Fannie-Freddie Regulator Urges Utility Mortgage Guarantors

(Bloomberg) -- Fannie Mae and Freddie Mac’s regulator is throwing its voice into the debate about what to do with the two companies at the center of the U.S. mortgage system.

In a proposal obtained by Bloomberg News, Federal Housing Finance Agency Director Mel Watt wrote that he and agency staff believe the mortgage market should be supported by shareholder-owned utilities with regulated rates of return and an explicit government guarantee of mortgage bonds.

Watt sent the document, titled “Federal Housing Finance Agency Perspectives on Housing Finance Reform” along with a letter dated Tuesday to Senate Banking Chairman Michael Crapo, an Idaho Republican, and Senator Sherrod Brown of Ohio, the panel’s top Democrat.

By sharing the perspectives now, “we seek to provide our views independently and transparently to those who have requested them while continuing to provide technical assistance to the committee and its members on other proposals that may be introduced,” Watt wrote.

Lawmakers’ Responsibility

He added that he still had a “strongly held view that it is the prerogative and responsibility of Congress, not FHFA, to decide on housing finance reform.”

Spokeswomen for the FHFA, Crapo and Brown declined to comment.

The proposal from Watt and the FHFA adds yet another wrinkle to the nine-year struggle by Congress and other policy makers to overhaul the U.S. housing-finance system. The government took over Fannie and Freddie in 2008, eventually injecting them with nearly $188 billion in bailout money. Since then, several lawmakers have introduced legislation that would reform or overhaul the companies, which back nearly half of the mortgage market. No proposal has gained traction.

Fannie and Freddie don’t make mortgages themselves, but buy them from lenders, wrap them into securities and make guarantees to investors in case the loans default.

Changes to their operations, or whatever replaces them, would have wide implications for the housing market, mortgage borrowers, taxpayers and one of the largest bond markets in the world.

New Push

This year, lawmakers are expected to make another push for housing-finance legislation. One Senate proposal, being worked on by Banking Committee members Bob Corker,  a Tennessee Republican, and Mark Warner, a Virginia Democrat, would preserve Fannie and Freddie’s operations but attempt to introduce more competition into the market.

The FHFA’s suggestions appear to differ from the senators’ plan in key ways. Watt and the regulator said future “secondary market entities” should be utilities with regulated rates of return. Such a feature wasn’t included in recent drafts of the Corker-Warner proposal, according to people familiar with the matter. The FHFA’s document also warned against having too many mortgage guarantors, arguing that an abundance of companies “could increase the potential for a race to the bottom” in loan standards.

Similar to the senators’ and other lawmakers’ views, however, the FHFA said mortgage-backed securities issued by the guarantors should have an explicit, paid-for guarantee by the U.S. government. The companies themselves should be allowed to fail, the proposal said.

Despite the differences with the potential Senate plan, the FHFA’s recommendations could build support for housing-finance legislation, Cowen analyst Jaret Seiberg wrote in a Wednesday note to clients.

“We see this document as helpful to efforts in the Senate to enact housing finance reform by giving FHFA’s seal of approval to the basic framework that banking committee leaders have been working on,” Seiberg wrote.

Transfer Risk

The FHFA document said future mortgage guarantors should be required to transfer credit risk to the private market when it’s economically feasible and that the companies should have enough capital to withstand a housing crash akin to the one that devastated the financial markets a decade ago. Rather than having a specific amount of capital dictated in legislation, the FHFA said it should be up to the companies’ regulator to set and adjust the needed level.

FHFA officials wrote that the future mortgage guarantors should be required to operate nationwide, have affordable-housing mandates, and provide equal access to the mortgage-finance system for large and small lenders.

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