TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/844227
58 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T GOVERNMENT THE LATEST Watt Calls GSEs "Not Sustainable," Urges Congressional Action The FHFA Director testified before a Senate committee to discuss Fannie's and Freddie's conservatorships. F ederal Housing Finance Agency Director Melvin Watt testified before the U.S. Senate Commit - tee on Banking, Housing, and Urban Affairs in May regard- ing 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, or else taxpayers will be footing a hefty bill next year. "I have said repeatedly, and I want to reiterate, that these con - servatorships are not sustainable and they need to end as soon as Congress can chart the way for- ward on housing finance reform," Watt said from a prepared state- ment. "FHFA knows probably better than anyone that these con- servatorships 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, in - creased cooperation and harmony in competition between the GSEs, more sound underwriting prac- tices, smaller and more-efficient portfolios, single-family credit risk transfers, improved securitiza- tion infrastructure, and improved credit and financing channels—he said Congress needs to act im- mediately 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 ques - tions to the committee regarding how much backing, if any, should the federal government provide, and in what form. He also ques- tioned what the process should be to transfer from conservatorship, as well as the roles the GSEs should themselves play and the regula- tory 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 the FHFA, to make those housing reform decisions, and I encourage Congress to do so expeditiously," he said. Watt also said that the FHFA must continue to meet its obliga - tions while housing finance reform takes place. The challenge, he said, is that money available for tax- payer 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 pre- ferred 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 con- cern," 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, noncredit-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 sup - port 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."