After years of speculation, it finally happened – on Dec. 10, 2013, the Federal Housing Finance Agency (FHFA), the regulatory agency that oversees government housing behemoths Fannie Mae and Freddie Mac, finally had an official director.
Indeed, it was a very ironic turn of events. Though the FHFA has a hugely important role in the U.S. housing market, given that its regulations of Fannie and Freddie have widespread effects on what amounts to a $10 trillion residential mortgage market, the agency had not had an official director in more than four years; instead, Edward J. DeMarco, a George W. Bush appointee, had acted as the agency’s acting director while a permanent replacement was sought.
President Obama’s first choice for the position, North Carolina Banking Commissioner Joseph Smith, was stonewalled for more than two years by Republican opposition (he eventually withdrew his name), and it wasn’t until Senate Democrats’ reform of filibuster rules in late 2013 that Mel Watt, a Democratic congressman from North Carolina, was finally appointed to the position.
After four years of abbreviated policy and the start of the housing recovery, though, what impact could Watt possibly have on housing? Quite a bit, it turns out, and in three major ways:
1. Greater Access to Credit – Chances are good that Watt will push lending institutions to loosen their lending standards a bit, which have been at historically stingy levels the last couple years. In fact, the first move that Watt took as FHFA director involved the delay of planned loan-fee increases for Fannie and Freddie mortgages.
Such a stance puts Watt in stark contrast to DeMarco, who for years argued that the government should have less, not more, of a presence in the nation’s housing market. After all, between Fannie, Freddie, the FHA and the VA, the government still guarantees more than four out of every five new mortgages, and the planned loan-fee increases for Fannie and Freddie were pegged as an essential step in weening the housing market off public support and opening the doors for private mortgage backers to return.
As Nick Timiraos framed it in the Wall Street Journal, “Analysts said [Watt’s] reversal signals that ensuring access to mortgage credit likely will be higher on Mr. Watt’s agenda than other competing policy goals, such as reducing the government’s role in housing markets, a top priority of the FHFA in recent years.”
Whether this appeal to lending standards will contradict the government’s other mortgage-related endeavors, namely the QM standards that are currently taking effect, remains to be seen.
2. Details, Details, Details – Though Congress is currently mulling over the details of a bill that would not only wind down Fannie and Freddie, but also replace the quasi-public lending institutions with a robust exchange market, Watt’s appointment would likely create much more urgency from the FHFA’s standpoint; for instance, a more detailed game plan could result, one that would specify how the housing market would evolve from its current status, where the government is highly active in the mortgage market, to a privately managed marketplace with a limited government footprint.
As already stated, though, any plan to wind down Fannie and Freddie will inevitably conflict with Watt’s initial plan of increasing consumer access to credit, so we’ll have to see how the government decides to reconcile those competing interests.
3. The Resurrection of Principal Reduction – Perhaps no action by DeMarco earned him more ire from politicians and consumers alike than his refusal to implement principal reductions for delinquent homeowners with GSE-backed mortgages. Though principal reductions received widespread support from academics (such as Joseph Stiglitz and Mark Zandi) and respected institutions (including the Congressional Budget Office), DeMarco argued that any such plan would leave the GSEs, along with the taxpayers who bailed them out, susceptible to unacceptable losses. Such was Congressional frustration with DeMarco that, in early 2013, 45 House Democrats signed a letter to the president urging that he fire the acting director.
“We believe your re-election is a prime opportunity to put forth a new candidate who is ready and willing to implement all of Congress’ directives to meet the critical challenges still facing our nation’s housing-finance markets,” the letter read.
Of course, with DeMarco out and Watt in at the FHFA, the main barrier to principal reductions has now been eliminated, though if comments by Watt are any indication, we should not expect an immediate decision on the matter. Way back in June 2013, during Watt’s initial confirmation hearing before the Senate Banking Committee, Republican Senator Pat Toomey asked Watt about principal reductions, and whether he would commit, at that moment, to instituting the policy. Here is Watt’s response:
“I suspect I will be asked to look at that again because some people will still think it’s a relevant question, despite the fact that housing prices have gone up and there are fewer and fewer people underwater at this point than there have been. But I would start, as I would with any issue that has been decided already by FHFA, I would start by studying carefully how that decision was reached, what it was based on, and then I would build on that new information – the information on which that decision was made is a year and a half old now – and make a responsible decision.”
In Dec. 2012, Watt did sign a Congressional letter urging DeMarco to institute a principal reduction policy; and there are, no doubt, a large number of homeowners waiting on his decision, including the 7.6 percent of mortgaged homeowners in Chicago who, according to CoreLogic, are still seriously delinquent on their mortgages.