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FHFA Director Says He Is Powerless to Alter GSE Bailout Agreement

FHFA Mel Watt [1]As stakeholders [2] continue to battle [3] with the government over what they say should be their share of Fannie Mae and Freddie Mac's profits, the regulator in charge of overseeing the two GSEs says he's not in a position to act on that situation.

In a meeting with reporters on Wednesday, Mel Watt, former U.S. representative and chief of the Federal Housing Finance Agency (FHFA [4]) since December 2013, discussed a number of key issues facing the GSEs and the agency, touching on topics ranging from recently introduced low down payment programs to the often debated subject of principal reduction for struggling homeowners.

One thing Watt says he has no plans to change is the GSEs' current bailout agreement with the government, which has allowed the Treasury Department to sweep nearly all of their profits since August 2012.

Despite protests and lawsuits from politicians, industry groups [5], and investors about the terms, Watt told reporters he doesn't perceive "that it's [his] responsibility to start that discussion," according to the Wall Street Journal [6].

"I inherited a set of agreements," he said. "I know why they were put in place, basically as a quid pro quo for rescuing Fannie and Freddie. ... I just have to live with it."

Bruce Berkowitz, the CEO of Fairholme Funds, said he does not believe that Watt is powerless to act in this situation. Fairholme, one of the GSEs' largest investors, has a lawsuit pending against the government which claims that the sweeping of GSE profits into Treasury is unconstitutional.

"According to recent Congressional testimony, Mel Watt, our conservator at FHFA, claims he is unable to end his own conservatorship," Berkowitz said in a conference call [7] earlier this week. "In the history of conservatorships, this is a first. Think about it."

Another issue Watt stayed relatively quiet on was the Home Affordable Refinance Program (HARP [8]), which is set to expire at the end of this year. Since debuting in 2009, the program has reached more than 3 million U.S. homeowners, though its numbers have fallen off dramatically [9] over the last year. FHFA estimates there are some 700,000 borrowers who are eligible for HARP refinances.

While some industry participants say they would like to see a new expansion to allow more homeowners to refinance under HARP, Watt said that is not in the cards.

On the topic of Fannie and Freddie's recent move to lower down payment requirements to 3 percent for qualified borrowers, the FHFA leader kept up the same kind of defense he offered to Republicans critical of the change.

"There's not the kind of correlation that  people say there is between a down payment and paying a loan," he said, adding that the new loan programs are substantially different from the types of offerings that led to the housing crash.

Finally, Watt also discussed the idea of reducing principal on severely underwater properties, a strategy that this predecessor, Edward DeMarco, was staunchly against.

While noting that the idea had never been taken off the table, he said that any cuts will be "substantially narrower" than what some housing advocates have called for, adding that the focus would be to reduce the risk to both the GSEs and taxpayers.

"Reducing everybody's principal would cost taxpayers billions," Watt said.