(Bloomberg) — Senator Richard Shelby’s declaration Wednesday that Fannie Mae and Freddie Mac will likely remain in U.S. conservatorship shifts the task of reducing taxpayer mortgage risk mostly to one man: Mel Watt.
Shelby, an Alabama Republican, controls the fate of housing bills as chairman of the Banking Committee. He said he wouldn’t support replacing the two U.S.-controlled companies with a system that includes explicit government backing for mortgages.
“I don’t want to do something to make it worse than it is,” Shelby, 80, said in his Southern drawl at a Chamber of Commerce conference in Washington. “It’s very complex, but giving an explicit guarantee by the taxpayer, that’s too strong for me.”
With those words, Shelby snuffed out any chance that Congress would overhaul the $11 trillion housing-finance system in this two-year term. President Barack Obama’s insistence on a continued government role in supporting the housing market puts him and fellow Democrats at loggerheads with the powerful banking chairman. That increases pressure on Watt, director of the Federal Housing Finance Agency, to accelerate regulatory efforts to remake Fannie Mae and Freddie Mac — under rules of a crisis-era conservatorship that’s dragging into a seventh year.
Shelby’s comments “just reaffirm the markets’ belief that Mel Watt is the most important figure in the housing-finance system,” said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC in Washington.
Taxpayer Risk
Since the housing crash, Fannie Mae and Freddie Mac, which package mortgages into guaranteed securities, have taken on a greater share of risk. According to a New York Federal Reserve report this week, the two companies — and therefore the U.S. Treasury — backed 47 percent of outstanding single-family mortgage debt in 2013. That compares with 40 percent in 2007, the year before the companies were seized by regulators and rescued with a $187.5 bailout.
Even the Obama administration, after months of unsuccessfully exhorting lawmakers to replace the two companies, is pushing the FHFA to act on its own. Outside of their core securitization business, the two companies have asset portfolios of about $400 billion each that they’re under regulatory orders to wind down to $250 billion.
Securitization Platform
Michael Stegman, a senior adviser at Treasury on housing issues, this month said Fannie Mae and Freddie Mac should speed up the pace of shrinking their portfolios, accelerate deals transferring mortgage-bond risk to private investors and open a securitization platform to bond issuers that they’re building for themselves.
“The progress we make today could serve both as a framework for, and reduce certain challenges associated with, achieving bipartisan legislative reform,” Stegman said at a Goldman Sachs Group Inc. conference in New York in March.
The two companies have sold risk-sharing securities on about $530 billion of mortgage debt since 2013, amounting to about 12 percent of their book of business. That should be increased, Stegman said.
“The closer the GSEs can come to transferring the majority of risk to private market participants, the better,” he said.
Fannie Mae and Freddie Mac, which currently issue separate securities, also have finished building many of the core functions of their platform for a joint security. They need to set more concrete timelines for development of the platform, make it more transparent and allow outside participants to have a role in governing it, Stegman said.
Politically Polarized
Missouri Democrat Emanuel Cleaver, a member of the House Financial Services Committee, said the prospects for a broad housing bill are nil in this Congress. House Republicans, if they introduce such a measure, are likely to limit the government role so much that it wouldn’t gain Democratic support.
“We’re politically polarized to the point that we have probably the highest level of dysfunctionality in the history of Congress,” Cleaver said at a meeting with Bloomberg reporters Wednesday in Washington.
A bipartisan bill that would have replaced Fannie Mae and Freddie Mac with government insurers taking losses behind private investors almost made it to a vote in the Senate last year. The bill failed after some Democrats said it didn’t give enough support to affordable housing.
While the prospect of comprehensive legislation remained on the horizon, lawmakers were reluctant to work on smaller bills to fix portions of the system on which Democrats and Republicans agreed. That may have changed now, said Jim Parrott, a senior fellow at the Urban Institute.
Watt’s Speed
Watt defended the speed of his agency’s risk-transfer efforts at the Goldman Sachs conference.
“We move at a pace we think is a responsible pace,” Watt told reporters. “We evaluate things very carefully.”
The director could find himself the target of legislation requiring him to speed up.
“Mel Watt is already pushing down several paths that will ultimately better position us for longer term reform,” Parrott said. “The question is whether he’s going down them as aggressively as those who are interested in reform would like.”
If Congress clarified the path of reform, he added, “it would remove a great deal of uncertainty for the regulator and market participants alike.”
To contact the reporter on this story: Clea Benson in Washington atcbenson20@bloomberg.net
To contact the editors responsible for this story: Vincent Bielski atvbielski@bloomberg.net Rob Urban