Tag Archives: Acting Director

Hope for Housing Finance Reform?

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The former Acting Director of the Federal Housing Finance Agency, Edward Demarco, has issued a short policy brief from his new perch at the Milken Institute’s Center for Financial Markets.While there is nothing that is really new in this policy brief, Twelve Things You Need to Know About the Housing Market, it does set forth a lot of commonsensical views about the housing markets. I do take issue, however, with his optimism about the structural improvements in the housing finance sector. He writes,

The crisis showed that numerous structural improvements were needed in housing—and such improvements have been under way for several years. Poor data, misuse of specialty mortgage products, lagging technologies, weak servicing standards, and an inadequate securitization infrastructure became evident during the financial crisis. A multi-year effort to fix and rebuild this infrastructure has been quietly under way, with notable improvements already in place.The mortgage industry has been working since 2010 to overhaul mortgage data standards and the supporting technology. New data standards have emerged and are in use, with more on the way. These standards should improve risk management while lowering origination costs and barriers to entry.

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Structural improvements will take several more years. A new securitization infrastructure has been in development for more than two years. This ongoing work should be a cornerstone for the future secondary mortgage market. Other structural improvements will include updated quality assurance (rep and warrant) systems for the Federal Housing Administration, Fannie and Freddie, revamped private mortgage insurance eligibility standards, and completion and implementation of remaining Dodd-Frank rulemakings. (2)

DeMarco himself had led the charge to develop a common securitization platform while at the FHFA, so I take care in critiquing his views about structural change. Nonetheless, I am worried that he is striking too optimistic of a note about the state of Fannie and Freddie. They have been in a state of limbo for far too long (which DeMarco acknowledges). All sorts of operational risks may be cropping up in the entities as employees sit around (or walk out the door) waiting for Congress to act. I think commentators should be striking a far more ominous tone about our housing finance system — something this big should not be treated as an afterthought by our elected officials.

Reiss on Watt Confirmation

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Law360 interviewed me about the Senate confirmation of Mel Watt as the Director of the Federal Housing Finance Agency in Fannie, Freddie’s Footprint Could Grow Under New FHFA Head. The article reads in part,

The U.S. mortgage industry is in for a sea change as Rep. Mel Watt, D-N.C., takes the helm of the Federal Housing Finance Agency, experts say, predicting Watt will seek to expand Fannie Mae and Freddie Mac, veering sharply from his predecessor’s plans but lining up more closely with President Barack Obama’s.

The confirmation came Tuesday in a 57-41 vote after months of delay ended by Senate Democrats’ implementation of the so-called “nuclear option” eliminating the filibuster of presidential nominees. Senate Republicans had expressed concern about the choice of a politician like Watt — as opposed to an academic or economist — to head the agency.

Members of the real estate finance community are also divided about whether Watt’s confirmation will have a positive or negative impact on the industry, but most agree that a major change is ahead.

“I think Watt, as director, could end up having a very big impact both in terms of reversing some changes that have been implemented, and also taking the agency in a very different direction,” said David Reiss, a professor at Brooklyn Law School.

Since 2009, interim FHFA head Ed DeMarco has made an effort to shrink the footprint of the regulator and its government-sponsored enterprises, Fannie and Freddie, in the U.S. residential mortgage market.

DeMarco faced pushback in these efforts from industry groups and lawmakers, causing him to backpedal a bit in November when the FHFA announced that it would hold off on reducing the size of mortgages that Fannie and Freddie can guarantee for at least the first half of next year.

Obama also did not share DeMarco’s ideology, but experts believe Watt’s plans for the GSEs are much more in line with those of the president. He appears cautious about allowing Fannie and Freddie to back away from the market entirely and may in fact favor policies that will increase the GSEs’ role in the mortgage market.

“My guess is that Watt will further enmesh Fannie and Freddie in the operations of the mortgage markets, whereas DeMarco was actually shrinking their footprint,” Reiss said.

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The difference between the short-term and long-term impacts of Watt’s expected actions will be significant, experts say.

DeMarco’s moves made short-term waves, but supporters believed the aim was long-term equilibrium and an eventual balance of public and private capital in the mortgage market. Watt may have more potential for positive short-term results, but there will still be a question as to whether this will translate into a stable market for the next generation, Reiss said.

“Often when people are talking about government intervention, they want help for problems now, but they’re also setting up the rules of the game for once the crisis has passed,” he said.