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FHFA Adopts New Plan Under Director Watt; Won’t Reduce GSE Market Share

In a speaking engagement at the Brookings Institution [1], Federal Housing Finance Agency [2] (FHFA) Director Melvin L. Watt spoke about his new 2014 Strategic Plan for the Conservatorships of Fannie Mae [3] and Freddie Mac [4], highlighting a few major changes to the plan. Notably Watt’s plan removes any intention to reduce the GSEs' presence in the market, a central part of former Acting Director Edward DeMarco's strategic plan.

Instead of reducing the agencies' market footprint as specified by DeMarco, Watt aims to reduce the risk the agencies pose to taxpayers.

"This approach allows us to meet our mandates of upholding safety and soundness and ensuring broad market liquidity," Watt said before his audience at the Brookings Institution.

The goal of reducing risk will be achieved through credit risk transfers at both Fannie Mae and Freddie Mac, Watt explained. The GSEs will triple their credit risk transfers from last year with a stated goal of transferring $90 billion this year.

FHFA will also reduce taxpayer risk by requiring the GSEs to reduce their retained portfolios and by encouraging private capital in the mortgage market, Watt said.

While Watt will keep alive DeMarco's goal of creating a securitization infrastructure that can be adapted for the future secondary market, he explained his main objective under this stated goal will be to create a Common Securitization Platform "that can undertake Fannie Mae and Freddie Mac's current securitization operations."

Watt explained "pursuing too many objectives all at the same time would be problematic," so he will focus on a system that accommodates the GSEs' current platforms.

Another major objective for the FHFA this year is to create a common security for Fannie and Freddie, which Watt said, will increase market liquidity.

Beyond creating the Common Securitization Platform and reducing taxpayer risk, Watt's major focus will be on maintaining the safety and soundness of Fannie Mae and Freddie Mac.

Watt announced he will not lower loan limits for the GSEs, and he will make changes to representation and warranty standards. The standards will now allow for two delinquent payments over the first 36 months of a loan, and cancellation of mortgage insurance is no longer cause for automatic repurchase.

Missing from Watt's strategic plan was any mention of housing finance reform, but Watt addressed this omission in his speech.

"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," Watt said. "However, Congress and the Administration have the important job of deciding on housing finance reform legislation, not FHFA."