The Federal Housing Finance Agency could slow efforts to shrink Fannie Mae and Freddie Mac and boost aid to troubled borrowers if U.S. Representative Mel Watt is confirmed as the agency’s director early next month.
Watt, a North Carolina Democrat, has the unanimous support of Senate Democrats who voted this week to change the chamber’s rules to approve nominees with a simple majority. Watt could gain confirmation as soon as the week of Dec. 9, when the Senate returns from a recess.
“We believe he is less inclined to lower the conforming loan limit, raise guarantee fees, or take other steps that could make housing finance more expensive,” Jaret Seiberg, an analyst at Guggenheim Securities LLC’s Washington Research Group, said in a note to clients. “Yet he is also a threat to engage in broad principal forgiveness and to expand the HARP refinancing program.”
Watt would be taking over as independent regulator at a pivotal time for the two government-sponsored enterprises, which provide liquidity to the housing market by packaging loans into securities on which they guarantee payments of principal and interest. FHFA’s director has the power to set and modify terms for the 50 percent of existing U.S. mortgages owned or backed by Fannie Mae and Freddie Mac.
Watt would replace FHFA Acting Director Edward J. DeMarco, whose focus during his four-year tenure has been on improving the companies’ bottom line and conserving assets for taxpayers. Fannie Mae and Freddie Mac received a $187.5 billion bailout from the U.S. Treasury after they were seized by regulators in the midst of the 2008 financial crisis.
The two companies have begun posting record profits and sending billions of dollars in dividends to the Treasury as the housing market rebounds. At the same time, Republicans and Democrats in the Senate are working on a bipartisan plan to wind them down and replace them with a new housing finance system.
In naming Watt, Obama was responding to months of pressure from housing activists and groups including the Congressional Black Caucus who wanted an FHFA director who would place more emphasis on aiding financially struggling borrowers.
Watt may reverse DeMarco’s ruling prohibiting Fannie Mae and Freddie Mac to cut the principal balance on delinquent loans. DeMarco argued that policy would hurt taxpayers more than it would help homeowners. Watt called for principal reduction as a member of Congress; after his nomination, he said his congressional positions wouldn’t dictate his views as a regulator.
Mortgage industry participants are hoping Watt will expand the Home Affordable Refinancing Program, or HARP, which allows borrowers with Fannie Mae and Freddie Mac loans to lower their interest rates even if they owe more than their homes are worth. The current program applies to loans originated before June of 2009, and some housing advocates and lenders have been pressing for it to be extended to more recent originations.
Certain Fannie Mae and Freddie Mac mortgage bonds slumped on the potential for an expansion of HARP. Fannie Mae’s 5 percent securities underperformed similar duration Treasuries by about 0.5 cent on the dollar for two days ending Friday, the most this year, according to data compiled by Bloomberg.
Watt may also slow some of DeMarco’s efforts to gradually wind down Fannie Mae and Freddie Mac’s operations in the absence of action from lawmakers on a broader housing-finance overhaul.
DeMarco has announced he wants to lower the maximum size of loans the companies can purchase, raise the fees they charge to guarantee loans, charge additional fees in states with long foreclosure timelines, and cut the amount of financing they make available for apartment-building loans.
Participants in the housing industry have pushed back against some of those initiatives, saying they are premature as the housing market is still recovering.
Senate Republicans, who approve of DeMarco’s policies, blocked Watt’s confirmation in October when all but two of them voted against moving his nomination to a final debate, leaving Democrats short the 60 votes they needed at the time.
Senate Majority Leader Harry Reid, a Nevada Democrat, cited that vote as one of the reasons to change the rules to require a simple majority vote on nominees.
“Senate Republicans simply don’t like the consumer protections Congressman Watt was nominated to develop and implement,” Reid said during a speech on the Senate floor.
Watt, a lawyer, has served in Congress since 1992, representing a district that includes the second-largest concentration of the banking industry next to the New York district that contains Wall Street, according to his website.