The chief regulator of Fannie Mae and Freddie Mac reversed course Tuesday and no longer plans to have the companies retreat from the housing market, asserting that the government-controlled mortgage giants must help keep home loans flowing to the public.
About four months into his job as director of the Federal Housing Finance Agency, Melvin L. Watt said his goal is to make sure the mortgage market is working smoothly while limiting taxpayers’ exposure to lending risks. The vision reverses the strategy of his predecessor, who worked to wind down the companies in part by limiting the number of loans they backed and raising their prices. The goal was to scale back the government’s outsize role in the mortgage market and lure the private sector back in.
Fannie and Freddie buy mortgages from lenders, package them as securities and sell them to investors. They also insure the mortgages and pay investors if the loans go bad. Watt’s strategy allays fears of dramatic near-term changes that could disrupt the lending market and raise mortgage costs for borrowers.
On Tuesday, Watt said his plan is to keep Fannie and Freddie going strong while Congress sorts out how to revamp the nation’s housing finance system, a goal Watt said he supports. Various proposals before Congress would dismantle the companies and shift mortgage lending risks from taxpayers to the private sector. But none are expected to gain traction this year.
“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Watt said at an event hosted by the Brookings Institution. “Our role is to maintain an efficient credit market, and as private capital demonstrates that it will come into this market, it will be clear that Fannie and Freddie will step back.”
In his first public comments about Fannie and Freddie, Watt said that the government’s takeover of the companies should not be viewed as a “permanent condition or a desirable end state.” But to arbitrarily reduce the companies’ share of the market without having an alternative plan in place would be “irresponsible,” he said.
The Senate Banking Committee plans to vote this week on a complex bill that would shut down the two companies over five years. While the measure is expected to pass the committee, it is likely to stall after that, which is why all eyes are now on Watt.
With lawmakers in limbo, the former North Carolina congressman will be centerstage in shaping significant housing finance policy as he oversees Fannie and Freddie, which together support about 60 percent of the mortgage market.
The government took control of the companies at the height of the 2008 financial crisis to keep them solvent and to ward off panic in the global financial markets. In the past two years, as the housing recovery has taken shape, the companies have been churning out huge profits. But Watt said the profits are not sustainable and should not drive policy decisions.
Still, he wants to maintain the companies’ dominance, unlike his predecessor, Edward J. DeMarco, who spent four years pressing for policies that would shrink the companies’ operations. He continued to do so Tuesday in a speech at the Federal Reserve Bank of Richmond.
“Rather than striving to preserve a system that failed so spectacularly and in so many ways, we need to find our courage and our creativity to build a new system,” DeMarco said, adding that “restoring Fannie and Freddie is not the solution.”
Watt said he is scrapping one of DeMarco’s proposals to lower the loan limits on mortgages backed by Fannie and Freddie. Requiring them to back only lower-balance loans would have been one of the easiest ways to pull back the companies’ presence in the market.
“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” Watt said.
Watt also delayed a DeMarco plan to raise the fees that Fannie and Freddie charge lenders when they back lenders’ loans. The increased fees were thought to be a way of giving the private sector a competitive edge, enabling it to grow its share of the market. But industry observers worried that the higher fees would be passed on to borrowers.
Watt is soliciting public comment on that issue before proceeding.
Under his watch, Fannie and Freddie also plan to loosen some of the conditions under which lenders would have to buy back defaulted loans that they sell to the two companies, another move that could expand the number of loans backed by Fannie and Freddie.
“Watt is articulating the option for keeping Fannie and Freddie around, and nobody in the government has really done that before,” said Guy Cecala, publisher of Inside Mortgage Finance.
The agency Watt heads is an independent regulator, and he is therefore under no obligation to follow the lead of the administration, which has been pressing to shutter Fannie and Freddie for years. Still, several experts who have been tracking the issue say Watt’s position is not at odds with what the White House wants to achieve: winding down Fannie and Freddie while ensuring that potential borrowers have access to credit in the meantime.
“There is nothing inconsistent in these views, any more than a recognition that one needs a new car is inconsistent with a recognition that you’d like your current one to work adequately in the meantime,” said Jim Parrott, a former housing adviser in the Obama White House.