Did FHFAÕ Watt open the door to ending Fannie, Freddie conservatorship?

Civil rights groups join calls to bring GSEs out from nest

When Federal Housing Finance Agency Director Mel Watt spoke before the Senate Banking Committee on Wednesday he opened the door to the possibility of ending the GSE conservatorship.

Watt acknowledged that the process would have to begin with the Treasury Department because of the sweep established under the third amendment to the Senior Preferred Stock Purchase Agreements, which prevents Fannie Mae and Freddie Mac from building capital.

Analysts at Keefe, Bruyette & Woods note that Fannie and Freddie are currently undercapitalized and until they are allowed to build up their capital levels, they will remain in conservatorship.

“Despite that, and despite the fact that Watt said there would be no short-term fix for the GSEs, he did say something could change in the longer term,” KBW analysts say in a client note. “Again, this would require moves from Treasury to change the current arrangement with Fannie and Freddie.”

Adam Hodge, spokesperson for the Department of Treasury, said the Administration is committed to ending conservatorship, but as part of a larger piece.

“The Administration continues to believe that the best way to responsibly end the conservatorship is through comprehensive housing finance reform legislation,” Hodge said.

Further, Watt is getting pressure from a number of civil rights groups forming a growing coalition that is also calling for an end to conservatorship.

The Leadership Conference on Civil and Human Rights has bonded with the largest Hispanic civil rights organization in the country, the National Council on La Raza, and sent a letter stating just that.

“The GSEs require capital if they are to serve their historic mission. As your agency proceeds with its decisions on affordable housing policies, those policies naturally must be balanced with FHFA’s statutory obligation as conservator to the safety and soundness of these enterprises,” the organization writes. “We applaud FHFA for its announcement last month on the expansion of lending to middle class borrowers, but we note that this expansion will require capital. We also note that some of the current proposals to raise g-fees and to impose new requirements on private mortgage insurers will increase the costs of borrowing, and would still fall short of building the capital needed to grow a robust and healthy housing market.

“This is especially true given the GSE’s status in what Rep. Maxine Waters, D-Calif., describes as seemingly ‘permanent conservatorship,’ where they are unable to rebuild capital,” the letter states. “In light of this, in order to ensure the best path forward for increasing homeownership in the communities we represent, we believe it is vital to look into unwinding the conservatorship and allowing Fannie and Freddie to begin rebuilding their capital.”

The full text of the letter can be read here.

KBW analysts say that many questions remain about how Fannie and Freddie could be recapitalized to end conservatorship.

“We think it premature to get too excited about the companies' future,” KBW analysts write. “But Watt's comments are among the first comments by government officials that acknowledge a future for the GSEs other than being unwound and we think his comments support our view that the GSEs will ultimately survive.” 

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