* Watt emphasizes mortgage liquidity in first public speech
* Won't lower cap on size of loans Fannie, Freddie can back
* Steps taken to cut risk banks might have to buy back loans
* Detroit program will allow for "deeper" loan modifications
(Adds Breakingviews link)
By Margaret Chadbourn
WASHINGTON, May 13 The regulator of Fannie Mae
and Freddie Mac laid out plans for the
government-run companies on Tuesday that could make it easier
for Americans to obtain mortgages, marking a sharp departure
from a predecessor who wanted to aggressively shrink their role
in the housing finance market.
Federal Housing Finance Agency Director Mel Watt, in his
first public speech since taking office in early January, said
he would hold off on a proposed reduction in the size of loans
the firms can buy, and added he was jettisoning plans to reduce
the financing they provide for apartment building loans.
He also said the two companies, which own or guarantee about
60 percent of all U.S. home loans, would ease standards that
govern when banks must buy back faulty loans from them, which
could also help open the credit taps.
"I don't think it's FHFA's role to contract the footprint of
Fannie and Freddie," Watt said at an event sponsored by the
Brookings Institution. "Our overriding objective is to ensure
that there is broad liquidity in the housing finance market and
to do so in a way that is safe and sound."
The Senate Banking Committee will consider a bill on
Thursday to replace Fannie Mae and Freddie Mac with an
industry-financed government mortgage reinsurer, but the
likelihood of any legislation becoming law soon is slim, leaving
the regulator with power to direct the firms.
Watt said he did not see it as his role to weigh in on the
Both Watt's predecessor, Edward DeMarco, and the Obama
administration favored cutting the size of so-called conforming
loans as a way to make room for more private capital. But
housing industry groups had warned the step could undercut a
market that already appears to be flagging.
Federal Reserve Chair Janet Yellen said last week there was
a risk a protracted housing slowdown could undermine hopes for
stronger economic growth this year.
"FHFA will not use its authority as conservator to reduce
current loan limits," Watt said. "This decision is motivated by
concerns about how such a reduction could adversely impact the
health of the current housing finance market."
Some investors saw the shift as making it more likely the
bailed-out companies, which lawmakers and the Obama
administration want to shut down eventually, would ultimately
survive. Their common stock shot up more than 11 percent in
early trading to around $4.70 a share. If the companies are
wound down, the stock would likely be worthless.
Investors also seemed heartened by Watt's decision to not
force Fannie Mae and Freddie Mac to pull back support for
multi-family housing. The PHLX Housing Index of
homebuilders ticked up 0.7 percent, with several major builders,
including PulteGroup, Lennar and KB Home all rallying.
HELPING AT THE MARGINS
In easing rules that govern when banks are required to
repurchase faulty mortgages they sold to the two companies, Watt
took aim at a risk that lenders cite for the still-tight credit
that has hindered the housing recovery.
Watt said Fannie Mae and Freddie Mac, which buy mortgages
and package them into securities they issue with a guarantee,
would expand the universe of loans exempt from repurchase
requests in part by relaxing mortgage payment history
"While none of his actions will solve the mortgage credit
crunch. They all will help at the margins," said Jaret Seiberg,
a senior policy analyst at Guggenheim Securities. "The path Watt
has laid out is positive for mortgage originators, mortgage
insurers and homebuilders."
DeMarco earned a reputation as a staunch protector of the
taxpayers who bailed out Fannie Mae and Freddie Mac with $187.5
billion, but housing advocates felt he did not do enough to help
Americans whose home values plummeted when the U.S. housing
Watt said his agency had no plans to cut mortgage principal
for borrowers whose homes were now worth less than their
mortgages, but he said that did not necessarily mean FHFA was
"not considering it."
He also announced a pilot program in Detroit that would
permit extended loan modifications than available under a
program that helps so-called underwater borrowers refinance
loans. He said the FHFA hoped to expand the program nationwide.
(Reporting by Margaret Chadbourn; Editing by Andrea Ricci and