Mel Watt, the recently installed head of the FHFA, delivered his first major address on housing this week; here were the main takeaways.
Mel Watt, who is the director of the Federal Housing Finance Agency (FHFA), is inarguably the most powerful man in housing. As the head of the chief regulatory agency of housing giants Fannie Mae and Freddie Mac, Watt wields enormous influence on the direction of the housing market.
Since his appointment to the directorship in late 2013, though, Watt has been relatively absent from the public eye, with little indication of how his approach to the FHFA will defer from that of Ed DeMarco, the beleaguered acting director he replaced.
That all changed this week, with Watt giving a detailed speech to the Brookings Institution on the FHFA’s new policies. Here were the five main takeaways from the speech:
1. Reforming the “Put-Back” System – Following the housing bust, Fannie and Freddie pursued a policy of “put-backs,” which forced banks to absorb the losses of defaulted mortgages. Between 2011 and 2013 alone, the GSEs forced banks to repurchase $81.2 billion in defaulted loans, which banks argue has kept lending standards elevated.
Under Watts leadership, though, that system is going to change. Now, banks will be freed of liability for the following: mortgages with three years of steady payments; or if the loans pass underwriting spot-checks during that three-year period. Additionally, a rescinding of coverage by PMIs will no longer generate put-backs.
Without the fear of put-backs, Watt said in his speech, banks will be able to lower their lending standards, which will open housing to more people and boost the overall market.
2. Stabilizing Hard Hit Neighborhoods – In perhaps the most dramatic change of pace from the DeMarco years, Watt announced an aggressive neighborhood stabilization pilot program, which will focus on rejuvenating some of the nation’s most foreclosure-ridden neighborhoods.
Set to launch in Detroit, the program will feature the following initiatives: aggressive loan modifications for delinquent borrowers, so that they can stay in their homes; partnering with community non-profits to renovate and sell vacant properties; and finally, seeing through demolition plans for other vacant residences.
3. No Changes to Size, Loan Limits – Watt also announced that he will not go along with previous plans to both downsize the GSEs and lower their conforming loan limits, strategies from the DeMarco era that were intended to lower the firm’s substantial footprint in the current housing market (a full two-thirds of today’s new mortgages fall under Fannie and Freddie’s immense umbrella).
Instead, Watt will keep conforming loan limits at their current levels, citing concerns that lowering the limits could hurt housing; and regarding the size of Fannie and Freddie, Watt said that he will focus on reducing taxpayer risk through such things as selling certain, less stable securities.