As Congress moves slowly, Fannie-Freddie work to boost housing market

Mel Watt, in his first public speech as director of the Federal Housing Finance Agency (FHFA), laid out on Tuesday a series of steps his agency will take to help the housing market -- a key economic sector whose sluggish growth could be dragging down the rest of the economy.

As director of the FHFA, Watt oversees Fannie Mae and Freddie Mac, two entities under government conservatorship that currently guarantee about 60 percent of home loans. Watt scrapped plans to reduce Fannie and Freddie's presence in the marketplace, in spite of concerns over potentially spurring another housing bubble, because "such a reduction could adversely impact the health of the current housing finance market."

Congress and President Obama have called for an overhaul of the mortgage finance system that would wind down Fannie and Freddie, leaving the private sector rather than the taxpayers at risk for the loans. The Senate Banking Committee on Thursday will consider legislation to do just that -- the Housing Finance Reform and Taxpayer Protection Act.

Watt, however, suggested he's creating policies around the current status of Fannie Mae and Freddie Mac because legislative policy changes may not be coming down any time soon.

"I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary," Watt said. "However, Congress and the Administration have the important job of deciding on housing finance reform legislation, not FHFA. Instead, our task is to continue to fulfill our statutory mandates, to execute our Strategic Plan and to manage the present status of Fannie Mae and Freddie Mac."

The legislation the Senate Banking Committee will consider tomorrow would wind down Fannie and Freddie over five years. It has bipartisan support and is likely to make it through the committee. However, the liberal Democratic senators on the committee are reportedly opposed to the bill because it doesn't do enough to ensure affordable housing. The senators have faced pressure from low-income housing advocates who've called for more support to address the shortage affordable rental housing.

Congress has another opportunity to influence the housing market by renewing the Mortgage Forgiveness Debt Relief Act, a law first passed in 2007 that would save homeowners from having to pay income tax on mortgage relief from a loan modification or short sale. That legislation made it through the Senate Finance Committee as part of a package of tax-code extenders, but it's unclear when it will make it through the full Senate or House.

In addition to rejecting earlier proposals to reduce the mortgage amounts eligible for guarantee by Fannie Mae or Freddie Mac, Watt on Tuesday introduced policies that would encourage broader access to credit and help communities still recovering from widespread foreclosures.

His policy changes came one week after Federal Reserve Chair Janet Yellen warned that while the U.S. economy is improving, the slowing growth in the housing market remained a threat.

As the Wall Street Journal notes, existing home sales fell for the seventh time in eight months in March and were 7.5 percent below the seasonally adjusted annual rate of a year earlier.

While the FHFA works to stimulate the market, some are suggesting that new mortgage regulations implemented by the Consumer Financial Protection Bureau as a result of the 2010 Dodd-Frank Wall Street Act are creating a drag on mortgage lending.

The FHFA this week also announced new rules, in coordination with the Department of Housing and Urban Development, to ensure greater access to credit in the Housing market. The Homeowners Armed with Knowledge (HAWK) pilot program will encourage more counseling during the home buying process for borrowers using Federal Housing Administration-insured financing. The Quality Assurance Initiative, meanwhile, is intended to provide greater clarity to FHA-approved lenders so they can expand credit access.

"While we are encouraged that the housing market is showing signs of recovery, we recognize that lingering scars from the financial crisis have resulted in significantly constrained access to mortgage credit for some borrowers," White House spokesman Jay Carney said Tuesday in response to the announcement of those programs. "That is why the President has repeatedly called for regulators to cut red tape so that all responsible families can get a mortgage -- not a return to the days of unsound lending practices, but ensuring that responsible, creditworthy families from all communities can obtain access to sustainable mortgage credit when they're ready and prepared to buy a home."