May 14, 2014
Watt’s up with Fannie and Freddie
There has been a lot of press coverage of FHFA Director Watt’s first public speech since taking on his job. Watt emphasized that
we must ensure that Fannie Mae and Freddie Mac operate in a safe and sound manner. It means that we’ll work to preserve and conserve Fannie Mae and Freddie Mac’s assets. And it means that we’ll work to ensure a liquid and efficient national housing finance market. Our job at FHFA is to balance these obligations . . ..
He also set forth three goals for his FHFA:
Strategic Goal 1: MAINTAIN, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets.
Strategic Goal 2: REDUCE taxpayer risk through increasing the role of private capital in the mortgage market.
Strategic Goal 3: BUILD a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future.
These goals are all totally reasonable for the FHFA to pursue. But it is also clear that Director Watt is taking the FHFA in a direction that is quite different than the one pursued by his predecessor, Acting Director DeMarco. DeMarco had taken the position that the best way to protect taxpayers was to be pretty tough on everyone else. “Everyone else” included defaulting and underwater homeowners as well as originating lenders who had sold Fannie and Freddie tons of mortgages that did not comply with the reps and warranties that the parties had agreed to about the quality of those mortgages. DeMarco’s strategy was much criticized but also quite coherent.
Watt has made it clear that he is going to be more flexible with homeowners. He highlighted a pilot program in Detroit that will include “deeper loan modifications.” He has also made it clear that he is going to be more flexible with lenders, relaxing rep and warranty standards for mortgages that Fannie and Freddie purchase from lenders. These may be very good policies to pursue, but it would be helpful if he set forth a clearer vision of how safety and soundness is best balanced with liquidity and efficiency. Federal housing finance policy typically goes off the rails when its goals get all mixed up. Director Watt should ensure that FHFA’s safety and soundness goals are clearly set forth and that other goals for Fannie and Freddie are designed to work in harmony with them.
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