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Watt remains mum on recapitalizing GSEs

In a rare speech, Federal Housing Finance Agency Director Mel Watt steered clear of a controversial proposal to recapitalize the government-sponsored enterprises Fannie Mae and Freddie Mac and also largely avoided other hot-button topics under review by the agency.

Watt has previously said that the GSEs are likely to take draws on the U.S. Treasury as the enterprises’ reserves are wound down to zero at the beginning of 2018, an outcome that could erode investor confidence in the GSEs’ securities.

WattLast week the Congressional Budget Office released a report that indicated that if Fannie and Freddie were allowed to retain up to $5 billion in profits annually, it would marginally help stabilize the mortgage market, but significantly reduce the chances that the GSEs would have to take unpopular draws on the Treasury in the event of quarterly losses. Watt and the chief executive officers at Fannie and Freddie did not mention the report, or discuss the potential impact of future draws. Numerous groups on the left and right have urged Watt to allow the GSEs to begin retaining some earnings.

During a speech Monday in Boston at the Mortgage Bankers Association, Watt did not mention recapitalization one time, and also avoided references to the conservatorship and comprehensive GSE reform.

Watt also did not tip his hand on whether the FHFA will require Fannie and Freddie to expand its use of front-end risk sharing models, including an expansion of the use of private insurers.

Watt focused most of the 30-minute speech on challenges facing underserved borrowers and the recovery. He indicated that the GSEs will be required to develop more pilots to address and retain affordable housing. He also mentioned that the FHFA will be seeking input on addressing the language-preference question in the standard application for a GSE loan. The industry raised strong objections to including the question, and the FHFA removed it from a draft revision to the form. 

Watt also urged industry participants to embrace changes in the industry.  

“I have spent a lot of time wondering if we will ever get to the new ‘normal’ and, if so, what the new normal will look like,” Watt said. “One thing that I have concluded is that change is inevitable, and change will be a constant ingredient in the new normal.” 


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