The new head of the Federal Housing Finance Agency has failed to help homeowners who owe more than their house is worth to get partial loan forgiveness, a key senator charged Wednesday in a rare criticism of a fellow Democrat.
The charges came from Sen. Elizabeth Warren, D-Mass., the fiery leader of the party’s liberal wing. On the receiving end of her anger was Mel Watt, the former Charlotte congressman tapped by President Barack Obama to head the agency that oversees housing finance.
The agency oversees mortgage finance titans Fannie Mae and Freddie Mac, both in government receivership since September 2008 at the start of the financial crisis. Warren contends Watt and his agency haven’t pushed for a reduction on the balance owed to mortgage lenders – called a principal reduction – on millions of loans placed with Fannie and Freddie that are more expensive than the home is now worth. That’s called being underwater on the mortgage.
“You’ve been in office for nearly a year now, and you haven’t helped a single family, not even one” through principal reduction, Warren told a surprised Watt at a hearing before the Senate Banking Committee.
It was Watt’s first appearance before the committee since taking the helm of the agency after a long delay because of Republican opposition. But the toughest questioning Wednesday came from fellow Democrat Warren.
“Chairman Watt, you’ve had a year to do that. You’ve known for five years what the problem is,” Warren said, saying 5.4 million borrowers with loans backed by Fannie and Freddie are underwater and could benefit from principal reduction.
Watt answered that his agency has taken a number of steps to help struggling homeowners and cautioned that across-the-board forgiveness on a portion of outstanding loans was unlikely.
“It’s just a very difficult issue,” Watt told Warren, who came over to him after the hearing to continue pressing her concerns.
Republicans peppered Watt with a number of regulatory concerns, and worries about a forthcoming plan that will make it easier to get a government-backed loan with a down payment of just 3 percent. Most conventional loans today require a down payment equal to 20 percent of the cost of the home being purchased.
“I’m troubled that you would reduce borrowing equity after the problems we’ve seen” in the run-up to the housing crisis, said Idaho Sen. Mike Crapo, the committee’s top Republican.
Promising that “compensating factors” will be required to reduce the risk to the government, Watt said that “details will be coming out in early December.”
He also warned that a 20-percent down payment “is not a necessarily reliable indicator of whether somebody will pay (off) a loan. It is a factor.”
Most sectors of the economy have returned to normal since the 2008 financial crisis, but housing remains an exception, in part because of tougher lending requirements.
Congress is divided over the future of housing finance. A bipartisan Senate bill would create a new backstop to mortgage lending as Fannie and Freddie, quasi-government entities, are effectively phased out. But the House of Representatives, with a stronger presence of conservative Republicans, leans toward a rapid exit of government from housing finance.
Fannie and Freddie buy loans from lenders and then package them into mortgage bonds, sold to investors. The process, called securitization, frees up banks and other lenders to reach other prospective home buyers.
Asked about whether he’ll offer a way forward, Watt said it is up to his former colleagues in Congress to make that call.
“I’ve left that role behind,” he said. “I don’t have an independent opinion now, because anytime I express myself now people take it as the FHFA opinion.”
The problem must be dealt with, he offered, noting there’s “$5 trillion of outstanding obligations that somebody has to deal with, and that is the current (sum) of housing finance business, not in the future.”