Watt sounds warning bell on Fannie, Freddie

The nation’s top housing regulator is urging politicians to finally overhaul the housing finance system.

The push from Mel Watt, the director of the Federal Housing Finance Agency, came the same day government-sponsored enterprise Freddie Mac reported a $2.2 billion profit in the final quarter of 2015.

{mosads}Despite those profits, Watt warned Thursday that Freddie and its counterpart, Fannie Mae, were facing increasing risks. After eight years of functioning under a government conservatorship, Watt said the situation was growing worse at the housing giants, which guarantee the overwhelming majority of the nation’s mortgages.

“By giving this speech today, I am signaling my belief that some of the challenges and risks we are managing are escalating and will continue to do so the longer the Enterprises remain in conservatorship,” he said at the Bipartisan Policy Center. “Consequently, I believe that I have a responsibility, both as regulator and as conservator, to identify and discuss this concern more openly.”

The GSEs were brought under conservatorship after the two entities nearly became insolvent during the subprime mortgage crisis. The two were kept afloat with an injection of funds from the Treasury Department, but the arrangement required the two to remit nearly all profits back to the Treasury.

But Watt warned that this arrangement makes it nearly impossible for the GSEs to build up a capital buffer to guard against future losses. Under the terms of the conservatorship, the two will have no buffer beginning in 2018, meaning that if either posts a loss, it will again have to turn to the Treasury for funds to close the gap.

The government still has $258 billion available in taxpayer funds to provide to the GSEs if necessary. But Watt cautioned that the drama brought on by another financial rescue by the Treasury could undermine confidence in the housing market, and push Congress to act hastily in search for a fix.

That being said, Watt also said that it was past time for policymakers to come up with some sort of solution to the current arrangement. There has been broad bipartisan agreement that the current arrangement, in which nearly every mortgage in the country is backed by entities that have explicit government backing, is unsustainable.

But coming up with a new system of housing finance reform has proven remarkably difficult for Congress, as repeated efforts have made little to no headway.

Watt also noted that on the presidential campaign trail, talk of how to fix housing has been nearly nonexistent.

“I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind,” he said. “While it’s not my place to meddle in political discussions, I’m also not hearing much discussion of housing finance reform in any of the presidential campaigns.”

In response to his remarks, a Treasury official underlined the taxpayer support Fannie and Freddie have already received, and reiterated the call for Congress to act.

“Director Watt’s remarks underscore the Administration’s consistent position regarding the GSEs’ conservatorship: the best long-term solution is comprehensive housing finance reform. Until then, Fannie Mae and Freddie Mac will continue to rely on the $258 billion of taxpayer provided support to sustain market confidence,” the spokesman said.

Watt’s comment came on the same day that Freddie Mac reported a strong fourth quarter in 2015, where it recorded $2.2 billion in profits. The enterprise sent $1.7 billion to the Treasury, and has now made dividend payments totaling $98.2 billion overall. That exceeds the $72.3 billion it initially received from Treasury during the rescue — although dividend payments do not count against that payout.

This post updated at 1:27pm and 1:56pm.