Lawmakers urge FHFA to end Fannie, Freddie conservatorship

by MPA19 Nov 2014
During a Senate Banking Committee hearing this morning, lawmakers grilled Federal Housing Finance Agency (FHFA) Director Mel Watt and pushed for a move toward dismantling Fannie Mae and Freddie Mac to set up a new housing finance framework. 

Banking Committee Chairman Tim Johnson (D-S.D.) urged Watt to “engage with the Treasury Department in talks to end the conservatorship” of the mortgage giants if Congress doesn’t proceed with housing-finance reform.

“Everyone agrees that conservatorship cannot continue forever, so I hope my colleagues will keep working towards a more certain future for the housing market,” Johnson said today at the Senate Banking Committee hearing with Watt.  “If Congress cannot agree on a smooth, more certain path forward, I urge you, Director Watt, to engage the Treasury Department in talks to end the conservatorship.”

Yesterday in an open letter to Watt, Senators Elizabeth Warren (Mass.) and Mark Warner (Va.) urged the FHFA director to go even further with many of his current plans for Fannie and Freddie, including the development of the Common Securitization Platform.

In the letter, the senators outlined six areas where the FHFA can move "to build a housing finance infrastructure for the future, enhance the role of private capital in the agency mortgage-backed security market and responsibly increase access to mortgage credit."
"Millions of creditworthy families are struggling to get mortgages and buy a home," Warren wrote. "We believe FHFA can use its existing authority to extend credit to responsible families and, at the same time, prepare the housing finance system for the end of government conservatorship." Previously, Warren had expressed skepticism of the Crapo-Johnson housing reform bill, which was based on a previous Corker-Warner bill.

In his prepared remarks to the Senate Banking Committee Watt said, "While conservatorship of the enterprises has helped stabilize their financial condition and the mortgage market, significant challenges remain." He added that serious delinquencies have declined but remain historically high compared to pre-crisis levels, and counterparty exposure remains a concern.

"While the risks from the enterprises’ mortgage-related investment portfolios are declining as their volume shrinks, revenues from these portfolios are also shrinking," Watt said. "And both enterprises continue to work on maintaining the effectiveness and efficiency of their operational and information technology infrastructures".

Johnson and Ranking Member Mike Crapo (R-Idaho) introduced legislation earlier this year that would dismantle Fannie and Freddie and replace them with a new federal mortgage insurer. Fannie and Freddie were put into government conservancy in 2008 after teetering on the brink of insolvency. A $197.5 billion cash infusion from the Treasury saved the mortgage finance giants. Under the terms of the bailout, Fannie and Freddie had to send all their profits back to the Treasury as dividends.

Guidelines for GSEs 3% down payment option coming 'soon'

Also at today's Senate Banking Committee hearing, Watt said Fannie Mae and Freddie Mac will soon provide guidance to banks regarding mortgage loans that would require only a 3% to 5% down payment by borrowers.

Watt noted in his prepared remarks that current creditworthy borrowers can afford monthly mortgage payments but do not have the money to make a large down payment and pay closing costs. "As a result, Fannie Mae and Freddie Mac will shortly announce purchase guidelines that allow for 3% to 5% down payments, which will improve opportunities for access to credit for some of these borrowers," he said.

Watt told the Senate Banking Committee that the guidelines for these loans will be structured in a way that reduces risk for the GSEs, including requiring that borrowers have "compensating factors" and "risk mitigants," like housing counseling, stronger credit histories or lower debt-to-income ratios.

"Additionally, like other loans with down payments below 20%, these loans will require credit enhancement, such as private mortgage insurance," he added.

Click here to read Watt's prepared remarks.