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Mel Watt renews call for housing-finance reform

In a speech before mortgage bankers Monday, Federal Housing Finance Agency (FHFA) Director Mel Watt strongly urged Congress to get housing-finance reform moving.

“Fannie Mae and Freddie Mac reached another milestone last month, completing their ninth year in conservatorship under the control of FHFA,” Watt said during the Mortgage Bankers Association (MBA) national conference in Denver. “A conservatorship with a nine-year duration is unprecedented in the history of our country.”


Watt noted that that the government-sponsored enterprises (GSEs) back about $5 trillion in mortgages. A large percentage of the U.S. economy is locked up in the conservatorship, he added.

“It is not surprising, therefore, that calls for housing-finance reform are growing more and more urgent every day,” Watt said. 

Watt drew a distinction between housing-finance reform and the kind of GSE reform that Fannie and Freddie have done internally over the past nine years while under the government’s control.

“I have made it clear that is the role of Congress, not FHFA, to do housing-finance reform,” Watt said.

Unlike his previous testimony before Congress, however, Watt provided no indication that he might allow the GSEs to withhold future dividend payments to the U.S. Treasury, ending the profit sweeps at least temporarily so the GSEs can raise a small capital buffer as advocated by some banking trade groups. 

Earlier this month, Watt testified before the House Financial Services Committee and previously in May before the U.S. Senate banking committee that he wanted to find a solution that would reduce the GSEs’ risk of needing to take draws on a line-of-credit extended by the U.S. Treasury. The enterprises’ capital reserves are scheduled to go to zero at the beginning of 2018. One quick solution to this problem would be to allow the enterprises to retain some of their earnings. Watt has the power as the conservator to act on his own to ensure the GSEs’ safety and soundness.

MBA, the largest mortgage trade group, opposes any change to the profit sweeps or conservatorship prior to reforms by Congress, however. 

Watt has previously said future draws could undermine the confidence in the GSEs’ securities. Fannie and Freddie can draw a combined $258.1 billion in the event of losses, but almost all their profits are swept up by the Treasury. If they take draws due to a quarterly loss, the overall drawable credit line is reduced and cannot be replenished through future earnings.

Although he has expressed concern about the GSE diminishing buffers, Watt has also repeatedly said that Congress should lead the way on reform on the big-picture issues. He says it is up to Congress to determine the government’s level of backing, the transition model to end the conservatorship, what role a reformed Fannie and Freddie will take in housing finance, and so on.

In their presentations at the same conference, Fannie Mae CEO Tim Mayopoulos and Freddie CEO Donald Layton didn’t address the capital-buffer issue.

In a question-and-answer session, however, Mayopoulos acknowledged that the enterprises are operating with political uncertainty about the GSEs’ future.

“I would say that we are very clear on what at Fannie Mae we are trying to get done,” Mayopoulos said. “Some say that the GSEs are broken, that the system is broken. I don’t subscribe to that theory. I actually think the GSEs are stronger today than they were before the crisis, and I actually think that the system works well.” 

This story was corrected to note that Watt spoke in October before the House Financial Services Committee. 


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