FHFA director: Next year, taxpayers will foot any Fannie, Freddie losses

Says conservatorships are not sustainable and need to end soon

Thursday, Federal Housing Finance Agency Director Melvin Watt testified before the U.S. Senate Committee on Banking, Housing and Urban affairs as to the state of the government-sponsored enterprises' conservatorship.

In his prepared remarks, he emphasized that reform for Fannie Mae and Freddie Mac is needed, and soon.

“I have said repeatedly, and I want to reiterate, that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform,” Watt said.

But he did point out that while reform is needed now, the conservatorship period has been good for the GSEs and for the housing market.

“However, it is important for all of us to recognize that the conservatorships have led to numerous reforms of the enterprises and their operations, practices, and protocols that have been extremely beneficial to the housing finance markets and have reduced exposure and risks to taxpayers,” Watt said.

However, now, as the GSEs are called upon to retain zero capital, beginning next year, Watt is speaking out.

He calls the 0% buffer “irresponsible,” something that threatens to derail their operations through the entire American mortgage process: “We reasonably foresee that this could erode investor confidence. This could stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit for borrowers,” Watt said.

And the effect on taxpayers could come as soon as next year. Watt explained any Fannie, Freddie losses next quarter will be paid for out of the U.S. Treasury.

“At that point, neither Enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support,” he said.

However, a recent interview with Freddie Mac shows CEO Donald Layton says the 0% capital buffer does not factor into daily operations. He explained capital is a measure of risk, so the company will be fine.

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