Breaking his silence on housing matters for the first time since taking office in January, new Federal Housing Finance Agency Director Mel Watt sketched out his vision for a bigger role for the bailed-out government mortgage businesses Fannie Mae and Freddie Mac, which are in federal conservatorship managed by his office.
In a speech at the Brookings Institution, Watt said he would take several actions to reverse course from the fiscally conservative measures implemented by his predecessor, Ed DeMarco, whom many Democrats had blamed for blocking homeowner relief efforts over the course of the recession. Unlike DeMarco, Watt is an Obama appointee.
In particular, Watt said the FHFA would not reduce the limit on loans eligible for a guarantee from Fannie or Freddie that had been under consideration. The two government-sponsored enterprises package home loans into securities and provide insurance in case they fail. Lowering mortgage eligibility limits tightens credit availability and also shrinks the presence of the GSEs relative to private capital.
Watt said his decision not to lower mortgage limits "is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market." The mortgage loan limits for 2014 are $417,000 for a single-family home in most areas, and up to $625,500 in high-cost areas.
Watt also announced that he has "reformulated" the goal of bringing private capital into housing finance to reduce the risk to taxpayers "so that it no longer involves specific steps to contract the enterprises’ market presence, which could have an adverse impact on liquidity."
Instead of shrinking Fannie and Freddie's market footprint, Watt said, the FHFA would focus on limiting their overall risk exposure. In recent years, Fannie and Freddie have backed about two-thirds of all new home loans.
Watt's FHFA also will not play a role in the ongoing legislative efforts to overhaul housing finance and eliminate Fannie and Freddie. That is the role of Congress and the Obama administration, not the FHFA, Watt said. Although he said that "conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary," he will not be involved in advocating or shaping any reform.
The clear implication of Watt's speech Tuesday is that the FHFA will pivot from a focus on protecting taxpayers and shrinking the GSEs' market share toward easing mortgage credit.
Nevertheless, Watt did say that the agency would not attempt to renew a program to help underwater homeowners refinance their mortgages by loosening the terms. With the housing market improving and mortgage rates rising, the number of homeowners who would now benefit from such a measure would be "relatively small," Watt said.
After being bailed out in 2008, the two GSEs ultimately received $188 billion in taxpayer funds. In recent years, they have returned to positive cash flow and have paid more than $200 billion to the Treasury in dividends, increasing the pressure on the administration and Congress to move the giant companies out of conservatorship.
Those profits, Watt said, are due to one-time tax adjustments and recoveries from litigation related to the mortgage crisis and are not sustainable.
"I don’t think we should let profits drive decisions that we make," Watt said. "We’re trying to increase the availability of credit to creditworthy borrowers. We’re trying to do it in a safe and sound way and not be irresponsible."