Mel Watt has now officially
taken the reins of the Federal Housing Finance Agency (FHFA),
replacing Acting Director Edward J. DeMarco. He was sworn in earlier
today to a five year term as the very first actual FHFA Director
(DeMarco was appointed and never confirmed by the Senate). While
DeMarco was seen as a friend to the stability of the housing finance system, the industry has high hopes for Watt to be more of a friend to the broader housing market. Hopefully the two aren't mutually exclusive.
Two conflicting views of Watt and about
the course he may be planning to follow in running the agency that serves as
both regulator and conservator of Freddie Mac and Fannie Mae (the GSEs) are
presented in two articles, each published last week. The first, an editorial that appeared on
January 2 in Investor.com is one of
the more virulent we have seen in a supposedly mainstream publication, starting
out with the statement that January 6 "will
live in infamy as the start of the next housing bubble."
The unsigned editorial calls Watt "A
radical social activist with one of the most liberal voting records in
Congress," taking particular care to mention he is the former head of the
Congressional Black Caucus and that he "has a soft spot for borrowers who can't
afford a house." It claims that he "was
one of the affordable-housing zealots on the Hill who helped push Fannie and
Freddie into the risky subprime market. They (Congressional Republicans) rightly
argued that putting him in charge of regulating Fannie and Freddie would be
letting the fox guard the henhouse."
The CEOs of the two GSEs, it says,
have been relegated to largely figureheads and as FHFA chief, "Watt can yank
these CEOs around like puppets on a string."
The writer expects him to reboot the era of easy credit and return the
GSEs to the policies that caused the crisis.
Saying that he is "already undoing
the solid work of his prudent predecessor, Edward DeMarco, who locked horns
with the White House by tightening credit and winding down the failed agencies,
it points to a statement made by Watt in response to an announcement in early
December by DeMarco that he was raising the fees the GSEs charge borrowers with
lower credit and or down payments. Watt then
said he would postpone the March date for implementing the fees until he could
review them. Investor.com couches Watt's statement this way; "DeMarco's moves
helped return Fannie and Freddie to profitability and helped them gradually pay
back the Treasury for their bailouts. Whereas he protected taxpayers, Watt
wants to protect deadbeats."
A, dare we say, more moderate take
on Watt's installation was written by Nick Timiraos of the Wall Street Journal who says Watt has already signaled a coming
shift in direction from that of DeMarco.
Timiraos said that DeMarco's December
9th announcement of the loan-fee hikes had already provoked strong
industry blowback, even more a few days later when the GSEs revealed the
targets of the new fees. He says that
Watt's delay "Signals that access to mortgage credit is likely to ride shotgun
ahead of other competing policy goals, such as reducing the firms' footprint in
housing markets, a top priority of the FHFA in recent years."
The reasoning behind the several fee
increases has been to raise the cost of government involved mortgages to a
point where the private market could complete.
Timiraos said the most recent round of increases came after FHFA decided
that certain loans were still priced too low to encourage private investors even
though Fannie and Freddie are now profiting handsomely from these loans. There were also statements from FHFA to the
effect that these higher fees would make it easier for the GSEs to accelerate risk
Watt's announced delay shows there
is a larger policy disagreement.
Timiraos said that while there is broad consensus in Washington that
private capital should play a larger role there are two competing views as to
why this has not happened. One is that
the government is subsidizing loans by pricing its guarantee too low and
insuring too-large loans. The other is
that investors may be concerned about the housing market or worried about "certain
conflicts of interest in how loans are managed.
If the latter is the case, the argument is that raising fees will not
mean more private capital it will mean less capital for housing, hurting the
market, and making it harder still to attract private capital. Higher GSE fees could also drive business to
Will Watt will merely continue where
DeMarco left off; reducing loan limits and raising fees or will he freeze all
steps to bring back private capital, further entrenching the government's large
role in the industry, Timiraos asks. "Or will he attempt to find a middle
ground-taking steps to identify and remove other potential barriers to private
capital besides the government's price advantages?"
Timiraos concludes, "The answers to
those last two questions will reveal much about the direction Mr. Watt plans to
take the FHFA, especially if he concludes that borrowers' access to mortgages
isn't to be sacrificed for other competing purposes."