Regulator backs away from plan to shrink Fannie and Freddie’s role in housing

05/13/2014 4:26 PM

05/13/2014 4:27 PM

The federal regulator overseeing Fannie Mae and Freddie Mac will remove targets for reducing their mortgage-market footprint and keep current limits on the size of loans they buy under a new strategic plan announced Tuesday.

The changes outlined by Federal Housing Finance Agency Director Melvin L. Watt in remarks prepared for a Washington speech mark a reversal of efforts to shrink the role of the two companies, which have been under federal control since 2008.

The companies will also renew their focus on helping troubled borrowers, beginning with a program in Detroit that will offer deeper loan modifications, Watt said in his first public comments since taking over at FHFA in January.

“Our overriding objective is to ensure that there is broad liquidity in the housing-finance market and to do so in a way that is safe and sound,” Watt said in his remarks.

Watt also announced he was loosening rules that have forced banks to buy back billions of dollars’ worth of flawed home loans they sold to the two U.S.-owned mortgage financiers, a move designed to spur the housing market. Watt said he would seek public input before deciding whether to increase the fees that Fannie Mae and Freddie Mac charge to guarantee loans.

Fannie Mae and Freddie Mac, which buy loans and package them into securities, were seized by regulators as losses on risky loans brought them to the brink of bankruptcy. They received $187.5 billion in taxpayer funds to stay afloat before the housing-market turnaround propelled them to record profits.

The two companies now back about two-thirds of new U.S. home loan originations, giving them a broad influence on lending and credit availability.

To counter recent indications that the housing market is slowing, Watt said he was rejecting a proposal by his predecessor, Edward J. DeMarco, to lower the maximum size of loans the companies can buy from the current level of $417,000 in most areas.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” he said.

Watt said he wouldn’t require the companies to reduce their purchases of loans on multifamily buildings this year. Last year, they were required to cut those operations by 10 percent.

Watt’s policy decisions will play an increasingly pivotal role in the nation’s housing finance system as bipartisan efforts to wind down Fannie Mae and Freddie Mac appear to be stalling in the Senate.

The Senate Banking Committee is expected to vote Thursday on a measure that would replace the two companies with a reinsurer of mortgage bonds that would suffer losses only after private capital was wiped out. The bill doesn’t have enough Democratic support to advance beyond the committee and legislative efforts to remake Fannie Mae and Freddie Mac are unlikely to continue before next year.

Watt said his role is not a substitute for legislation.

“I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing-finance reform is necessary,” he said.

In the interim, Watt will determine the size and nature of the companies’ business. The former Democratic congressman from North Carolina was appointed to lead the FHFA by President Barack Obama, to replace DeMarco, who had served at FHFA since the administration of President George W. Bush.

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