FHFA’s Watt Seen as Enigma in Fannie-Freddie Market
On January 6, Bloomberg Businessweek published an article titled Watt at FHFA Seen as Enigma in Fannie-Freddie Market: Mortgages.
Watt at FHFA Seen as Enigma in Fannie-Freddie Market: Mortgages
Mel Watt’s first act overseeing Fannie Mae (FNMA:US) and Freddie Mac came before he officially started.
At about 9 p.m. on the Friday before Christmas, as Washington and Wall Street were shutting down, the incoming head of the Federal Housing Finance Agency sent reporters an e-mail from his personal account telling them he would indefinitely put on hold planned increases in the fees the two companies charge for insuring mortgage securities.
With the three-sentence message, Watt signaled a break from his FHFA predecessor Edward J. DeMarco and hinted at how he’ll shape the direction of the two firms that account for about 60 percent of new U.S. mortgages. Set to be sworn in today by President Barack Obama, Watt already is seen by consumer advocates as a potential champion for helping homeowners and by bond managers as a possible threat to the value of their investments. Watt, a 68-year-old Democratic Congressman from North Carolina, remains circumspect as to his intentions.
“Everyone wants to know what Mel Watt is going to do,” said Mortgage Bankers Association President David Stevens, who from 2009 to 2011 ran the Federal Housing Administration that insures loans with low down payments. “He’s really a bit of an enigma: You don’t know exactly where he’s going to head.”
Under DeMarco, a career civil servant who took over the FHFA’s top role in 2009 and later won accolades from Republicans for his approach, the agency initially focused on limiting Fannie Mae and Freddie Mac’s losses from the housing slump. The FHFA said in December it planned to raise guarantee fees to reduce their footprint in the market five years after the government had to rescue them.
Watt’s decision, after complaints by mortgage bankers and others in the housing industry that the higher charges set to take effect in March and April were too steep and sudden, may slow those efforts.Peter Wallison, a senior fellow at the American Enterprise Institute, said it’s the type of decision he expected.
“He’s a thoughtful man, he’s a smart man and he’s a good man, but that is something that is certainly along the lines of what I expect Mel to do,” said Wallison, a frequent critic of the two companies, who as a member of the Financial Crisis Inquiry Commission blamed government policy for causing the housing meltdown. “To follow the guidance he’s getting from people on the left and government-housing complex about what FHFA should be doing.”
Watt is inheriting a lengthy list of pending decisions from DeMarco, including whether to reduce the maximum size of mortgages that Fannie Mae and Freddie Mac can finance, which currently ranges from $417,000 to as much $629,500 in high-cost areas. A reduction would potentially hurt homeowners and builders by making larger loans more expensive, while it may help banks and issuers of private mortgage bonds expand their share of the market. In December, DeMarco sought public comment on cutting the limits to $400,000 to $600,000.
The FHFA is working with Fannie Mae and Freddie Mac to complete rules on the amount of capital that private mortgage insurers such as MGIC Investment Corp. and Radian Group Inc. must hold to do business with the companies. The agency also needs to respond to criticism from developers, lenders and affordable-housing advocates about its plans to shrink apartment-building financing, after a 10 percent cut last year.
The FHFA has said it will expand a program started last year to reduce the initial risk of losses to Fannie Mae and Freddie Mac on certain loans by selling bonds or purchasing additional insurance. This approach reflects a strategy that many lawmakers see as the most likely path of reforming the $9 trillion mortgage finance system.
The stakes are high because “there are numerous players in the housing finance system that have structured their businesses and household decisions around the current system, contributing to nearly 20 percent of the economy,” Tim Johnson, a South Dakota Democrat who heads the Senate banking committee said last month at a hearing. “As we draft changes to the system, we must keep that in mind.”
Residential investment including construction and remodeling and housing services, such as home use, rents and utilities, accounted for more than 15 percent of U.S. gross domestic product last year, according to U.S. Bureau of Economic Analysis data. In a nation in which consumer spending accounts for about 70 percent of economic activity, roughly 25 percent of American household wealth stems from home equity, according to the latest Census Bureau data.
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