Administration Official Sees GSE Reform 'Accelerating'

WASHINGTON — A top Treasury Department official called for Senate confirmation of Rep. Mel Watt to head the Federal Housing Finance Agency on Tuesday while also providing an update on bipartisan talks to pass a housing finance reform bill.

Michael Stegman, a counselor to the Treasury Secretary on housing finance, defended Watt's record in Congress, calling him "the right man for the job" at a panel discussion hosted by Politico and the Mortgage Bankers Association. His statement comes as Senate Majority Leader Harry Reid attempts to force a vote on Watt's nomination, which could come as early as Thursday.

Stegman said the FHFA needs a leader that can transition to a new housing finance system designed by Congress and President Obama.

"It really is Congress and the administration, but predominantly Congress' role, to create that long-term vision of what a future sustainable housing future ought to look like. [The] transition needs to look like that vision," said Stegman. "The President deserves to have a nominee and a candidate and a director who shares that long-term vision, despite the fact that we all understand that the FHFA is an independent regulator. The administration does not and would not control a director, but a director that shares the values and long-term vision can help bring together the different stakeholders and make sure that the transition builds a bridge to that future."

Stegman added that the FHFA needs to do more to bring private capital into the market in the interim. Acting FHFA Director Ed DeMarco has raised guarantee fees at Fannie Mae and Freddie Mac to help bring in that capital, and the agency has been actively considering lowering conforming loan limits.

DeMarco said last week that any change in loan limits would not go into effect until at least next spring, following a call by Obama in August for the agency to reduce the limits. Still, Stegman urged that more must be done in conjunction with those efforts.

"We do agree of the footprint of the [government-sponsored enterprises] and the exposure of the taxpayer is too great, and that guarantee fees ultimately have to be high enough to attract private capital to take mortgage credit risk, but you don't just raise g-fees and lower conforming loan limits without other things happening on the private side of the securitization market to bring back private capital," he said. "So we want to see a much broader, more comprehensive effort to bring back private capital to take credit risk before you just squeeze and raise fees and lower loan limits. It's all got to be of one piece."

The Treasury official also described the administration's work with the Senate Banking Committee, which is currently in the process of writing a bill to overhaul the mortgage finance system. The effort, which is being led by Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the top Republican on the panel, is "accelerating," according to Stegman, who added that the administration is "optimistic that the process can work."

Stegman added that although the committee leaders are likely to use a plan by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., as a starting point for their efforts, the administration is also working with lawmakers on ways to improve that legislation. He said that Treasury officials are involved with the banking panel on a number of "plumbing and infrastructure" issues, including looking at the best ways to bring the private market into the system.

Specifically, he pointed to the Corker-Warner bill's proposal for credit enhancement of mortgage loans, which could take place on either a specific pool of loans in a security through capital markets execution or via a bond guarantee structure, the latter of which he said the administration favors.

"We think, and we've told the committee this, that some of the capital markets executions really provide challenges for modifying loans during periods of stress, and the refinancing of underwater loans, as we are facing right now in the private-label-security market," he said. "[W]e think there is greater protection of the taxpayer and the ability to meet borrower servicing needs and align servicing interests between a guarantor who has credit risk and a mortgage insurance fund that the government actually is basically at risk for — and that the bond guarantor structure, it really is a preferred way of thinking about first loss."

Stegman also defended the administration's commitment to affordable housing, arguing that Obama wants a system that provides access for a diverse array of borrowers.

"The system that we want to replace Fannie Mae and Freddie Mac with … would fundamentally require broad access to mortgage credit for credit-qualified buyers and borrowers and for multifamily rental housing," he said. "And I would not discount the fact that a bipartisan bill in the Senate does include, on top of level-playing-field requirements, an assessment to explicitly fund … a stream of revenue" for the Housing Trust and the Capital Magnet Funds, which would provide additional assistance to needy borrowers.