Federal Housing Finance Agency Director Melvin Watt testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs Thursday on the status of the housing finance system after nine years of conservatorship. His message? Fannie Mae and Freddie Mac need to be reformed, and soon, else taxpayers will be footing a hefty bill next year.
“I have said repeatedly, and I want to reiterate, that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform,” Watt said from a prepared statement. “FHFA knows probably better than anyone that these conservatorships are not sustainable and we also know that housing finance reform will involve many tough decisions and steps that go well beyond the reforms made in conservatorship.”
While Watt lined up a string of reforms already in place from conservatorship‒‒ better board leadership and management, increased cooperation and harmony in competition between the GSEs, more sound underwriting practices, smaller and more efficient portfolios, single-family credit risk transfers, improved securitization infrastructure, and improved credit and financing channels‒‒he said Congress needs to act immediately to help “chart the path out of conservatorship” in order to stabilize the future of the U.S. housing finance system.
Watt posed several hard questions to committee regarding how much backing, if any, should the federal government provide, and in what form. He also questioned what the process should be to transfer from conservatorship, as well as the roles the GSEs should themselves play and the regulatory and supervisory environment that must be in place to make a sustainable system. And he placed the responsibility for figuring out the answers to all these questions squarely on Congress.
“I reaffirm my belief that it is the role of Congress, not FHFA, to make those housing reform decisions and I encourage Congress to do so expeditiously,” he said.
Watt also said that FHFA Must Continue to Meet Its Obligations While Housing Finance Reform Takes Place. The challenge, he said, is that money available for taxpayer draws is running out fast. A little more than a year ago, Fannie and Freddie each had a $1.2 billion buffer under the terms of the preferred stock purchase agreements (PSPAs)to protect the GSEs from having to make additional draws of taxpayer support in the event of an operating loss in any quarter. But under the provisions of the PSPAs, on January 1 of this year, the amount of that buffer reduced to $600 million. Next January 1, it will be gone entirely, Watt said.
“This is not a theoretical concern,” he said.
Watt also stated that a short-term consequence of corporate tax reform would be a reduction in the value of the GSEs’ deferred tax assets, “which would result in short-term, non-credit related losses to the Enterprises. The greater the reduction in the corporate tax rate, the greater the short-term losses to the Enterprises would be.”
Also, Watt said, even minor housing market disruptions or short periods of distress in the economy could also cause credit-related losses to the Enterprises in a given quarter.
“FHFA has explicit statutory obligations to ensure that each Enterprise operates in a safe and sound manner and fosters liquid, efficient, competitive, and resilient national housing finance markets,” he said. “To ensure that we meet these obligations, we cannot risk the loss of investor confidence. It would, therefore, be a serious misconception for members of this Committee, or for anyone else, to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release. FHFA's actions would be taken solely to avoid a draw during conservatorship.”