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50 50 All of this changed in May when Watt gave his first substantive speech on national housing policy. e end result? If you thought Fannie and Freddie were down for the count, think again. Watt may have failed to convey an aggressive demeanor in early 2014, but he is forging a new path—one that is far enough from Ed DeMarco's trail to create a sudden sea shift in GSE policy. To recognize the myriad differences between Watt and DeMarco, you only have to look at their own words, says Ed Pinto, a fellow with the American Enterprise Institute and a former Fannie Mae credit risk officer. In his strategic plan, Watt explained how originators and mortgage insurers "have placed additional conditions—such as higher minimum credit score requirements—on top of the acceptable credit standards of each enterprise." e FHFA leader criticized some of the heightened standards, noting that "[t]hese credit overlays result in the rejection of many loans that would otherwise meet enterprise credit standards." DeMarco, on the other hand, spent his time at the FHFA worrying about the excessive use of mortgage financing to stir up unsafe activities in the housing market. "Do not confuse weakening underwriting standards and under- pricing risk with helping people or promoting market efficiency," DeMarco once warned in his own words. When you compare these two philosophies, Mel Watt is clearly cutting a different path, despite his continual insistence for a strong balance between more relaxed lending and safer standards. e mortgage industry recognizes a clear distinction between the two FHFA leaders even after a brief six-month stint on Watt's part. "DeMarco was defensive out of necessity, and it appears as Watt is going to play offense out of necessity," observed Alex Santos, president of mortgage analytics firm Digital Risk, Inc. "DeMarco stabilized the GSEs after the financial crisis and implemented changes to make it easier for private capital to participate in the market (reduced g-fees, reduced loan limits, reduced credit standards—notably during QE)." "Watt needs to stimulate housing during tapering. e only way to do this is to drop prices and loosen standards," Santos explained. And this is exactly what is occurring, housing analysts suggest. In May, Watt publicly reconfirmed his commitment to a mortgage market where Fannie and Freddie take the lead, as the rest of the market follows. In other words, forget a mortgage finance system spearheaded by the enterprising forces of private capital. Fannie and Freddie still dominate and remain Watt's top concerns. e problem with private capital is it remains on the sidelines, stalled by worries about the structure of the future secondary mortgage market, industry analysts say. Until private capital is ready to aggressively move in, Watt is prepared to use the GSEs' platforms to create the future of housing. For now, the director is committed to using the existing structures of Fannie and Freddie to spawn the much-anticipated single securitization platform that will shape the future secondary mortgage market. His first major policy speech in May also shows Watt retreating from plans that would have forced the ceilings for conforming loan limits in certain housing markets lower. Watt resisted this change, fearing it could dampen an already shaky housing sector. His message is not surprising to housing analysts. In Watt's view, the GSEs are still needed as housing struggles to regain its momentum. One of Watt's more pressing goals is to foster a more robust housing recovery by supplying the market with additional liquidity. e idea is to have Fannie Mae and Freddie Mac deliver heavier doses of liquidity to energize new lending in the form of purchases and refis. For housing reform advocates, Watt's strategy seems a far cry from the aggressive wind-down of the GSEs that politicians envisioned just a short few years ago. It's also a definitive path away from housing reform bills that have been laying out aggressive plans to finish off the GSEs. "My guess is that there were many people who expected that I would start talking about reform legislation the minute I got to FHFA," Watt said in his May housing speech. "I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary." Yet, he added, "Congress and the administration have the important job of deciding on housing finance reform legislation, not FHFA. Instead, our task is to continue to fulfill our statutory mandates, to execute our strategic plan, and to manage the present status of Fannie Mae and Freddie Mac." Watt's total reform package includes the expansion of credit for new and refinanced mortgages via the GSEs, enhanced foreclosure prevention activities, more lenient representation and warranty standards governing GSE-loan buybacks, and looser lending standards as compared to today's tighter guidelines. e big takeaway from the May speech is Watt's commitment to allowing the GSEs to provide more liquidity to the market. He even weighs this initiative as a much larger part of the GSEs' overall strategy going forward. "We have also doubled the scorecard weight given to this goal, from 20 percent to 40 percent," Watt pointed out. "Do not confuse weakening underwriting standards and under-pricing risk with helping people or promoting market efficiency," –Ed DeMarco Former Director, FHFA

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