With U.S. housing sales slowing from stellar rise to gentle slope, yesterday’s appointment of Democratic U.S. Representative Melvin L. Watt of North Carolina as the new Director of the Federal Housing Finance Agency may be just what the slumbering housing market needs to get back to robust growth.
After some two years of near frenetic home buying and rapidly rising property prices, the U.S. housing market has pretty much completed its growth spurt after coming out of one of its severest housing crashes. Cheap foreclosed homes are all bought up, and mortgage rates have been rising for months, making it tougher for new home buyers to enter the market.
But Watt is determined to keep the housing recovery going. And it’s all based on making home financing more accessible and affordable.
“I am honored to serve as Director of the Federal Housing Finance Agency,” Watt expressed at his swearing-in ceremony in Washington yesterday. “Today’s housing finance system is one of the keys to our economic recovery, and I am grateful for the opportunity to help develop a strong foundation for moving this system forward for the benefit of all Americans at this critical point in our nation’s history.”
To achieve this end, Watt plans on bringing home financing reforms to the nation’s largest home mortgage backers Fannie Mae and Freddy Mac, which the F.H.F.A. oversees. But even before taking office, the controversies and objections have already begun.
Supporters and Detractors
Nominated for the F.H.F.A.’s top post last May by President Obama, Watt is not a newcomer to housing or financing. For some 22 years from 1970-92, Watt practiced law in the field of minority business and economic development.
As a Democratic Representative since 1992 and a one-term North Carolina Senator, Watt has served on the Committee on Financial Services and its Subcommittee on Capital Markets and Government Sponsored Enterprises – Fannie Mae and Freddy Mac being two such government sponsored enterprises he as worked with before.
Yet Republicans challenged Watt’s recent nomination to the F.H.F.A. on grounds that the position requires technical knowledge of the housing market and mortgage financing, which Watt as a politician simply does not have.
Challengers also cite the requirement for the Agency’s head to be unaligned politically as an independent regulator. They worry Watt’s more than 21 years as a staunch Democrat will compromise his decision-making with a greater leaning toward supporting Democrat-controlled Senate and White House agendas.
Watt seems to be destined as a man causing change even before taking the F.H.F.A.’s director’s chair. It was on account of a Republican threat to filibuster Watt’s appointment that changes were made to the Senate’s nomination process, which now requires a simple majority vote of 51% instead of the previous 60% requirement.
Watt’s Contentious Priorities
One of the first objectives Watt has promised to pursue is to delay mortgage fee increases which Fannie Mae and Freddie Mac were planning on charging new mortgages.
The two government-backed agencies were severely criticized for taking on too many improperly-collateralized mortgages in the build-up to the housing implosion during the middle part of the last decade – which ended up siphoning over $187 billion in emergency capital funding out of taxpayers. The proposed fee increases were intended to increase revenue and reduce the need for taxpayer bailouts in the future.
But housing industry experts protested that any such fee increases would further slow an already slumbering housing recovery by making mortgages more expensive. Watt’s intent to block the fee hikes may satisfy housing market participants, but it frustrates Republicans who are pushing for Fannie and Freddy to be more self-reliant and less dependant on taxpayer backing.
Another of Watt’s plans has raised even more objections. In an effort to help struggling homeowners who were lured into mortgages they could not afford, a plan was proposed to lower the value of their mortgages through partial debt forgiveness.
But the F.H.F.A.’s previous director Edward DeMarco blocked such debt forgiveness, insisting that slashing the value of mortgages would draw on more taxpayer dollars to cover the forgiven portions of debt, passing the burden off of unwise homebuyers onto the state.
For his part, Watt has announced he intends to uphold the plan for debt forgiveness – although he promises it will be targeted only to those families who were clearly misguided or defrauded into loans they could not afford.
Yet another of Watt’s plans worries investors and holders of mortgage-backed stocks and bonds. If Watt proceeds with his plan to expand federal programs which extend lower interest rates to home buyers with mortgages backed by Fannie and Freddy, the stocks and bonds that hold such low-rate mortgages would receive lower interest payments and would thus lose value on the markets.
Where Will the Boost Come From?
It seems that any effort to boost the housing recovery and avoid a flat-line slump will have to come from somewhere undesirable. Whether that boost comes at the expense of tax payers through debt forgiveness and lower fees charged by Fannie and Freddy, or at the expense of mortgage-back security investors through low-rate mortgages, or at the expense of home buyers and the housing recovery if no relief measures are implemented at all – any plan is destined to displease some as much as it pleases others.
Senior policy analyst at Guggenheim Securities, Jaret Seiberg, believes there is great pressure on Watt to “focus on expanding the mortgage credit box”. Only by making financing more accessible and more affordable can the housing recovery continue.
“The open question is how effective he will be and how strongly he will endorse that role,” Seiberg summarized to Reuters. “The first few months are likely to tell the market a lot about his tenure.”