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» VISIT US ONLINE @ DSNEWS.COM 51 COVE R STORY INDUSTRY INSIGHT M ARKET PUL SE DATA & RESE ARCH 51 e new game plan shows one thing about his leadership: Lenders are talking about where the market is hurting, and Watt is listening and acting on those concerns. As a result, the enterprises will be relaxing their payment history guidelines for offering reps and warrants relief. In addition, the agencies will now accept two delinquent payments in the first 36 months after a loan is acquired by Fannie or Freddie, and the enterprises will no longer demand an automatic repurchase when a loan's primary mortgage insurance is rescinded. For Watt's critics—including Ed Pinto with the American Enterprise Institute, a former EVP and chief credit officer for Fannie—Watt's plan is nothing more than Subprime 2.0. Pinto views the slowdown in lending as asymptomatic of a much larger economics problem: the emergence of higher interest rates, escalating home prices, and a sluggish economic recovery that is suffering from the aftershocks of a sagging job market. "Jobs for homebuilders and real estate agents do not make for a robust and sound economy," Pinto said of Watt's plan. "Excessive debt to finance consumption in excess of income is destabilizing," Pinto noted. "It serves to bid up existing assets and the land they sit on, creating a temporary wealth effect. It crowds out productive capital investment that creates real demand and jobs. Borrowers become overextended and susceptible to economic shocks." Lenders, on the other hand—and especially credit unions—find themselves basking in some of Watt's proposed changes. "Mel Watt is shifting the fundamental emphasis at FHFA from reducing the footprint of the GSEs in the housing finance market to making sure that the market is functional and that ordinary Americans have access to mortgage credit," said Eric Richard, EVP and general counsel for the Credit Union National Association, or CUNA. "Since the likelihood of legislation seems to be receding, this is a welcome development from our perspective." Yet Watt's not doing everything his supporters want. e FHFA refuses to expand the Home Affordable Refinancing Program (HARP) beyond its current universe of already qualified borrowers, since the risks far outweigh the potential benefits. But with Watt remaining committed to the idea of a GSE-led housing market, what happens to all of the congressional plans that have long advocated for an escape from a system dominated by Fannie and Freddie? "No doubt, Mel Watt is expanding the GSEs' role in housing. Why expand? To stimulate the economy," he explained. "So is this the right way to stimulate the economy? In the short term with QE ending, what is the choice? Private capital? Private capital is more expensive and will drive home prices into recession, which will slam consumer confidence (unless you think wages are going up—nope). So you're left with continued government subsidies. How do you break the vicious cycle?" Richard with CUNA shared similar thoughts on Fannie and Freddie's future and outlined how Watt's approach is a stark contrast from former acting director DeMarco. "Ed DeMarco's primary emphasis was on reducing the role of the GSEs in the housing finance marketplace," he pointed out. "It seems he wanted to create more space for private capital to replace the GSEs, and perhaps to encourage Congress to move ahead on the issue. But so far, Congress does not seem ready." Ready or not, Watt's recent statements paint a picture that is both promising and frightening, depending on who is viewing it. At one point, Watt even shocked GSE shareholders by saying it's not his job to make GSE shareholders the FHFA's top priority. Santos wasn't surprised by Watt's public announcements. e biggest shock is the fact that the "hedge funds were surprised," he added. e good news, according to Santos, is that "it looks like the GSEs are smarter this time around, implementing proactive quality control programs instead of waiting for repurchases." From the viewpoint of credit unions, CUNA is one group welcoming some of Watt's changes. "Our primary concern has been that the wrong moves by FHFA, or by Congress, could effectively squeeze small mortgage originators like credit unions out of the secondary market," Richard said. "A de facto takeover of the secondary market function by large institutions focusing only on profits could be bad for consumers and credit unions. e Watt administration seems to have a strong sense of public mission in deciding how to handle Fannie and Freddie." But, he added, "FHFA will need to be vigilant against any new safety and soundness issues that start to emerge." Still, Richard argues that middle-class homebuyers will do better under the new FHFA approach, along with the credit unions and banks that serve them. "We can expect the Watt administration to take a more consumer-oriented approach to overseeing the refi and other activities of the GSEs," he explained. "is will be part of FHFA's new emphasis on ensuring access to credit. But these areas of emphasis will be modulated by a continued focus on safety and soundness as well." As the new image of the FHFA emerges under Watt's leadership, the man behind the GSEs is starting to come into full view. But with Watt, unlike DeMarco, a few surprises are starting to surface, given Watt's seemingly less aggressive approach out of the gate. Yet, as time passes, Watt is appearing more and more like the reformer many envisioned, as he emerges from housing's shadows. "Jobs for homebuilders and real estate agents do not make for a robust and sound economy," –Edward Pinto Fellow at American Enterprise Institute

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