North Carolina Democratic Rep. Melvin Watt narrowly missed a procedural hurdle Thursday afternoon and the Senate effectively blocked his confirmation vote to head the little-known but vital Federal Housing Finance Agency.
Watt needed sixty senators to agree to end debate, and with Democrats enjoying a majority his confirmation would have been all but certain. Instead, senators voted 56-42 with two members not casting a vote. One of the “no” votes was Senate Majority Leader Harry Reid, D-Nev., whose vote in opposition allows the nomination to be brought back up again later.
The FHFA oversees the housing finance giants Fannie Mae and Freddie Mac, placed into government conservatorship at the start of the summer 2008 financial crisis.
A vote on Watt, a veteran minority lawmaker and longtime member of the House Financial Services Committee, has been held up for months by Republicans who feel Watt’s views contributed to the need for the government to take over the quasi-government entities. They favor someone with experience in housing finance, and were happy with Acting FHFA Director Ed DeMarco, who has resisted efforts to relax tighter standards on mortgage lending.
“While Mel Watt is certainly a good man, I think it is the wrong job for Mel Watt,” said Sen. Pat Toomey, R-Pa.
Citing complex financial instruments called derivatives, used by Fannie and Freddie to hedge against risks, Toomey read back a quote from Watt saying he didn’t understand how derivatives worked and and Toomey noted “derivatives are central to the management of this institution.” The job of a regulator requires a skilled bureaucrat, not a politician, he suggested.
Democrats accused their Republican counterparts of simply stalling. Watt’s home-state senator, Democrat Kay Hagan, pointed to his record of “bipartisan skills” and support from groups such as the National Realtors Associations, the National Association of Homebuilders and the Mortgage Bankers Association.
“The time has come for some permanency and some certainty,” added Sen. Elizabeth Warren, D-Mass., in a floor speech shortly before the Senate failed to vote in favor of moving forward with Watt’s nomination.
Ideology divides the parties on Watt’s nominations. Republicans want Fannie and Freddie to keep the focus on profitability and returns for investors who purchase mortgage bonds. Democrats think the mortgage-finance companies should play a bigger role in making access to mortgage lending easier for all Americans, especially for underserved minority communities.
Democrats argued that as a veteran lawmaker and someone who grew up poor and familiar with the challenges of home ownership, Watt was amply qualified to lead the agency which polices the two entities that buy mortgages from banks and bundle them together as mortgage bonds for sale to investors in a $10 trillion market. This process, called securitization, allows banks to clear their balance sheets by passing along loans into a secondary market, and frees them up to keep lending to consumers and businesses.
What do about Fannie and Freddie will be a front-and-center issue for Watt. The Republican-led House Financial Services Committee in July passed legislation that would liquidate Fannie and Freddie and largely eliminates a federal backstop for the housing market.
The Senate Banking Committee is considering legislation that’d get Fannie and Freddie out of the government’s hands and would leave them operating as private entities that still enjoy some federal backstop. It held a hearing on the matter Thursday as the full Senate debated Watt’s nomination.
The Bush administration took over Fannie and Freddie as the housing market began to collapse. Although the mortgage bonds sold by Fannie and Freddie said they were not government backed investors felt they were implicitly backed by the Treasury Department and demanded a verbal guarantee if they were to continue purchasing bonds that were once considered as plain as vanilla. In order to provide that guarantee, then-Treasury Secretary Henry Paulson seized them and put them under government conservatorship, where they’ve stayed ever since.
The administration’s first nominee to head the FHFA, North Carolina Banking Commissioner Joseph Smith, withdrew his name from consideration in January 2011 after losing support from Republicans.
It wasn’t immediately clear if Watt would fight on or also withdraw from consideration. The Obama administration had also been considering prominent economist Mark Zandi as a potential nominee to head the housing-finance regulator.