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 9^th 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 sharing transactions.

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 FHA.

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."