FHFA's Watt plows ahead on housing finance fixes

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WASHINGTON — With the clock ticking down on his term as head of the Federal Housing Finance Agency, Mel Watt made clear Wednesday that he will continue implementing administrative housing finance reforms as Congress fails to achieve legislative changes.

Chief among them, Watt told members of the Senate Banking Committee, is a risk-based capital proposal for Fannie Mae and Freddie Mac to be unveiled "in the very near future."

Such a framework, which would also include minimum leverage capital requirements, was in place under the Office of Federal Housing Enterprise Oversight — the FHFA's pre-crisis predecessor — but was suspended once the two government-sponsored enterprises were placed in conservatorship.

A new FHFA framework would similarly be suspended as long as the conservatorships continue, but Watt said "it is important for our Agency, as a regulator, to articulate a view on prudential capital requirements for the Enterprises based on their current operations."

The proposal "will provide valuable transparency to the public about capital and will be a catalyst for serious and thoughtful discussions and opinions about the capital requirements that would be appropriate for the Enterprises and/or other entities playing similar roles in the housing finance system going forward," Watt said at the hearing.

The plan could bring some certainty to Fannie and Freddie's capital situation at a time of continued unpredictability, but Watt cautioned that the proposal is not an endorsement of various ideas to release the companies from conservatorship without reforming them.

"I emphasize that this rulemaking is not connected in any way to any efforts or ideas others may have about recapitalizing and releasing the Enterprises from conservatorship," he said. "The rule may need to be further revised to take into account the provisions of housing finance reform legislation and FHFA will suspend any final capital rule adopted while the Enterprises remain in conservatorship, just as the OFHEO rule that is currently on the books has been suspended."

The proposal would be another example of how Watt, whose term ends in January, has sought to make changes at the agency level in the absence of GSE reform legislation.

“Housing finance reform is kind of a slow process,” said Ed Mills, a policy analyst at Raymond James. “Everything that you see if kind of a building block for housing finance reform.”

While the specifics of the capital requirements have not been released, Watt said the format would be similar to requirements for other systemically important financial institutions.

“We are following a format that is similar to banking capital but these enterprises are not banks and capital is about protecting against risk,” Watt said. “You have to really assess the risks that are being undertaken, compare them to risks banks have and there are some differences.”

The proposal comes as lawmakers have made numerous attempts to propose housing finance reform bills that have gone nowhere.

Most everyone agrees that GSE reform legislation is dead this year, but Sen. Mark Warner, D-Va., warned that without a bill in place when Watt's term ends, the Trump administration could appoint a new FHFA director with “enormous power” overseeing the conservatorships to undo many of Watt's policies.

Statutorily, a new director could potentially roll back the GSEs’ affordability and duty-to-serve goals, put them in receivership, and tighten credit requirements, among other things.

“I would argue editorially that the Trump administration has not been necessarily favorable towards a lot of the expanded access and other issues,” Warner said. “They’re going to appoint a new director in 2019 and some of those forces who say they’re for progressive causes, who have been advocates of the status quo, I really do wonder what they will say come January when a new director is put in place.”

Mills said Watt’s proposal of a new capital requirement could be intended to limit the next FHFA head’s ability to reverse his agenda.

“I think you could argue that there are certain things that he is doing to get in front of what the next director might do,” Mills said. “He is implementing the potential next director’s agenda, yet to his own liking.”

At the Wednesday hearing, Watt also said he is concerned about a provision in the regulatory relief legislation enacted by the House Tuesday, which that Trump is expected to sign shortly, that directs the FHFA to create a process by which new credit scoring models can be validated and approved for use by Fannie and Freddie when they purchase mortgages.

“We had concerns about it initially because credit scoring is one of those things where competition is good if you’re competing on the right things, but if you’re competing just to get more business in the credit scoring arena, that’s not a good thing,” Watt said.

He added that the provision “could have come at a better time.”

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