The status of the GSE's (Fannie Mae and Freddie Mac), as well as the topic of housing finance reform continue to be "hot," according to Melvin L. Watt, Director of the GSE's conservator, the Federal Housing Finance Agency (FHFA).  Watt spoke to the North Carolina Bankers Association at their annual convention in his home state.

Watt elaborated on some of the points he made about these topics when he testified before the Senate Banking Committee earlier this month, drawing a distinction between decisions FHFA have made and continued to make and those that are the responsibility of Congress.  Watt said he generally considers the former to be "GSE reforms" while viewing the latter as "housing finance reform."

Watt reminded his audience that when he had last spoken to them right after taking his post at FHFA he had outlined his priorities of making FHFA's issues transparent and the agency more open and receptive to stakeholder input.  That receptivity, he said, has help inform many decisions and many in attendance deserve thanks for the input they provided regarding decisions such as the GSE's guarantee fees, counterparty standards for private mortgage insurance, and the Common Securitization Platform among others.

Some of the decisions made by the FHFA and with stakeholder input have fundamentally reformed the GSEs, their operations, practices, and protocols as well as aiding the liquidity and efficiency of housing finance markets and reducing risk to taxpayers. Many of these reforms, he said, are extremely important and should not be ignored or disregarded by Congress when it works on housing finance reform.

He gave as examples:

  • Reforms of GSE governance and day-to-day operations. The GSEs have significantly improved risk management and operations, with certain business, loss mitigation, and counter-party practices aligned. The GSEs, while operated similarly in many respects, are still expected to compete and innovate on things that matter.
  • GSE guarantee fees are now appropriately priced, the retained portfolios have been reduced by over 60 percent, and both Freddie Mac and Fannie Mae have created programs that transfer a meaningful amount of credit risk to private investors on over 90 percent of their targeted mortgage acquisitions.
  • The GSEs are also many years down a path toward developing a common securitization platform and a single security to facilitate market liquidity by eliminating differences in the GSEs' trading prices.
  • Both GSEs have developed effective loss mitigation programs to minimize losses and allow borrowers to avoid foreclosure where ever possible.
  • Volume-based discounts for larger lenders have been eliminated, thus leveling the playing field for lenders of all sizes. Support is also provided to small lenders by purchasing loans through the cash window.

All of the above, Watt said, is about what FHFA has done and will continue to do to reform the GSEs, and lay a good foundation. But housing finance reform is the responsibility of Congress and it goes far beyond what FHFA can, or should, do in conservatorship.  Congress needs to move forward expeditiously, Watt said, and suggested questions that they will have to answer to do so. 

  • How much backing, if any, should the federal government provide and in what form?
  • What process should be followed to transition to the new housing finance system and avoid disruption to the housing finance market, and who should lead or implement that process?
  • What roles, if any, should the GSEs play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively?
  • What regulatory and supervisory structure and authorities will be needed in a reformed system and who will have responsibility to exercise those authorities?

These, the Director said, are questions that only Congress can answer.  "We should all encourage them to answer these questions soon."