Fannie-Freddie’s Watt Making Few Changes Irks His Allies

After a speech to bankers in Raleigh, North Carolina last month, Melvin L. Watt, chief regulator of Fannie Mae and Freddie Mac, called on a man in the back of the hotel ballroom.

“Does the National Housing Trust Fund have the possibility of being capitalized?” the man asked, referring to a low-income housing program that’s supposed to get a cut of revenues from the two mortgage-finance companies.

Watt, who has yet to approve funding of the trust, said he’s studying the issue. ‘He wants me to go way off script,’’ Watt told the group. “I can’t do that.”

Watt’s circumspect style and scant policy changes in his first nine months as director of the Federal Housing Finance Agency have drawn criticism from some of the same housing advocates who pushed President Barack Obama to appoint him. The National Low Income Housing Coalition and other groups said they expected Watt, the most powerful housing official in America, to move quickly to help troubled borrowers and lower-income families shut out of the two-year housing recovery. Instead, he is maneuvering cautiously, asking for public feedback on many issues -- and earning accolades from the mortgage industry.

“Mel Watt has been a huge disappointment,” said Peter Dreier, a public policy professor at Occidental College in Los Angeles who wrote a paper arguing that the FHFA should allow debt reductions for borrowers with Fannie Mae and Freddie Mac mortgages. “No one I know in the housing community understands why he’s sitting on his hands.”

Watt, through FHFA spokesman Peter Garuccio, declined to be interviewed for this story. FHFA is examining issues important to consumer groups, including whether to allow principal reductions, Garuccio said.

$187.5 Billion

Since Watt’s first day of work in January, he’s had to navigate political and legal battles over the shape of the nation’s housing-finance system. Fannie Mae and Freddie Mac, which buy and package mortgages into guaranteed bonds, have been under government control for six years after receiving a $187.5 billion taxpayer bailout. Lawmakers earlier this year failed to agree on a plan to replace the two companies while consumer groups have been pushing Watt to use them to expand homeownership.

Investors in Fannie Mae and Freddie Mac, including Fairholme Capital Management LLC, lost a lawsuit against FHFA and the Treasury yesterday to force the companies to divide profits with private shareholders. U.S. District Court Judge Royce Lamberth denied their claims, saying that the bailout agreement permitted the government to sweep nearly all profits to the Treasury. Shares of both companies plunged today.

A similar investor suit is pending in the Court of Federal Claims.

Balanced Way

Watt, 69, a tall, lean former Democratic congressman from North Carolina who favors dark suits, signaled early that he would listen to all sides. In February, he hired a group of advisers that includes Bob Ryan, a former Freddie Mac and Department of Housing and Urban Development official, and consumer advocate Eric Stein, who had been an executive at the Center for Responsible Lending. Watt also met with JPMorgan Chase & Co. Chairman Jamie Dimon and other mortgage industry leaders to get their advice.

Watt is approaching the job “in a very balanced way,” said David Stevens, president of the Washington-based Mortgage Bankers Association. “He’s taking great precautions to make sure he doesn’t just forge ahead with decisions that haven’t been fully vetted by his team.”

During a speech in May -- one of only five public appearances he’s made -- Watt unveiled a new strategy for the agency. While his predecessor, Edward J. DeMarco, made the financial soundness of Fannie Mae and Freddie Mac his top priority, Watt said he would put liquidity in the mortgage market on a par with the companies’ stability.

DeMarco’s Ban

In the same Brookings Institution address, he announced new rules to ease the flow of mortgages to riskier borrowers who have been closed out of government-backed loans.

Though Fannie Mae and Freddie Mac will buy loans from borrowers with credit scores as low as 620 on a scale of 850, the average score from the Fair Issac Corp. on mortgages they purchased is now about 740.

Dimon and other bankers have blamed tight credit on losses they have endured from having to buy back soured loans with underwriting errors. The new rules, which sought to clarify when lenders would have to absorb losses, haven’t opened the mortgage spigot yet. Both Watt and John Stumpf, chief executive of Wells Fargo & Co., have said additional rule changes are needed to ease lending.

Reform Bill

Housing advocates at the May event were alarmed when Watt said that he wasn’t prepared to reverse DeMarco’s ban on reducing the loan principal for struggling borrowers. DeMarco’s stand had galvanized housing groups to push for his ouster. Now Watt was telling them he needed time to analyze the issue.

“He is working incrementally, but it’s important that he think about bold action,” said Julia Gordon, director of housing finance and policy at the Washington-based Center for American Progress, which has ties to the Democratic Party. Congressional Budget Office data shows that ending the ban would potentially help hundreds of thousands of Americans avoid default.

As Watt was talking at Brookings in May, the Senate Banking Committee was preparing to vote on the most important piece of housing legislation since the financial crisis. The bill, endorsed by President Obama, would replace Fannie Mae and Freddie Mac with a government insurer of mortgages that would suffer losses only after private investors had been wiped out.

