Fannie Mae and Freddie Mac will shift their focus toward making
more credit available to homeowners instead of their existing
policy of pulling back from the mortgage market, the new head of
the regulator overseeing the companies said Tuesday in his first
public remarks.
The speech by Mel Watt, the former North Carolina congressman
who took over as the director of the Federal Housing Finance Agency
in January, offered clear signs of a shift in direction at the
agency, which controls Fannie and Freddie while they operate under
a legal process known as conservatorship.
Mr. Watt largely steered clear of hot-button policy debates,
resisting for now demands from liberal supporters to provide more
generous foreclosure relief and saying little about what steps the
agency might take if legislation to replace or overhaul the
companies can't pass Congress in the next few years.
But he signaled important changes in reports that outline the
performance goals for the companies' management teams. Citing
concerns about the health of the housing market, Mr. Watt said he
wouldn't direct the companies to reduce the maximum loan limits,
something his predecessor, Edward DeMarco, had actively
contemplated late last year.
He also said Fannie and Freddie would participate in a new pilot
program focused on neighborhood stabilization in Detroit that could
be expanded to other parts of the country later. "We believe this
will be a win-win for hardest hit communities and for our
conservatorship objectives," he said in a speech at the Brookings
Institution.
In recent years, the companies have been given three broad
mandates: to build a new infrastructure for the mortgage market, to
maintain foreclosure prevention and credit availability, and to
contract their presence in the market. Last year, the FHFA's acting
director, Mr. DeMarco, placed the highest priority on the latter
step.
Mr. Watt said that for the coming year, the firms' most
important mandate would be to promote credit access.
"Housing finance market conditions are far from what could
reasonably be considered satisfactory or normal," the FHFA said in
a report released Tuesday outlining its priorities. The report said
the agency expects Fannie and Freddie to assess "whether there are
additional opportunities to reach underserved creditworthy
borrowers."
Some policy makers have faulted ambiguous provisions around when
banks must repurchase defaulted mortgages for creating credit
standards that are unnecessarily restrictive. Fannie and Freddie,
at the FHFA's direction, on Monday unveiled steps to give lenders a
greater shield against so-called "put-backs."
Rather than contract their roles in the market, Mr. Watt will
give the companies a different mandate to reduce risks shouldered
by taxpayers. The changes suggest Mr. Watt may be more focused on
preserving Fannie and Freddie as the backbone of the nation's
mortgage market until Congress tells him to do otherwise.
Mr. Watt said the companies would refocus more narrowly an
initiative started by Mr. DeMarco to create a common platform for
mortgage securitization. Last year, the FHFA established a new
company, jointly owned by Fannie and Freddie, to set up that
platform. "Since any stumbles along the way could have ripple
effects...there's a lot at stake in getting this right," Mr. Watt
said on Tuesday.
Mr. Watt said he would use the initiative to move Fannie and
Freddie toward sharing a single security. Currently, the companies
issue separate securities, and Freddie has been forced to provide
concessions to lenders that cost hundreds of millions of dollars
every year because its security is less liquid than Fannie's.
Fannie and Freddie don't make loans, but they buy them from
lenders and package them into securities, providing guarantees to
investors. They play a significant role in financing around
two-thirds of mortgage originations, and they guarantee around half
of all mortgages outstanding in the U.S.
The companies were taken over by the U.S. in 2008 to prevent a
deeper housing depression, and the FHFA was tasked with managing
the companies. The agency has broad powers to refashion the firms,
including ending the government-run conservatorship, though only
Treasury can end the firms' funding backstops.
Mr. Watt's first steps are being heavily scrutinized because
bipartisan legislation to overhaul the firms appears unlikely to
advance in Congress this year. Meanwhile, the companies have now
returned more money to the Treasury--the amount will rise to around
$213 billion next month--than the nearly $188 billion they were
forced to seek after their collapse. Hedge funds and other
investors are suing the government to challenge bailout terms that
allow the government, rather than the companies, to retain
profits.
On Thursday, lawmakers on the Senate Banking Committee are
scheduled to vote on a bipartisan bill to replace Fannie and
Freddie with a new infrastructure by which the government would
reinsure certain loans in which private investors had agreed to
take initial losses. The measure is supported by the White
House.
While lawmakers are expected to approve the measure on a narrow
majority, the bill doesn't appear to have enough support to compel
Sen. Majority Leader Harry Reid (D., Nev.) to bring the bill up for
a floor vote.
Write to Nick Timiraos at nick.timiraos@wsj.com
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