Senate Banking Committee Discusses Housing Finance Reform with FHFA Director Watt

Last week. the Senate Banking Committee held a hearing to examine the status of the housing finance system and the role in it of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. This is the first in a series of hearings the Committee is expected to hold this year as it works on housing finance reform legislation.

In his opening statement, Committee Chair Mike Crapo (R-ID) noted that it has been nine years since the GSEs were taken into conservatorship by the Federal Housing Finance Agency (FHFA), a situation that was supposed to be temporary. The current system, Crapo said, is "not a sustainable solution" and leaves taxpayers on the hook for losses realized by market downturns. Crapo said that the Committee was currently examining a number of housing finance reform proposals and that he hoped to put together a plan that could draw bipartisan support.

Sherrod Brown (D-OH), the Ranking Democrat on the Committee, concurred with Crapo that the Committee should examine ways to improve the housing finance system. He stressed that any new housing finance system put into place should support affordable housing in underserved, rural, and low-income markets, something he said the GSEs currently do through their affordable housing goals and their obligations under the Duty to Serve Rule. Brown also remarked that any new system must make it possible for borrowers to continue accessing 30-year fixed-rate mortgages.

FHFA Director Mel Watt, the hearing’s sole witness, used both his opening statement and written testimony to urge the Committee to move forward with housing finance reform. Watt noted that while FHFA has implemented several reforms of the GSEs in recent years, it is ultimately Congress’s responsibility to determine the post-conservatorship shape of the housing finance system. Watt suggested Congress would have to make four key decisions: 1) how much backing the federal government should provide the housing finance market; 2) how to transition to the new housing finance system; 3) what role, if any, Fannie Mae and Freddie Mac should play in the new system; and 4) how the new system will be regulated and supervised.

Throughout the hearing, Watt demurred when Senators asked him for his recommendations on housing finance reform, replying that his job as FHFA director was simply to oversee the GSEs. Senators Jon Tester (D-MT) and Heidi Heitkamp (D-ND) both asked Watt if he thought that government backing of the housing finance system was necessary to ensure access to 30-year fixed-rate mortgages. Watt said he and FHFA has no official position on that question, but did, after Tester pressed, say that most research he read indicated that government backing was necessary.

Some Committee Republicans criticized Watt when he indicated he might allow Fannie Mae and Freddie Mac to retain some capital instead of their gradually reducing it to zero by January 1, 2018, as the existing preferred stock purchase agreements (PSPAs) between Fannie Mae and Freddie Mac and the Treasury Department currently require. Having no capital reserves, Watt argued, puts the GSEs at risk of realizing losses during market downturns that would require them to receive additional federal assistance. This would disrupt the secondary market and reduce liquidity, which Watt argued FHFA was required to protect against as the GSEs’ conservator. Watt said he hoped to negotiate an agreement with Treasury but would act unilaterally if necessary. He stressed that he was not looking to fully recapitalize the GSEs and release them from conservatorship, but only to prevent them from needing additional federal assistance.

Senator Bob Corker (R-TN) strongly opposed any action to recapitalize the GSEs. He expressed skepticism that providing additional federal assistance to either of the GSEs should they need it would disrupt the market, arguing that the federal government is already de facto backing them. Crapo agreed with Corker’s reasoning and asked Watt if he felt he had the authority to unilaterally allow the GSEs to retain capital. Watt reiterated that he would prefer to reach a joint solution with Treasury, but said that his agency has determined that it has the legal authority to act on its own.

Brown commended Watt for warning Congress about the GSEs’ capital levels and said that he saw no reason to prohibit FHFA from taking action to protect the GSEs from needing additional federal assistance.

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