Watt declined to take a position on the bill, which represented the closest that Democrats and Republicans had ever come to an agreement on reshaping the mortgage industry.

Housing Goals

Housing finance reform is necessary, he said at the speech, “however, Congress and the Administration have the important job of deciding on housing finance reform legislation, not FHFA.”

The full Senate never voted on the bill after it was approved by the committee. Elizabeth Warren of Massachusetts and other Democrats opposed the measure because it didn’t require the government-backed system to support lending in disadvantaged neighborhoods.

In August, Watt issued a proposal on lending to lower-income borrowers that drew more criticism from advocacy groups. FHFA is required to set affordable-housing goals for loans that Fannie Mae and Freddie Mac buy from disadvantaged areas and borrowers. DeMarco had reduced the targets: In 2012, 23 percent of the home-purchase loans the companies bought had to be made to these borrowers, a four percentage point drop from the goal of 27 percent in 2010.

Insurance Fees

Watt proposed that the agency keep the goals near current levels for the next three years. After getting public comment, FHFA will make a final decision by the beginning of 2015.

“I’m severely disappointed,” John Taylor, president of the National Community Reinvestment Coalition, said. “It more or less continues where Ed DeMarco was and it doesn’t raise the bar of opportunity for traditionally underserved people or for low- and moderate-income people.”

NCRC “worked hard on the administration” to appoint Watt, Taylor said. “We spent a lot of time and energy because when he was in Congress he was a voice for underserved people.”

Watt has also asked for public input on whether Fannie Mae and Freddie Mac fees to guarantee securities should be raised. The charges are typically passed along to borrowers in higher interest rates.

Trust Fund

DeMarco, a career bureaucrat who arrived at the agency during the presidency of George W. Bush, had been gradually raising the fees. Watt, who halted a planned increase under DeMarco, will make a final decision once the comments have been evaluated, Garuccio, the spokesman, said.

“Given the impact of these fees on the enterprises, the housing finance markets, and on borrowers, I believed that it was critical to evaluate this issue and to get feedback from stakeholders,” Watt said in North Carolina.

The director’s willingness to seek public input on issues that affect who gets mortgage credit has been excellent, said Mark Goldhaber, a North Carolina-based housing policy consultant and former executive at Genworth Financial Inc.

“Mel is taking a fresh look at really important housing issues around access,” Goldhaber said. “His focus on trying to be transparent has been very important.”

Congressional Career

Sheila Crowley, president of the National Low Income Housing Coalition in Washington, has called on Watt to break with DeMarco on another issue: allowing Fannie Mae and Freddie Mac to contribute to the National Low Income Housing Trust Fund. It was set up by Congress in 2008 to subsidize rental and homeownership programs for poor families.

DeMarco prevented the funding, which could have amounted to hundreds of millions of dollars annually, citing the companies’ precarious financial condition after the bailout.

Watt has said he’s investigating whether to have Fannie Mae and Freddie Mac, which are now posting record profits, make contributions.

“We’re frankly baffled at why he hasn’t done so,” said Crowley. ‘We’re not getting any answers about why not. It’s perplexing.’’

MBA’s Stevens said Watt’s careful approach as a regulator shouldn’t come as a surprise to anyone who followed his career in Congress. Watt, who grew up outside Charlotte in a house without running water, went to law school at Yale University and worked for two decades as a lawyer before winning a congressional seat in the district that includes the headquarters of Bank of America Corp. as well as low-income neighborhoods swept by foreclosures.

HARP Visit

In 22 years in Congress, Watt sat on the House Financial Services Committee, pushing with other Democrats for incremental policies to aid delinquent borrowers and spur lending.

“Anybody who thought there was going to be a more aggressive position taken by Mel should really have done a better job of looking at his track record,” Stevens said. “He was clearly concerned about his constituents in North Carolina, but I wouldn’t have described him as one of the more activist members of Congress.”

On Thursday, Watt will make his sixth public appearance since taking office, at an event in Detroit promoting the Home Affordable Housing Refinance Program. HARP has enabled 3.2 million borrowers, many of them underwater on their mortgages, to cut their monthly payments with lower interest rates. Lenders are willing to refinance the mortgages because Fannie Mae and Freddie Mac guarantee there won’t be any buyback risk.

DeMarco, who’s now a senior fellow at the Milken Institute in Washington, said Watt has a tough job. Balancing the ongoing needs of Fannie Mae, Freddie Mac, and the mortgage market without knowing if Congress will remake the housing finance system is the hardest part, DeMarco said.

“It is very difficult to be the conservator of these two companies” after six years of government control, he said. “To try to keep this going, what is the direction? Director Watt has a big challenge.”