While appearing before the Senate Banking Committee in a hearing titled “The Status of the Housing Finance System After Nine Years of Conservatorship,” Federal Housing Finance Agency (FHFA) Director Melvin L. Watt urged Congress to address housing finance reform.

Fannie Mae and Freddie Mac (the Enterprises) have been operating in conservatorships under the direction and control of FHFA, and with backing of the U.S. taxpayers with explicit dollar limits as set out in the Senior Preferred Stock Purchase Agreements (the PSPAs) with the Treasury Department, since Sept. 6, 2008.

“I have said repeatedly, and I want to reiterate, that these conservatorships are not sustainable and they need to end as soon as Congress can chart the way forward on housing finance reform.” Watt said in a prepared statement.

Watt provided list of questions and issues that he believed Congress should address, including:

• How much backing, if any, should the federal government provide and in what form?
• What process should be followed to transition to the new housing finance system and avoid disruption to the housing finance market, and who should lead or implement that process?
• What roles, if any, should the Enterprises play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively?
• What regulatory and supervisory structure and authorities will be needed in a reformed system and who will have responsibility to exercise those authorities?

Watt added that the most significant challenge for the FHFA is that additional draws of taxpayer support would reduce the amount of taxpayer backing available to the Enterprises under the PSPAs and the foreseeable risk that the uncertainty associated with such draws or from the reduction in committed taxpayer backing could adversely impact the housing finance market. 

The challenge is only going to increase, Watt cautioned.

“At the time I delivered my speech at the Bipartisan Policy Center in 2016, each Enterprise had a $1.2 billion buffer under the terms of the PSPAs to protect the Enterprise against having to make additional draws of taxpayer support in the event of an operating loss in any quarter,” Watt explained. “Under the provisions of the PSPAs, on Jan. 1, 2017, the amount of that buffer reduced to $600 million and on Jan. 1, 2018 the buffer will reduce to zero. At that point, neither Enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.