adviser on housing policy, according to sources familiar with the bill drafting process.

Regulators often play a role in helping to shape legislation for an industry they oversee. For example, several weighed in with advice as Congress crafted the Dodd-Frank Act, the financial regulatory overhaul enacted in 2010. At times they even sat side-by-side with lawmakers in drafting the bill.

"Watt's voice ... has been muted. He hasn't publicly been part of the debate," said Brandon Barford, a partner at Beacon Policy Advisors, a public policy research firm.

Edward DeMarco, who led the FHFA in the wake of the 2008 financial crisis until Watt took over, had asserted himself as a staunch defender of the taxpayers who pumped $187.5 billion into Fannie Mae and Freddie Mac to keep them afloat.

Despite great political pressure, he rejected the idea of letting the companies cut loan balances for troubled borrowers.

Watt could lead the agency in a different direction, particularly now that Fannie Mae and Freddie Mac are profitable, and consumer advocates want him to revisit DeMarco's decision.

"He's being a little cautious, but that's probably good at this point," said James Lockhart, a former director of FHFA who is now vice chairman at WL Ross & Co. "It's a big job to oversee two of the largest financial institutions in the world, and getting inside those behemoths is always an issue."

(The story is refiled to fix verb tense in first paragraph)

(Reporting by Margaret Chadbourn; Editing by Prudence Crowther)

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Comments (2)
nose2066 wrote:
Everbody loves a free lunch. And there are many groups that think that Fannie Mae and Freddie Mac represent a free lunch.

There are some big Wall Street investors who recently bought shares in Fannie Mae and Freddie Mac at very low prices, and they want the profits from those companies directed to them, and not directed to the U.S. government and to U.S. taxpayers the way they are now.

There are other Wall Street investors who want Fannie Mae and Freddie Mac gradually eliminated so that other companies that these investors own can take over their business.

Consumer groups want Fannie Mae and Freddie Mac to help home owners reduce their mortgage payments.

Many Congressmen and home builders want Fannie Mae and Freddie Mac to stimulate home buying in order to boost the economy.

With all these different groups having competing ideas for Fannie Mae and Freddie Mac, it might be best for Watt to stay quiet and make no changes at all.

Apr 14, 2014 8:41am EDT  --  Report as abuse
FreeFannieMae wrote:
As a taxpayer I have concerns about completely and needlessly restructuring a 5.4 trillion dollar system which has worked well since the late 1930′s without significant (arguably any) change in structure or function of proposed replacement entities, reduction in systemic risk, or promise that Congress will not compromise underwriting standards again when politically convenient to do so.

Fannie and Freddie should be allowed to capitalize and released from conservatorship as per the Housing and Economic Reform Act of 2008 as they are now in sound operating condition. Congress’s version of the subprime crisis is fictitious and serves only to divert attention from the role it played in the crash.

These housing reform bills are all jokes. Former Countrywide Financial executive, Michael Bright, wrote the Corker-Warner bill. Then is became Crapo-Johnson because 30-1 Mark Warner realized eliminating 8000 jobs in his state during an election year might be a bad idea. The Treasury and FDIC were involved in securities fraud and insider trading. Congress is hiding behind the rhetoric of ‘protecting the tax payer’ after their own policies caused the greatest economic turndown since the Great Depression. Elected officials, from both the legislative and executive branch, are ignoring the Fifth Amendment of our Constitution and setting an ugly precedence for property rights of shareholders. In my opinion, the United States government had an obligation to bailout companies harmed by its own ridiculous policies leading up to 2008.

Apr 19, 2014 9:41pm EDT  --  Report as abuse
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