Watt: Down payment, guarantee fee rules nearly ready

A top housing chief on Wednesday sought to reassure lawmakers that new policy initiatives to boost credit access will avoid the pitfalls of the past and bolster the nation’s housing finance system.

Mel Watt, director of the Federal Housing Finance Agency (FHFA), said Wednesday that new rules to lower down payments and change guarantee fees on the loans that mortgage giants Fannie Mae and Freddie Mac guarantee will be rolled out over the next few months.

{mosads}Watt tried to quell concerns that policy changes he is pursuing won’t put Fannie and Freddie back into a precarious position that led to their 2008 government takeover and need for a nearly $190 billion bailout. 

Sen. Mike Crapo (R-Idaho), the panel’s ranking member, expressed concern that Watt’s policy changes are setting up Fannie and Freddie for long-term control of the mortgage market.

“I’m troubled,” Crapo said.

He said he was especially concerned about the move to lower down payment requirements to 3 percent from 5 percent and that the agency would be taking a risk to acquire loans from borrowers without much equity.

But Watt, who said the guidelines on down payment requirements will be released in early December, said that he had a “high degree of certainty” that standards for borrowers will be maintained and will take into account “compensating factors.”

He argued that while the amount of a down payment is a factor in gauging a borrower’s creditworthiness “it is not the most reliable indicator of whether a borrower will repay their loan.”

Watt, who was back at the Senate Banking for the first time since he left Congress and took the new job, said that upward of 80 percent of people who are underwater on their mortgages are still paying them despite a lack of equity.

During the hearing, Sen. Pat Toomey (R-Pa.) said he was worried about the lack of action on raising guarantee fees, which he argued would attract private capital and lead to a reduction in the government’s dominant role in the mortgage finance market.

Watt said that a framework for guarantee fees is expected to be ready during the first three months of next year.

When Watt took the job in January he delayed raising the fees, saying that he wanted to determine their effect on credit access.

He told Toomey that raising the fees are just one piece in overhauling the mortgage finance market that include winding down the government’s role while attracting more private investment. 

Despite the concerns, lawmakers acknowledged that overhauling the mortgage finance market is largely up to them.

“While we were successful in passing a bipartisan path forward out of this committee, the ultimate goal of enacting legislation is not going to be achieved this Congress,” Crapo said.

Sen. Bob Corker (R-Tenn.), an architect of one of the first bipartisan bills on housing reform, asked Watt about what could happen if Congress can’t pass an overhaul plan. 

“Uncertainty about the future will have greater and greater cost to us,” Watt said.

“Bringing certainty to housing finance in this country is critically important.”

Watt reiterated that Fannie and Freddie must eventually get out from government control.

Banking Committee Chairman Tim Johnson (D-S.D.), who is retiring from Congress, suggested that if Congress can’t reach an agreement that  Watt should talk to the Treasury Department to end the conservatorship. 

“The administration continues to believe that the best way to responsibly end the conservatorship is through comprehensive housing finance reform legislation,” a Treasury spokesman told The Hill.

Watt avoided weighing in on what lawmakers should do and said if the committee was expecting him to take a position “it will be sorely disappointed.”

Fannie and Freddie provide a government backstop for loans that meet certain criteria. They package the loans and sell them as securities.