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Watt suggests GSEs need to hold some capital, urges Congress to act on housing reform

GSE capital buffer will hit 0 soon

Federal Housing Finance Agency Director Mel Watt once again pressed Congress on the urgent need for housing finance reform due to the looming deadline of the government-sponsored enterprises' capital buffer timeline.

In less than three months, both Fannie Mae’s and Freddie Mac’s capital buffer will fall to zero, meaning, as structured now, any loss the GSEs experience in any quarter will require additional taxpayer support, i.e. another bailout.  

Watt repeated his plea that housing finance reform must come from Congress as he sat before the House Finance Services Committee on Tuesday in a hearing titled, “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency.”

In his opening statement, Watt said that allowing the GSEs to have no capital is not a sound business decision.

“Like any business, the Enterprises need some kind of buffer to shield against short-term operating losses,” Watt said in his testimony. “In fact, it is especially irresponsible for the Enterprises not to have such a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce the fixed dollar commitment the Treasury Department has made to support the Enterprises.”

This message from Watt is far from new. Earlier this year, Watt stressed the same call during a speech at the American Mortgage Conference hosted by the North Carolina Bankers Association.

But despite the call from Watt, getting to a unified agreement on reform won’t happen easily.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said in his opening remarks, “Clearly it is time – in fact it is well past time – for Congress to enact sustainable housing finance reform with private capital at its center. It is time to get off the boom, bust, bailout cycle.”

Hensarling added, “In order to move forward, we need to first critically assess the state of the GSEs’ nine-year conservatorship. This hearing provides an opportunity to do just that.”

While Ranking Member of the Committee on Financial Services Maxine Waters, D-Calif., sees the need for GSE reform, she doesn’t agree with Hensarling on the way to get there.

“Unfortunately, our Chairman refuses to abandon the failed ideas in the PATH Act, which is still opposed by industry, consumer groups, civil rights groups, all Democrats and even a few Republicans,” said Waters.

“Democrats and the American people know what’s important in the housing finance reform debate: an explicit, paid-for government backstop, a mission to promote affordability, the 30-year fixed rate mortgage, a robust housing trust fund, strong federal oversight, support for the multifamily housing market, and equal market access for our community banks and credit unions,” said Waters. “Any proposal that fully embraces those principles should be taken seriously.”

Getting into the details of how reform will look, Mark Hultgren, R-Ill., questioned Watt on what the FHFA is doing to facilitate a smooth transition from a GSE-dominated market to a market where private lenders can also provide access to credit.

Watt’s response, once again, followed the same urgent call for reform.

“Just about everything we do is calculated to move in that direction,” Watt said. “We are waiting on housing finance reform to really be able to move more aggressively. We’ve taken about every step we can take and continue to take even additional steps to try and reinvigorate the private market. I’m a very strong supporter of private market involvement in every aspect of business in this country.”

Watt, interestingly enough, used to serve on the House Financial Services Committee when he was a representative for North Carolina, with a lot of representatives welcoming him back during the hearing. 

With his background on the committee and now his authority at the FHFA, Watt gave the committee and list of important decisions that Congress will need to make as part of housing finance reform:

  • 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?

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