President Barack Obama’s pick to lead the federal agency that oversees mortgage finance faces an uphill battle Thursday at a Senate confirmation hearing. Many Republicans are happy with the current caretaker and worry that Rep. Mel Watt, D-N.C., will bring a social agenda to the post.
Watt is a longtime lawmaker who’d bring plenty of policy history but little private-sector experience to the job of heading the Federal Housing Finance Agency. The little-known agency regulates Fannie Mae and Freddie Mac, the two mortgage-finance titans that have been in government conservatorship since 2008.
The Senate banking committee will take up Watt’s confirmation against the backdrop of Tuesday’s introduction in the Senate of a bipartisan proposal to revamp Fannie and Freddie, the first serious proposal to overhaul them in the nearly five years they’ve been in government hands.
Fannie and Freddie will be hot topics at Watt’s hearing, in part because many Republicans are happy with the job done by the acting head of the housing finance agency, Edward DeMarco, who’s put Fannie and Freddie on stronger financial footing.
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“Most people think he’s doing a decent job, he’s making the improvement that is needed with what he has,” said an aide to a Republican member of the Senate banking committee, speaking only on the condition of anonymity in order to freely discuss GOP views.
What really concerns Republicans, said Barry Zigas, the director of housing policy for the Consumer Federation of America, is that Watt might take a more public policy-oriented approach, while DeMarco is a career civil servant who’s defined the job more narrowly.
Republicans want Fannie and Freddie to keep the focus on profitability and returns for investors who purchase mortgage bonds. Democrats think the mortgage-finance companies should play a bigger role in making access to mortgage lending easier for all Americans, especially for underserved minority communities.
Watt is sure to be asked about forcing principal reduction on mortgages that are worth more than the present value of the homes today, with Fannie and Freddie absorbing some of the losses. The last man nominated to head the Federal Housing Finance Agency, North Carolina Banking Commissioner Joseph Smith, withdrew his name in January 2011 after losing support from Republicans who felt he didn’t say where he stood on principal reduction. DeMarco has resisted pressure to support principal reduction, unwilling to have taxpayers absorb the losses.
“I think it’s still very much a jump ball as to whether he’ll win approval from the Senate,” said Zigas, whose group supports Watt.
The Republican aide was less optimistic.
“I’ll put it this way: No one’s blowing up our phone lines for Mel Watt,” the aide said. “This is not one that’s going to get jammed through without a lot of serious debate.”
Fannie and Freddie buy mortgages from banks and pool them together into bonds, a process called securitization. That allows banks to clear risks off their balance sheets and keep lending in a $10 trillion mortgage market.
Fannie and Freddie long enjoyed implicit backing from the U.S. government, and it became explicit in 2008, when the George W. Bush administration, as the crisis unfolded, seized the two entities, which operated as private businesses but were chartered by Congress. Placed into conservatorship, they remain the only game in town, as private-sector bundlers of mortgages into complex bonds have all but disappeared in the aftermath of the financial crisis.
Many Republicans want to see Fannie and Freddie disappear and the private sector take over this function. Democrats counter that the private sector, namely Wall Street banks, brought the nation’s financial system to the brink of collapse when they took Fannie and Freddie’s business with little concern for loan quality, causing the housing-sector collapse.
The bipartisan bill introduced Tuesday in the Senate would have private companies purchase mortgages and craft them into mortgage bonds. Operating much like Fannie and Freddie, they’d have to purchase government guarantees to protect investors in the event of massive loan deterioration like the one seen in the 2008 crisis.