New FHFA Director May Change U.S. Housing Policy

Former Congressman Mel Watt was sworn in on January 6 as the Federal Housing Finance Agency's (FHFA) new director. FHFA oversees Fannie Mae and Freddie Mac. Mr. Watt is the first permanent FHFA director in four years. The FHFA director is appointed by the President for a five-year term.

In a statement made after being sworn in, Mr. Watt said "Today's housing finance system is one of the keys to our economic recovery," and also indicated that he hopes to "develop a strong foundation for moving [the housing finance] system forward for the benefit of all Americans."

Although a series of loan fee hikes were announced by FHFA ahead of Watt's confirmation, he has said that he will delay them. Mr. Watt is also expected to address two issues important to consumers and housing advocates. The agency's previous director did not permit mortgage modifications involving principal write-downs, and the overall climate of tighter credit requirements for mortgage approvals has been an obstacle for moderate-income and first-time home buyers.

FHFA Policy Significant to Lending, Housing Industries

Fannie Mae and Freddie Mac buy mortgages from mortgage lenders and securitize groups of mortgages (mortgage-backed securities, or MBS) for sale to investors. The proceeds from loans purchased from mortgage lenders provide the funds needed to make more mortgages. The two companies either own or back approximately 60 percent of the mortgage loans made in the U.S.

This suggests that changes in FHFA policies could have wide-ranging influence on mortgage lending and potentially impact housing markets as well.

Mortgage Modifications: "Targeted" Principal Reductions Possible

Mortgage lending industry analysts expect that Mr. Watt will amend FHFA policy for loan modifications to include "targeted principal reductions." This likely means that homes hardest hit by lost value would be considered for mortgage principal reductions sufficient to eliminate negative home equity (owing more on a mortgage loan than the home is worth.)

FHFA is also expected to consider allowing mortgage rates to be reduced for homes worth less than the balances of the mortgages against them.

If implemented, these moves could help countless homeowners impacted by the housing crisis, but such measures would likely be seen by fiscal conservatives as increasing costs to taxpayers.

Fannie and Freddie: Back to the Future?

Knowing the background of Fannie Mae and Freddie Mac helps explain the gap between recent restrictive mortgage credit policies and Fannie Mae and Freddie Mac's original charters. Fannie Mae was created in 1938, after the Great Depression. Its purpose was to provide funding for mortgage lenders that were devastated by mortgage defaults. By establishing a steady source of funds that lenders used for making new mortgages, credit supplies were eased and Fannie Mae helped with making home ownership accessible to post-Depression homebuyers that otherwise may not have qualified for mortgages.

In 1968, Fannie Mae, which held the official name of Federal National Mortgage Association, was converted to a publicly-traded corporation due to federal budget constraints related to the Vietnam War.

In 1970, The Federal Home Loan Mortgage Corporation (Freddie Mac) was created to prevent Fannie Mae from becoming a monopoly. It functions in the same way as Fannie Mae.

The two agencies were structured as a unique hybrid of federal agencies and corporations that were called government-sponsored enterprises (GSEs).

Fannie and Freddie came under government conservatorship in 2008 during the housing crisis. The Federal Housing Finance Administration (FHFA) was established in 2008 to oversee Fannie Mae, Freddie Mac and the twelve Federal Home Loan Banks.

The new FHFA director is in a position to help the housing and mortgage lending industries as well as homeowners and home buyers recover from the Great Recession.

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