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Mel Watt Warns of Rising Risks in Speech at BPC

By Andy Winkler

Monday, February 22, 2016

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Three years ago, the BPC Housing Commission produced a comprehensive blueprint for housing finance reform. Since that time, the BPC has continued the drumbeat for reform and cautioned against adopting a sense of complacency with our current government-dominated system. Speaking at the BPC, Federal Housing Finance Agency (FHFA) Director Mel Watt pointed out in clear and unmistakable terms the growing risks of inaction.

FHFA’s conservatorship of the GSEs has lasted eight years. While Congress, FHFA, and the president have all worked in various ways to stabilize the housing finance system, we now have a system that may be stable but clearly is not sustainable. As Director Watt said, “I can assure you that these challenges are certainly not going away, and some of them are almost certain to escalate the longer the Enterprises remain in conservatorship.”

In laying out his case, Director Watt’s remarks at BPC reminded us of these challenges:

  • In just two years, the GSEs will have no capital buffer, as profits are swept to the Treasury Department and allowed capital reserves are shrinking.
  • Both credit and non-credit related factors (e.g. interest rate volatility and accounting treatment of derivatives) can lead to large swings in profitability.
  • Uncertainty has a cost—including an uncompetitive market and difficulty retaining talent.

Over the long term, any significant downturn in the housing market could translate into a drawdown of taxpayer dollars. FHFA has made significant progress in making credit risk transfers with the private market a focus and building a common securitization platform and single GSE security. Yet, as BPC outlined in 2013, Congress is responsible for defining what role the GSEs will play or will not play in a new reformed system.

The risks of congressional inaction are well known. A report last year by FHFA’s Office of Inspector General noted that the GSEs’ continued profitability is far from inevitable. And Freddie Mac’s loss in the third quarter of last year reminded us all of the volatility of the GSEs’ earnings.

Today, the taxpayers bear an unacceptable level of risk. Yet, as Director Watt noted, the issue of housing finance reform has been largely absent from the discourse of the presidential campaign. The director’s speech was a welcome reminder that the stakes remain high for our housing markets and our economy.

KEYWORDS: FEDERAL HOUSING FINANCE AGENCY, FANNIE MAE, FREDDIE MAC, MEL WATT