Obama FHFA Pick Mel Watt's Radical Vision For Fannie
Posted 07/26/2013 08:05 AM ET

President Obama announces his nominee for the Federal Housing Finance Authority director, Rep. Mel Watt, on May 1, 2013, at the White House. AP View Enlarged Image

A pre-crisis bill written by Democratic Rep. Mel Watt President Obama's nod to run the Federal Housing Finance Agency reveals that his ideas for regulating Fannie Mae and Freddie Mac are more radical than he lets on.
On the eve of the financial crisis, Watt actually proposed the creation of the regulatory agency he now seeks to run only, he designed it not to reform Fannie and Freddie but to pressure them to underwrite even more affordable housing, exposing them to even more risk.

The bill he co-sponsored with then-banking panel Chairman Barney Frank the Federal Housing Finance Reform Act of 2007 would have forced the federally backed mortgage giants to meet even tougher quotas for affordable lending, while contributing to an "Affordable Housing Fund" to rebuild blighted urban areas.
"The real benefit of this bill is that it will provide a big stimulus for more affordable housing," Watt said at the time, ignoring concerns the agencies already were overexposed to low-income loans.

Such affordable housing quotas, set by the Department of Housing and Urban Development, led to the insolvency and $188 billion taxpayer bailout of Fannie and Freddie, now nationalized and under the control of the Federal Housing Finance Agency.

As President Obama's nominee to head FHFA, Watt has dodged questions about what he would do at the helm of the powerful agency. A career politician once voted the most liberal member of Congress, Watt has gone on a charm offensive to win over Senate Republicans, who have expressed strong reservations about his pick and plan to block a floor vote on his nomination.
During a recent Senate confirmation hearing, Republicans complained Watt offered few specifics in response to questions about his plans for Fannie and Freddie.

At one point, while probing his position on mortgage principal forgiveness, they questioned his sincerity. Watt implied he would follow FHFA's current stance against loan write-downs, even though he's publicly argued in favor of them.
If Senate Republicans want to know what he might actually do, they only need to read his proposed legislation, H.R. 1427. It's at least a partial blueprint of his agenda.

In March 2007, Watt said he co-authored the bill to create a new regulatory apparatus that "will provide a means to achieve our ultimate goal of expanding the supply of affordable mortgage credit across the country."

At the time, Watt was a senior member of the House Financial Services Committee and had just stepped down as chairman of the Congressional Black Caucus, where he'd pushed the government to boost minority homeownership.

His bill proposed enhancing existing federal goals boosting Fannie's and Freddie's low-income mortgage portfolios by adding "a new affordable housing sub-goal for re-financing transactions."

The proposed regulator, dubbed "the Federal Housing Finance Agency," also would direct Fannie and Freddie to make contributions to an Affordable Housing Fund for "very and extremely low-income families" in amounts equal to 1.2 basis points on each of their total outstanding mortgages including those held in portfolio and those securitized.

The bill, which failed to become law, authorized the new agency to set "housing goals and an annual home purchase goal for" Fannie and Freddie, and to "take enforcement action against an enterprise for failure to meet the housing goals."
Proposed enforcement actions included issuing fines, cease and desist orders and even criminal penalties against Fannie and Freddie if they fell short of the social lending goals. "The agency," moreover, "has the authority to remove management."

House members who are more familiar with Watt and his bill are more outspoken against him. GOP Rep. Scott Garrett, who's served with Watt on the House banking panel for the past decade, says that while his colleague pays lip service to "safety and soundness," he really only cares about "affordable housing" and "flexible underwriting," and would use Fannie and Freddie to carry out a risky social agenda.

"Watt voted time and time again against measures to make Fannie and Freddie more safe and sound," Garrett said. "He should not be put in charge of regulating and ensuring their safety and soundness."

The National Community Reinvestment Coalition, however, enthusiastically endorses Watt for the post. "Watt is highly qualified," asserted NCRC President John Taylor.