FHFA’s Watt: ‘GSE Reform Must Come from Congress’

Federal Housing Finance Agency Director Mel Watt, in testimony yesterday on Capitol Hill, defended his agency’s nearly 10-year conservatorship of Fannie Mae and Freddie Mac and said the agency has implemented numerous measures to strengthen the secondary mortgage market.

Testifying (https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-Melvin-L-Watt-Director-FHFA-Before-the-US-Senate-Committee-on-Banking-Housing-and-Urban-Affairs-05112017.aspx) before the Senate Banking Committee, Watt, a former representative from North Carolina, also called on Congress to move forward with secondary mortgage market reform that would bring the government-sponsored enterprises out of conservatorship.

“I want to reaffirm my strong belief that it is the role of Congress, not FHFA, to make these tough decisions that chart the path out of conservatorship and to the future housing finance system,” Watt said.

The federal government brought Fannie Mae and Freddie Mac into conservatorship on Sept. 6, 2008. Since then, the GSEs have drawn $187.5 billion from the Treasury Department. Watt warned that without action, Fannie Mae and Freddie Mac could require additional draws.

“These conservatorships have been unprecedented in scope, complexity and duration, especially when you consider that the Enterprises support over $5 trillion in mortgage loans and guarantees,” Watt said. “I have said repeatedly, and I want to reiterate, that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform. However, it is important for all of us to recognize that the conservatorships have led to numerous reforms of the Enterprises and their operations, practices, and protocols that have been extremely beneficial to the housing finance markets and have reduced exposure and risks to taxpayers.”

Watt outlined several issues Congress should address on GSE reform:

–How much backing, if any, should the federal government provide and in what form.

–What process should be followed to transition to the new housing finance system and avoid disruption to the housing finance market, and who should lead or implement that process.

–What roles, if any, should the Enterprises play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively

–What regulatory and supervisory structure and authorities will be needed in a reformed system and who will have responsibility to exercise those authorities

Watt warned additional draws of taxpayer support would reduce the amount of taxpayer backing available to the Enterprises and the foreseeable risk that the uncertainty associated with such draws or from the reduction in committed taxpayer backing could adversely impact the housing finance market.

“Unfortunately, the challenge is significantly greater today than it was last year and will continue to increase unless it is addressed,” Watt said. “At the time I delivered my speech at the Bipartisan Policy Center in 2016, each Enterprise had a $1.2 billion buffer under the terms of the [Preferred Stock Purchase Agreements] to protect the Enterprise against having to make additional draws of taxpayer support in the event of an operating loss in any quarter. Under the provisions of the PSPAs, on January 1, 2017 the amount of that buffer reduced to $600 million and on January 1, 2018 the buffer will reduce to zero. At that point, neither Enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.”

Watt insisted Fannie Mae and Freddie Mac need some kind of buffer to shield against short-term operating losses. “It is especially irresponsible for the Enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the fixed dollar commitment the Treasury Department has made to support the Enterprises. We reasonably foresee that this could erode investor confidence. This could stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit for borrowers.”

Watt’s call for congressional action on GSE reform echoed that of the Mortgage Bankers Association, which last month issued a white paper, GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (https://www.mba.org/issues/gse-reform?_zs=iS2FG1&_zl=KdDk3), the work of the MBA Task Force for the Future of the Secondary Market. The white paper establishes principles leading to a new government-guaranteed secondary market “end state.”

The proposal “preserves what works in the current system, while enhancing the stability of the market, and protecting taxpayers and consumers,” said MBA President and CEO David Stevens, CMB. “It ensures that mortgage lenders of all sizes and business models enjoy equal access and execution to the secondary market. And it dramatically reduces the taxpayer and government risk while preserving the products and processes.”