Finance & economics | Fannie Mae and Freddie Mac

Reopening the taps

A new regulator may make America’s mortgage giants more forgiving

|WASHINGTON, DC

DURING the early 2000s Fannie Mae and Freddie Mac, two government-linked agencies that guarantee the majority of America’s residential mortgages, helped to inflate America’s housing bubble with a gusher of easy credit. The pair have spent the past five years trying to make amends, by jacking up fees and tightening standards until only pristine borrowers qualified for their backing. But that may now be changing.

The mortgage giants’ exacting standards have been a sore point with the administration of Barack Obama, which wants more done to ease the supply of credit and to prevent foreclosures. With that goal in mind, Mr Obama nominated Mel Watt, a Democratic congressman and longtime advocate of more federally backed mortgage lending, to head the outfit that regulates the pair, the Federal Housing Finance Agency. He took office on January 6th, having been confirmed by the Senate last month. One of his first acts was to suspend an increase in the fees the companies charge to guarantee the mortgages that they buy from banks, bundle into securities and resell. Mr Watt wants the FHFA to assess the impact of the increase on “mortgage credit availability”.

This could mark a sea change. In 2008 the tottering companies were bailed out by the Treasury and placed in “conservatorship”, a sort of receivership that puts their regulator in control of their affairs. For Ed DeMarco, a civil servant appointed to run the FHFA in 2009, the priority was restoring the companies’ solvency, recovering the billions spent on their bail-out and shrinking their overall footprint. He refused to let Fannie and Freddie write down defaulting borrowers’ principal, arguing that this would encourage those who were still making their payments to default.

Mr DeMarco also raised the fee the companies charge to guarantee a mortgage, from 0.25% of the amount borrowed in 2008 to over 0.5%. (It was to rise by another 0.1 percentage points under the now-suspended proposal.) This boosted the companies’ profits while raising mortgage rates. Mr Obama’s officials seethed, but Mr DeMarco’s actions endeared him to Republicans, who used Senate rules to block Mr Obama’s first nominee to replace him.

Republicans also opposed Mr Watt, claiming he was unqualified. In fact, Mr Watt had served on the committee that oversees Fannie and Freddie. Republican consternation was really over his left-leaning record, his perceived sympathy for the companies’ staff (he opposed cutting their executives’ salaries after they were bailed out) and his advocacy of the reductions in principal Mr DeMarco opposed.

In the end, Mr Watt was confirmed only after the Democratic majority changed the Senate’s rules to overcome Republican obduracy over presidential appointments. Should he wish, he has many ways to bolster the housing market.

He could instruct Fannie and Freddie to write down the mortgages of borrowers who are in arrears, and reduce the interest rates of a wide range of those who are not—something they have already done in a few cases. He could reject a proposal by Mr DeMarco to reduce the maximum loan the pair will back, currently between $417,000 and $625,500. (That would force richer borrowers to secure entirely private mortgages, potentially at higher cost, while limiting the government’s exposure.) He could direct some of the companies’ now copious profits into a trust fund created in 2008 to finance low-income rentals, which Mr DeMarco had refused to do. He could end Mr DeMarco’s practice of forcing banks to buy back loans that were guaranteed by Fannie and Freddie and subsequently defaulted, citing underwriting flaws. Bankers’ fear of such forced repurchases has discouraged them from lending to anyone with less-than-stellar credit.

Yet the case for such moves is far weaker than five years ago. Then, shell-shocked private lenders were strangling the supply of credit and Mr DeMarco’s narrow-minded attention to the solvency of Fannie and Freddie only made matters worse. Now, home prices are rising briskly, the number of underwater homeowners is dropping and new foreclosures have plummeted. The Federal Reserve has begun to wind down its stimulus, and the resulting rise in mortgage rates has not torpedoed demand for homes. Private investors are, slowly, returning to the mortgage market; the federally backed share of new loans has dropped from 94% in 2009 to 81% in the third quarter of last year, according to Inside Mortgage Finance, a trade publication.

Redirecting Fannie and Freddie to expand lending will slow the return of private capital and delay the day when the companies can be wound down, goals that Mr Obama, Republicans and Mr Watt all claim to share. If Americans need cheaper credit, better to leave that job to the Federal Reserve; Fannie and Freddie have caused enough trouble.

This article appeared in the Finance & economics section of the print edition under the headline "Reopening the taps"

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