Former Charlotte Congressman Mel Watt said Tuesday he would direct mortgage giants Fannie Mae and Freddie Mac to focus on expanding access to home loans, signaling a change in how the government will approach housing policy.
In one of his first public speeches as head of the Federal Housing Finance Agency, Watt said the office will make changes that should allow banks to offer credit to a wider spectrum of borrowers. That’s a switch in philosophy from his predecessor, who focused on shrinking Fannie and Freddie’s role in the mortgage market.
Fannie Mae and Freddie Mac buy loans originated by banks, securitize them and sell the securities to investors with a guarantee against losses. They were placed into conservatorship in 2008 as the financial crisis unfolded and have been governed by the Federal Housing Finance Agency since then.
Taxpayers shelled out almost $190 billion to prop up Fannie and Freddie. The two entities have since returned to profitability and have more than repaid what they received in the bailout.
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Under Acting Director Edward DeMarco, the agency moved to reduce Fannie and Freddie’s dominance in the housing finance system. The entities back more than 60 percent of new mortgages.
Watt told an audience at the Brookings Institution in Washington that his agency will tweak its guidelines to reassure banks that they can lend to borrowers with slightly lower credit scores without the government forcing them to repurchase the mortgages the banks sell to Fannie or Freddie.
Charlotte-based Bank of America, for example, has paid or set aside $36.2 billion in the last five years to buy back mortgages originated before the crisis that ultimately went sour. Much of that total has been paid to Fannie and Freddie. Bank of America came to a $9.5 billion agreement with the Federal Housing Finance Agency in March and reached a $10 billion deal with Fannie Mae last year.
The changes should give banks more confidence to ease back on internal standards that restrict mortgages beyond what Fannie and Freddie require of homebuyers, Watt said.
Watt also said the agency won’t lower the maximum amount of a mortgage that Fannie or Freddie may purchase. The Federal Housing Finance Agency had considered such a change before Watt took over.
But Watt also said Fannie and Freddie won’t expand a major government-sponsored initiative known as the Home Affordable Refinance Program to reach more troubled homeowners.
Instead, Watt said the agency will improve servicing standards and foreclosure prevention options. One feature will be a “ Neighborhood Stabilization Initiative” targeting the hardest-hit communities. A pilot program will launch in Detroit.
Watt also set a goal of tripling the amount of private capital brought in to bear some of the risk of losses on unpaid mortgage principal.
Sterne Agee analyst Jay McCanless wrote in a report Tuesday that Watt’s comments signaled a significant departure from the past that should be positive for the housing industry. He said the new approach means Fannie Mae and Freddie Mac “have shifted from a capital preservation, bunker-like mentality to an amenable and active buyer of mortgages at and potentially below the credit score averages of the last two years.”
Industry groups also welcomed Watt’s moves. Mortgage Bankers Association CEO David Stevens said in a statement that Watt’s policies “indicate that positive change could be on its way.”
The Financial Services Roundtable said it is encouraged by Watt’s “thoughtful approach” to the agency’s priorities.
But Watt’s policies may find detractors among the Republicans who initially blocked his nomination to the post. Party leaders had criticized his lack of experience in the housing sector, and some Republicans had worried he would overly focus on loosening credit standards instead of preserving Fannie Mae and Freddie Mac’s assets.
Watt, a Democrat who represented North Carolina’s 12th District for nearly 11 terms, has spent four months as director of the Federal Housing Finance Agency, formally taking over in January after a long confirmation battle. In the role, Watt has broad authority to direct how Fannie Mae and Freddie Mac operate, without the need for legislation from Congress.
Watt declined Tuesday to wade into the ongoing congressional debate about how to reform Fannie Mae and Freddie Mac, though he said that some changes are needed. Several proposals are pending before Congress, and the Senate banking committee is scheduled to hold a hearing on one such bill this week that would phase out Fannie and Freddie in favor of a new system.
Speaking at the Federal Reserve branch office in Charlotte on Tuesday, DeMarco urged Congress to move swiftly on changes that would phase out Fannie and Freddie as part of a broad revamp of housing finance.
“There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form,” he said. “Restoring Fannie Mae and Freddie Mac is not a solution. They failed, and their business model failed.”