Fannie Mae-No Politics (FNMA)

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As Fannie and Freddie reform talk heats up, their regulator speaks up

By Andrea Riquier ... Published: Jan 18, 2018 9:09 a.m. ET


FHFA says it broke its silence after receiving ‘a number of’ requests for its views


Getty Images, Bloomberg

Fannie Mae and Freddie Mac should be reorganized as private, utility-like entities, and the government should provide an explicit guarantee for mortgages in order to preserve the popular 30-year fixed-rate loan, the regulator of the two government-sponsored mortgage enterprises said this week.

Mel Watt, director of the Federal Housing Finance Agency, the regulator created to oversee the two enterprises at the height of the 2008 financial crisis, had previously held back when asked for his views on the appropriate shape for the future of the housing-finance system, saying such a determination was up to Congress.

But as the situation for Fannie FNMA, +2.17% and Freddie FMCC, +2.74% became more fraught, that has changed.

Watt in May told the Senate Banking Committee that reform was “urgently” needed. “These conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform,” he said.

Read: Fannie and Freddie are nearly out of money and Washington is getting anxious

https://www.marketwatch.com/story/congress-wouldnt-do-it-so-fannie-and-freddie-reformed-themselves-2017-08-03

In recent months, a bipartisan consensus has started to emerge around what the future housing finance system should look like. In the January 16 letter to Mike Crapo and Sherrod Brown, the two senators leading the efforts, Watt said he had decided to make recommendations in response to requests from Congress following the May hearing.

“In recent months, perhaps attributable to the growing perception that reform could be achievable this year, FHFA has received a number of new or renewed requests for our views,” Watt wrote.

Still, he said, “it is the prerogative and responsibility of Congress, not FHFA, to decide on housing-finance reform.”

In a statement, the Mortgage Bankers Association’s head lobbyist, Bill Killmer, said “MBA is grateful for the well-informed input provided by the Director and hope that it contributes to momentum for congressional action on reform.”

The two enterprises now have capital buffers of only $3 billion and even that slim amount was hard-fought to secure, the result of negotiations between FHFA and the Treasury Department. Previously, the two enterprises were set to start 2018 with no capital, according to a 2012 amendment to the 2008 bailout. The zero-capital arrangement was designed to force Congress to take action to establish a future housing finance system, in order to avoid a repeat of the 2008 taxpayer bailout.

Under Watt’s recommendation, Fannie and Freddie would be reincorporated as “private, shareholder-owned corporations with a regulated rate of return.” The government would provide an “explicit and paid-for catastrophic guarantee” on mortgage bonds issued by the two entities — and any private players.

The broad outlines of Watt’s proposal are generally in line with what most housing finance watchers believe is the best, and most likely, housing finance system moving forward. That view is in line with the direction in which the two enterprises, under FHFA regulation, have already started to move.

Read: Congress wouldn’t do it, so Fannie and Freddie reformed themselves

Industry participants welcomed Watt’s step.

Mark Zandi, chief economist at Moody’s Analytics and a long-time housing finance watcher who advanced his own proposal in 2016, called it “a good plan both from an economic and political perspective.”

The plan would protect taxpayers, preserve the 30-year fixed-rate loan that’s considered the linchpin of American homeownership, “and provide broad access to loans for underserved communities,” Zandi said, while also keeping a level playing field for small lenders. “It is a solid reform proposal that should advance the ball on getting reform done.”

Rob Zimmer, acting executive director of the Community Mortgage Lenders of America, which represents smaller institutions that offer mortgages, agrees that the proposal would maintain a level playing field for lenders. But Zimmer questions how politically feasible the plan would be, given the new taxpayer-backed protections it would extend to big banks.

“Does Congress really want to be seen giving new goodies to Wells with all its problems?” he said.

Shares of Fannie and Freddie surged 7% and nearly 6%, respectively, this week. Shareholders were essentially wiped out by the 2012 amendment and have fought for restitution, and clarity, in multiple court cases.