Mel Watt, the Democratic representative from North Carolina, is President Obama’s pick to head the FHFA, a role that would give him enormous sway over housing.
News broke yesterday that Mel Watt, a long-time Democratic representative from the state of North Carolina and member of the House Committee on Financial Services, is President Obama’s choice to head the Federal Housing Finance Agency, a position that, as chief regulator of Fanne Mae and Freddie Mac, would make Watt the most powerful man in housing.
Of course, as with nearly everything in Washington nowadays, Watt’s nomination brings with it a hefty amount of controversy, and it’s fair to ask whether or not the president will succeed in placing his own appointee in the FHFA.
The Controversy of Receivership
The FHFA was created in 2008 to oversee the receivership of Fannie and Freddie, the two government-sponsored entities who, burdened with the toxic subprime loans they had guaranteed during the housing boom, received taxpayer bailouts to the tune of tens of billions of dollars.
Though a controversial decision at the time, the present controversy involving the FHFA has dealt with the agency’s policies toward many of those boom-era loans, and whether or not Fannie and Freddie should accomodate those homeowners – many of whom are underwater on their mortgages – with any special financing initiatives or outright principal reduction policies, the latter of which has been a favorite program of the president’s and that, the CBO just found, could save taxpayers $2.8 billion.
Thus, a Washington-style bloodbath has ensued, with Ed DeMarco, a George W. Bush appointee who has headed the FHFA since its creation, standing firmly against principal reductions, and Democratic lawmakers doing everything in their power to undermine DeMarco’s authority, including calls from some lawmakers for the president to outright fire him. Although DeMarco has steered the GSEs to their first profitable quarters in the post-boom era, the agency’s finances have done little to quell the policy outrage directed at DeMarco.
Tall Order for Mel Watt
And that is the highly harmonious environment that Mel Watt could be entering! Though Watt has not spoken out specifically on what he would do as FHFA director, it’s widely believed among policy analysts that he would be a supporter of a principal reduction policy, and that he may use Fannie and Freddie’s considerable influence on the housing market to lower what many agents see as excessively strict lending standards (with the FHA, Fannie and Freddie guarantee close to 90 percent of all new mortgages).
Of course, there is one caveat to all this – President Obama’s first attempt at replacing DeMarco. After Obama’s 2008 election, he nominated Joseph Smith, the North Carolina Banking Commissioner, to head the FHFA, but after two years of Republican opposition to his nomination (which finally, in late 2010, culminated in a 16-6 approval vote from the Senate Banking Committee), Smith withdrew his name from consideration in the first weeks of 2011, and Obama, prior to Watt’s nomination, refrained from choosing a new successor to DeMarco.
Will Matt’s nomination see any more success? We shall see!
This seems like a political move! How is this going to help the hundreds of thousands of people underwater, who are already in foreclosure?! How long is it going to take for Mr Watt to actually get into the office? How long is it going to take to study and design a program for principal reduction? And how long it will take to implement it into the Fannie and Freddie systems?… 1 year? 2 years to be more realistic? By then hundreds of thousands of foreclosures will have been concluded.
So, yes, short of any immediate measures, this one is a political move!
The current proprietary Fannie loan mod program allows principal forbearance capped to the lowest of 30% unpaid principal, or the amount that would bring the LTV to 115%. How about immediately removing the cap and modifying all underwater mortgages to 115% of LTV or even lower, up to 90% LTV, while forbearing the rest of the principal? This should be done ASAP only for those delinquent 90 days or longer. Then wait for Mr Watts to be confirmed and design another program where some of these mortgages would have the principal that was previously put at the end of the loan, forgiven for good with or without shared appreciation.
Something should be done NOW, not two years from now!
– underwater 300%, and with reduced income due to disability
– almost 2 yrs delinquent after a permanent HAMP was granted
– only a principal reduction of the underwater amount would actually lower my payments to 40% of income