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.”
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.
“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.”