Watt Reverses Efforts to Shrink Fannie Mae, Freddie Mac

The U.S. regulator overseeing Fannie Mae and Freddie Mac is assuming an increasingly pivotal role in the housing market as bipartisan efforts to wind down Fannie Mae and Freddie Mac are meeting resistance in the Senate.

Melvin L. Watt, director of the Federal Housing Finance Agency, said yesterday that he thinks Congress needs to act to determine the companies’ future. Until then, Watt, who’s been running the agency since January, is shifting course to ensure Fannie Mae and Freddie Mac bolster the weakening housing market and aid troubled borrowers.

“I don’t think it’s the FHFA’s role to contract the footprint of Fannie and Freddie,” Watt said during an appearance in Washington where he outlined his plans for the two companies.

The Senate Banking Committee is expected to vote tomorrow on a measure that would replace Fannie Mae and Freddie Mac with a government reinsurer of mortgage bonds that would suffer losses only after private capital was wiped out. The bill hasn’t won enough support from Democrats to gain a vote of the full Senate. Unless that backing materializes, legislative efforts to remake Fannie Mae and Freddie Mac won’t resume until 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. Watt replaced Acting Director Edward J. DeMarco, who had served at FHFA since the administration of President George W. Bush.

Reversing DeMarco

Reversing decisions made by DeMarco, Watt announced yesterday that FHFA will remove targets for reducing the companies’ mortgage-market footprint and keep current limits on the size of loans they buy.

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.

“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.

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.

Taxpayer Support

The companies, which buy mortgages 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 DeMarco-initiated project to create a “common securitization platform” to be used by both companies and later by private securitizers in a future housing-finance system. Watt said the effort will instead focus on developing new technology to be used by Fannie Mae and Freddie Mac to jointly issue mortgage-backed debt rather than separate bonds.

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.”

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