Mel Watt, director of the Federal Housing Finance Agency (FHFA), on Monday once again sounded the alarm on housing finance reform, telling attendees at the Mortgage Bankers Association’s (MBA) Annual Convention and Expo in Denver that the matter “is becoming more urgent every day.”
“[Government-sponsored enterprises] Fannie Mae and Freddie Mac reached another milestone last month, completing their ninth year in conservatorship under the control of [the] FHFA,” Watt said in his prepared remarks during the event’s general opening session. “A conservatorship with a nine-year duration is unprecedented in the history of our country. What is perhaps even more startling, however, is the percentage of the overall economy that has been in conservatorship for this protracted period. The [GSEs] back over $5 trillion in mortgages – by any measure, not an insignificant percentage of the U.S. economy.”
As Watt explained, the FHFA has taken a number of steps to reform the the GSEs since they entered conservatorship in September 2008, including revising the companies’ reps and warranties framework and reducing taxpayer risk through the establishment of credit risk transfer programs. As a result of these and other administrative reforms, Fannie Mae and Freddie Mac look nothing like they did in the pre-crisis years.
Watt has consistently maintained, however, that despite these reforms, housing finance reform remains the the domain of Congress. As such, he has made an effort to differentiate “GSE reform” from “housing finance reform.”
“While I think of these reforms as GSE reform, I have also made it clear that I firmly believe that it is the role of Congress, not FHFA, to do housing finance reform,” Watt said. “Unlike what I have characterized as GSE reform, housing finance reform will address issues that only Congress can decide.”
In testimony before the House Financial Services Committee earlier this month, Watt said housing finance reform needs to happen soon because the operating “buffers” that were established for Fannie and Freddie under their Preferred Stock Purchase Agreements in 2008 will be reduced down to zero by Jan. 1, 2018. He indicated that the FHFA might take action to have the companies build their own buffers, so as to protect taxpayers, but emphasized that this is is not the same thing as “recapitalizing” the GSEs.
It would be a “serious misconception,” Watt told the committee, for anyone “to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release.”
Watt did not bring up the topic of possibly having Fannie and Freddie hold some capital during his speech on Monday.