Policy: Economy

Mel Watt: The man who will regulate your mortgage

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PennAve,Joseph Lawler,Economy,Fannie Mae and Freddie Mac,Housing,Government Regulation,Mel Watt,FHFA

The man President Obama picked to take over the government's least known but most important financial regulatory agency was a major reason why Senate Majority Leader Harry Reid made the portentous decision to eliminate the filibuster for presidential nominees.

Republicans for seven months had steadfastly blocked the nomination of Rep. Mel Watt, D-N.C., to head the Federal Housing Finance Agency, prompting Reid to change the rules to allow Watt to be confirmed with a simple majority of votes in early December.

For now, Watt, who was sworn in Jan. 6, is a footnote in Reid's historic decision to invoke the "nuclear option." In time, however, his legacy as a regulator may overshadow the Senate intrigue.

The FHFA director is powerful because the agency head has been responsible for overseeing the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac since the two mortgage businesses failed in September 2008 and were taken over by the government.

Fannie and Freddie do not issue mortgages, but package them into securities that they then guarantee. Their influence is pervasive: By the end of 2012, they guaranteed almost 70 percent of all new mortgages, according to Inside Mortgage Finance.

In assuming responsibility for the two behemoths, Watt places himself at the center of the debate over the future of Fannie and Freddie and, more generally, housing finance policy, a partisan issue that has become increasingly bitter since the housing crisis.

Since 2009, the agency had been run by acting director Ed DeMarco, a fiscally conservative-minded regulator who, controversially, moved to tighten lending standards and rebuffed the Obama administration's attempts to cut underwater homeowners' principal.

Watt's fellow Democrats hope Watt will reverse course from his predecessor on a few short-term policies. Those include the possibility of principal reductions, which motivated GOP senators to block Watt in the first place. He is also expected to attempt a “HARP 3.0” — an expansion of a refinancing program for underwater homeowners.

But lawmakers and analysts say the biggest decisions Watt will face in the next year or two will not be the hot-button issues that held up his nomination, but instead will relate to the kinds of loans Fannie and Freddie guarantee. With reform or privatization of Fannie and Freddie at least a few years down the road — both chambers of Congress are in the beginning stages of bills that would end the GSEs — the FHFA will continue to have a decisive say in the availability of mortgage credit as the housing market strengthens.

Most importantly, Watt controls the limits on loans that the two GSEs guarantee, and also the fees they charge for those guarantees, known as g-fees. Lower loan limits and higher g-fees mean less risk to the housing system, but they also mean that potential home buyers will find it harder to qualify for home loans.

Critics say DeMarco made those limits too tight over the last two years. Premier Mortgage Group banker Lou Barnes wrote recently that DeMarco's policy was “strangulation,” pointing out that the default rate on new Fannie- and Freddie-backed loans has fallen 90 percent below pre-bubble levels — a sign, to Barnes, that DeMarco has taken safety too far.

But Andy Winkler, an analyst for the right-of-center American Action Forum think tank, worried that “there's a greater concern down the road that [Watt] won't stay the course” and will loosen lending standards, setting the stage for another round of mortgage failures. That would hurt low-income families, according to American Enterprise Institute analyst Edward Pinto, by “putting them under the stress of risky loans.”

Watt's former Democratic colleagues on the House Financial Services Committee, who say their priority is ensuring that families have access to home loans, hope that Watt's background will help him promote a less restrictive credit policy than DeMarco has.

“He does believe in home ownership, and in people realizing the American dream,” explained Rep. William Lacy Clay of Missouri.

Unlike DeMarco, Watt is not a bureaucrat. He's been in Congress since 1993, a 68-year-old grandfather of one whom colleagues describe as studious and thoughtful.

Watt grew up poor in North Carolina, he testified at a confirmation hearing, attending segregated schools and living his earliest years in an old house with a tin roof through which the stars were visible. But he found success in law after graduating from the University of North Carolina and Yale Law School, and eventually won a seat in the North Carolina senate.

He gave up that seat after one term to focus on raising his two sons, and came to Congress when North Carolina's heavily gerrymandered 12th District was drawn. Harvey Gantt, the Charlotte mayor for whom Watt managed two campaigns against GOP Sen. Jesse Helms, declined to run for the seat and told Watt that he should run for it instead.

Watt's friends contend that after 20 years in Congress, he knows how to say “no” to the housing groups and home builders who will lobby for looser restrictions. One of Watt's closest colleagues on Capitol Hill, Virginia Democrat Bobby Scott, promised as much, saying that Watt is “willing to stand up to friend and foe and do the right thing."

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