Despite some speculation within the mortgage industry that a speech on February 18 in which FHFA Director Mel Watt expressed concern over the GSEs’ impending zero capital buffer, Treasury put to rest the notion that a policy change is on the horizon.
Treasury counselor Antonio Weiss made it clear in October that a so-called “recap and release” for Fannie Mae and Freddie Mac, or a recapitalization and subsequent release from the FHFA’s conservatorship, was not imminent and would definitely not happen during the Obama Adminstration. Weiss contended that “The default must not be a return to a model that failed. . .we owe it to the American people to create the housing finance system they deserve.”
In response to Watt’s speech and in particular to speculation about a potential policy change, a Treasury spokesperson told DS News in an email, “Taxpayers injected $188 billion into the GSEs to stabilize the housing market and lay the groundwork for our economic recovery. Director Watt's remarks underscore the Administration’s consistent position regarding the GSEs’ conservatorship: the best long-term solution is comprehensive housing finance reform. Until then, Fannie Mae and Freddie Mac will continue to rely on the $258 billion of taxpayer provided support to sustain market confidence.”
Watt said in his speech at the Bipartisan Center in Washington, D.C., on February 18 that there were certain substantial risks and challenges associated with managing the conservatorship, which were “certain to escalate” as the conservatorship, now in its eighth year, continues. One of those risks was the capital buffer of Fannie Mae and Freddie Mac, which is required by the government to be reduced to zero by January 1, 2018. Watt said with Fannie Mae and Freddie Mac holding zero capital, a disruption in the housing market could result in the GSEs needing another draw on Treasury.
“Director Watt’s remarks underscore the Administration’s consistent position regarding the GSEs’ conservatorship: the best long-term solution is comprehensive housing finance reform.”
Ralph Axel, rates strategist for Bank of America, stated he believes that Watt’s speech will be the driver of policy change, calling the speech “unusual” and saying that it “opens the door to FHFA pursuing a recapitalization plan, eventually leading to the end of the conservatorships. . .Now that the FHFA has made the decision to tackle the undercapitalization issue at Fannie/Freddie, we think FHFA will continue to push in this direction and cite its statutory obligation as the driver.”
Weiss argued back in October that a recap and release would be ineffective, however, because it would not increase access to the housing market for creditworthy borrowers, that taxpayers have not been fully “repaid” for the bailout (contrary to claims of private investors), and that a recap and release would drive up the cost of mortgages, since it would take decades for Fannie Mae and Freddie Mac to build safe and sound levels of capital to operate. Weiss claimed that those who believe a recap and release is a sustainable solution to the need for housing finance reform are “misguided.”
In response to Weiss’ remarks, several civil rights groups—the National Community Reinvestment Coalition (NCRC), the National Association for the Advancement of Colored People (NAACP), and the League of United Latin American Citizens (LULAC) sent a letter to President Obama calling on the Administration to end the conservatorships and recapitalize Fannie Mae and Freddie Mac.