Watt Reverses Efforts to Shrink Fannie Mae, Freddie Mac

The U.S. regulator overseeing Fannie Mae and Freddie Mac revealed plans to ensure the two mortgage-finance companies maintain support for the fragile housing market, reversing efforts to shrink their role.

The Federal Housing Finance Agency will remove targets for reducing the the companies’ mortgage-market footprint and keep current limits on the size of loans they buy, Melvin L. Watt, the agency’s director, said during a speech in Washington today.

The companies, which have been under U.S. control since 2008, will also renew their focus on helping troubled borrowers, beginning with a program in Detroit that will offer deeper loan modifications, Watt said in his first public comments since taking over at FHFA in January.

“Our overriding objective is to ensure that there is broad liquidity in the housing-finance market and to do so in a way that is safe and sound,” Watt said.

Shares of Fannie Mae closed at $4.57 in New York, up 8 percent from $4.24 at Monday’s close and 52 percent from $3.01 on Dec. 31. Freddie Mac shares ended the day at $4.49, a gain of 7 percent from Monday’s close and 55 percent for the year.

Watt also announced he was loosening rules that have forced banks to buy back billions of dollars’ worth of flawed home loans they sold to the two mortgage financiers, a move designed to spur the housing market. Watt said he would seek public input before deciding whether to increase the fees that Fannie Mae and Freddie Mac charge to guarantee loans.

Home Sales

New home sales dropped 14.5 percent to a 384,000 annualized pace in April, the weakest since July, according to Commerce Department data. The slump was concentrated in homes priced less than $300,000, showing that entry-level borrowers are being kept out of the market as prices and interest rates rise, and credit remains tight.

The companies, which buy loans and package them into securities, were seized by regulators as losses on risky loans brought them to the brink of bankruptcy. They received $187.5 billion in taxpayer funds to stay afloat before the housing-market turnaround propelled them to record profits.

The two companies now back about two-thirds of new U.S. home loan originations, giving them a broad influence on lending and credit availability.

Watt also said that he would scale back a project intended to create a “common securitization platform,” shifting the focus to forming new technology to be used by Fannie Mae and Freddie Mac to issue securities, rather than in a future housing finance system. He also said that the goal would be for the companies to use the system to issue a single type of mortgage-backed debt, instead of separate bonds.

HARP Eligibility

The FHFA won’t expand eligibility for its program allowing borrowers who owe more than their homes are worth to refinance, the Home Affordable Refinance Program, because not many borrowers would be aided, Watt said.

“What he’s showing us is that he’s going to approach this in a deliberate and measured way,” said Julia Gordon, director for housing finance and policy at the Center for American Progress, a Washington advocacy group with ties to the Democratic Party. “The focus is on expanding credit and expanding it in a safe and responsible way.”

Watt’s policy decisions will play an increasingly pivotal role in the nation’s housing finance system as bipartisan efforts to wind down Fannie Mae and Freddie Mac appear to be stalling in the Senate.

Committee Vote

The Senate Banking Committee is expected to vote Thursday on a measure that would replace the two companies with a reinsurer of mortgage bonds that would suffer losses only after private capital was wiped out. The bill doesn’t have enough Democratic support to advance beyond the committee and legislative efforts to remake Fannie Mae and Freddie Mac are unlikely to continue before next year.

In the interim, Watt will determine the size and nature of the companies’ business. The former Democratic congressman from North Carolina was appointed to lead the FHFA by President Barack Obama, to replace DeMarco, who had served at FHFA since the administration of President George W. Bush.

Right now, Fannie Mae and Freddie Mac have no legal avenue for recapitalizing and exiting U.S. conservatorship. Under an arrangement set by regulators, the companies are each required to send all of their profits to the Treasury each quarter above a $2.4 billion cushion. The payments, which will total $213.1 billion by the end of June, count as a return on the U.S. investment and not as repayment of the taxpayer bailout.

Stockholders including Bruce Berkowitz’s Fairholme Capital Management and hedge fund Perry Capital LLC are suing in federal court to force the U.S. to allow investors a share in the companies’ profits.