In his first time to testify before Congress since he became director of the Federal Housing Finance Agency (FHFA) in January, Mel Watt on Wednesday outlined three main objectives that make up the 2014 Conservatorship for Fannie Mae and Freddie Mac and discussed the agency's progress toward each in the last 10 months.
Speaking before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Watt stated that the three strategic goals for the conservatorship of the GSEs are: Maintaining foreclosure prevention activities and creating “liquid, efficient, competitive, and resilient national housing markets” by maintaining credit availability for new and refinanced mortgages; reducing the risk of taxpayers by increasing the role of private capital in the mortgage market; and building a single family securitization infrastructure that can be used by Fannie Mae and Freddie Mac as well as other participants in the secondary market.
"Since entering conservatorship, the Enterprises have continued to focus on loss mitigation and borrower assistance activities," Watt said regarding the first objective. "As of August 31, 2014, the Enterprises had conducted more than 3.3 million foreclosure prevention actions since the start of the conservatorships in September 2008. However, there are still areas of the country where the housing market recovery has lagged and groups of borrowers continue to need assistance."
Watt said FHFA is attempting to reach out to these areas where borrowers still need assistance in the form of town hall-style meetings in cities with the most borrowers eligible for a Home Affordable Refinance Program (HARP) loan and the Neighborhood Stabilization Initiative, which includes developing pre-foreclosure strategies.
"FHFA's second strategic goal, reduce, is focused on ways to bring additional private capital into the system in order to reduce taxpayer risk," Watt said regarding the second objective. "We have reformulated this goal so that it no longer involves specific steps to contract the Enterprises' market presence, which would risk having an adverse impact on liquidity. Instead, the reduce goal focuses on ways to scale back Fannie Mae and Freddie Mac's overall risk exposure. This approach allows us to meet our mandates of upholding safety and soundness and ensuring broad liquidity in the housing finance market."
Regarding the third objective, building a single-family securitization infrastructure, Watt discussed the recent formation of a corporation jointly owned by the GSEs, Common Securitization Solutions, and the appointment of a CEO for the corporation.
"FHFA's final strategic goal is to build a new infrastructure for the Enterprises' securitization functions," Watt said. "This includes ongoing work to develop the Common Securitization Platform (CSP) infrastructure and to improve the liquidity of Enterprise securities. We have clarified that FHFA's top objective for the CSP is to make sure that it works for the benefit of Fannie Mae and Freddie Mac. We are also requiring that the CSP leverage the systems, software and standards used in the private sector wherever possible. This will ensure that the CSP will be adaptable for use by other secondary market actors – including private-label securities issuers – in the future. In addition, FHFA has also worked with the Enterprises to leverage the CSP in order to develop a Single Security, which we believe will improve liquidity in the housing finance markets."
The three objectives were first introduced in May 2014 when the FHFA released the 2014 Strategic Plan for the Conservatorship of Fannie Mae and Freddie Mac. FHFA also released the 2014 Conservatorship Scorecard, featuring the same three objectives, back in May to explain the expectations for the GSEs as well as their activities.
Following his opening remarks, Watt took questions from the members of the Senate Banking Committee during what was at times a contentious hour an a half. Committee chairman Tim Johnson (D-South Dakota) urged Watt to engage Treasury in talks to end the government's conservatorship of the two GSEs, which began back in September 2008, if Congress could not bring about an overhaul to the housing finance system. Since needing a $187.5 billion bailout at that time of the government takeover, Fannie Mae and Freddie Mac have returned to profitability; in fact, during his speech on Wednesday,Watt reported a $3.9 billion net income for Fannie Mae in the third quarter of this year and a $2.1 billion net income for Freddie Mac during the same period.
Watt said that while ending the conservatorship was a possibility, Treasury would have to initiate the talks and that his focus at the moment was on the financial overhaul rather than ending the conservatorship.
When questioned by committee ranking member Mike Crapo (R-Idaho) on the topic of lowering the traditional down payment to 3 percent for certain borrowers, which the FHFA proposed in October, Watt said that more details were forthcoming in December along with steps the FHFA would take to mitigate risk. Watt also said the agency was currently discussing ways that Fannie Mae and Freddie Mac could better evaluate a borrower's creditworthiness in response to a question from Senator Mark Warner (D-Virginia).