Bloomberg News is reporting on a proposal from Federal Housing Finance Agency (FHFA) Director Melvin Watt regarding the future of Fannie Mae and Freddie Mac (the GSEs). The two former companies, which have been in conservatorship under FHFA since 2008, are at the heart of the current debate on housing finance reform.
Watt's proposal, titled "Federal Housing Finance Agency Perspectives on Housing Finance Reform," was sent to Senate Banking Chairman Michael Crapo (R-ID) and the committee's ranking member, Sherrod Brown (D-OH). In the proposal's cover letter Watt said that he and the FHFA staff feel they should provide their views "independently and transparently to those who have requested them while continuing to provide technical assistance to the committee and its members on other proposals that may be introduced."
According to Bloomberg's Joe Light, Watt proposes that the mortgage market should be supported by guarantors that are shareholder owned, but treated as utilities, with regulated rates of returns, and an explicit government guarantee backing the bonds they issue. He also restated what he had told Congress at a hearing in October; he has a "strongly held view that it is the prerogative and responsibility of Congress, not FHFA, to decide on housing finance reform."
Spokeswomen for the FHFA, Crapo and Brown declined to comment, and the proposal does not appear to be available on the FHFA website.
Watt's proposal joins several others in the ongoing debate over housing finance, one that has heated up every two years or so since the housing crisis began. The legislation now given the best chance to succeed is one sponsored by Senators Bob Corker (R-TN) and Mark Warner (D-VA), which would also preserve Fannie and Freddie as guarantors, but would open the role to competitors.
Light says the FHFA's suggestions depart from the most recent Warren-Corker plan in that the regulator proposes regulated rates of return, and warns against having too many guarantors, because heightened competition could increase the potential lowering of loan standards. Watt's proposal also appears to preserve the rights of existing shareholders while others currently on the table would strip the shares of all value or preserve only the preferred stock.
Nearly all proposals, however, envision an explicit, paid-for guarantee by the government, most if not all at the mortgage-backed securities level, although the guarantors themselves would be allowed to fail.
The FHFA document also said the guarantors should be required to transfer credit risk to the private market where feasible, and have sufficient capital to withstand a housing crash similar to the last decade's. The amount of the guantors' capital reserve would be left to the discretion of their regulator.
Light said, FHFA also suggests that the future mortgage guarantors be required to operate nationwide, have affordable-housing mandates, and provide equal access to the mortgage-finance system for large and small lenders.
The Mortgage Bankers Association (MBA), which is apparently also privy to the contents of the proposal, issued the following statement over the signature of its President and CEO David H. Stevens.
"MBA applauds FHFA Director Mel Watt for releasing this important paper which reinforces the need for comprehensive legislative housing finance reform. There are many similarities between this proposal and MBA's own plan including the need for a government guarantee behind MBS to support single-family and multifamily finance, two or more competing guarantors, the use of a single security in the single family market, and a level playing field for lenders of all sizes and business models. We look forward to continuing to work with Congressional leaders, the Administration, Director Watt, and other stakeholders to create a secondary mortgage market that provides a more stable system and broad, sustainable access to credit for all qualified borrowers."