On Thursday, while Department of the Treasury Secretary Steven Mnuchin told members of the Senate about the Trump administration’s plans for housing finance reform, Federal Housing Finance Agency Director Mel Watt said that the heavy lifting on housing finance reform needs to come from Congress.
Watt made the remarks during a speech Thursday at the American Mortgage Conference hosted by the North Carolina Bankers Association.
During his speech, Watt touched on his own Senate testimony, delivered a week ago.
While speaking before the Senate Committee on Banking, Housing and Urban Affairs last week, Watt said that he believes the conservatorship of Fannie Mae and Freddie Mac must end through Congressional action.
“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 last week.
That echoes a statement made by Watt last year, when he told several of the largest trade groups in the housing industry that the FHFA’s focus is on fulfilling its role as a conservator of the government-sponsored enterprises, rather than pursuing the recapitalization of the GSEs.
“I continue to believe that conservatorship is not a desirable end state and that Congress needs to tackle the important work of housing finance reform,” Watt said last year.
And Thursday, Watt repeated his beliefs.
“In the written statement we delivered to the committee before last week's hearing and in my testimony, I drew a distinction between decisions we have made (and continue to make) as conservator and the decisions Congress must make,” Watt said Thursday, according to his prepared remarks.
“The essence of what I said boils down to this: FHFA has made substantial progress during conservatorship on reforming Fannie Mae and Freddie Mac (what I generally think of as ‘GSE reform’), but it's the role of Congress to do the bigger job I generally think of as ‘housing finance reform,’” Watt added.
“Housing finance reform is the responsibility of Congress and it goes far beyond what we can, or should, do in conservatorship,” Watt said.
Watt then listed a number of reforms that the GSEs have undertaken during conservatorship, including beginning to shift some their credit risk to private investors through various risk-sharing deals, pursuing a single GSE mortgage bond, and developing a new modification program that will replace the government’s Home Affordable Modification Program.
Watt added that he hopes that Congress considers the changes the FHFA has overseen at the GSEs when tackling housing finance reform.
“Many of the reforms made in conservatorship are extremely important and they should not be ignored or disregarded by Congress while Congress works on housing finance reform,” Watt said.
During his speech, Watt also provided more information about the GSEs risk-sharing deals and lessons the GSEs learned over the last few years.
“Prior to this year, the enterprises experimented with selling the first 100 basis points of credit losses to investors. As a result of feedback we have received from market participants and from credit risk transfer transactions to date, we have learned that selling the first 50 basis points of this expected credit losses is expensive,” Watt said Thursday.
“Investors, like the enterprises, know that there will be some degree of expected credit losses for any portfolio of mortgages no matter the economic conditions. As a result, investors charge more for providing credit risk protection for expected credit losses,” Watt continued.
Watt said that based on this information, the FHFA and the GSEs determined that it is “better” if Fannie Mae and Freddie Mac retain the first 50 basis points of expected losses in most transactions.
“This means that the Enterprises have begun selling credit losses between 50 to 100 basis points,” Watt said. “Early indicators have not only reflected better pricing, but greater competition for credit losses beginning at 50 basis points, rather than zero basis points.”
Watt also stated that the GSEs are exploring new credit-risk mechanisms, including offering portions of 15-year term loans and adjustable rate mortgages.
“Pursuing different transactions is exactly what we want the Enterprises to do to continue developing the credit risk transfer market,” Watt said. “We want them to do responsible innovation.”
Watt concluded his speech by again calling for Congress to act on housing finance reform.
“But, as I said at the outset, we view these reforms as GSE reform, not housing finance reform. Consequently, last week I encouraged the Senate Banking Committee to move forward expeditiously on housing finance reform and suggested questions that they will have to answer to do so,” Watt said.
Watt’s questions for housing finance reform are:
How much backing, if any, should the federal government provide and in what form?
What process should be followed to transition to the new housing finance system and avoid disruption to the housing finance market, and who should lead or implement that process?
What roles, if any, should the Enterprises play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively?
What regulatory and supervisory structure and authorities will be needed in a reformed system and who will have responsibility to exercise those authorities?
“These are questions that only Congress can answer,” Watt concluded. “We should all encourage them to answer these questions soon.”