Economics, U.S. Economy

President Obama to nominate Rep. Mel Watt as the director of the Federal Housing Finance Agency

Congressman Mel Watt with Congresswoman Barbara Lee during a news conference in Cuba, April 2009. Image Credit: REUTERS

Congressman Mel Watt with Congresswoman Barbara Lee during a news conference in Cuba, April 2009. Image Credit: REUTERS

The president is set to make a key staffing announcement later today that will have major reverberations for the US housing market. Several sources report that the president will announce Representative Mel Watt as his choice to run the Federal Housing Finance Agency (FHFA).

FHFA regulates Fannie Mae and Freddie Mac. Created in 2008 only months before Fannie and Freddie’s collapse, the FHFA combined the powers of two now-defunct regulatory agencies into one. The idea was to place the regulation of the Government Sponsored Enterprises (Fannie and Freddie) into the hands of a centralized authority with greater powers than the two previous agencies. The greatest of the FHFA’s new powers was the ability to place the GSE’s into conservatorship, which the agency quickly did in September of 2008. This gave FHFA the powers of the Board and management at both Fannie and Freddie.

Fannie and Freddie remain under FHFA’s control and currently back about half of the US’s existing home loans, so the director of FHFA has immense power in the housing market. Edward DeMarco, the current acting director, has worked to protect the interests of taxpayers and taken key steps to encourage more private capital to enter what is currently a government-centered mortgage market.

The Obama administration has had trouble finding a permanent replacement for DeMarco, and any nominee will require Senate confirmation. The Senate should focus on two key areas when considering Watt or any other nominee:

1. The continuation of steps to encourage private capital to replace the growing risk being shouldered by the taxpayer. For example, continuing the congressionally-mandated policy to raise the fees charged by Fannie and Freddie to levels that will allow the private sector to compete.

2. The role the director will play as the regulator of Fannie and Freddie’s affordable housing mandates. The government’s past enforcement of such mandates and other policies are widely credited with forcing an industry-wide loosening of underwriting standards. This led to the accumulation of an unprecedented number of weak and risky mortgages and the ensuing financial crisis.

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