The Obama administration’s selection Wednesday of a North Carolina congressman to head the government’s mortgage-finance regulator appears certain to spark a confirmation battle and renewed debate over the government’s role in backstopping home loans.
Obama announced that he’d picked Rep. Mel Watt, a Democrat from Charlotte, to head the Federal Housing Finance Agency.
Never heard of it? Don’t worry, most Americans haven’t, either.
The agency’s job is to oversee the quasi-government titans of mortgage finance, Fannie Mae and Freddie Mac. These two, until the summer of 2008, had operated largely as private enterprises with congressional oversight. Since late 2008 they’ve been in government conservatorship.
The selection of Watt, a career politician who hasn’t worked in banking or finance, touched off immediate controversy. He’ll head a highly technical agency, and his nomination did not sit well with Republicans who want changes in housing policy.
“I could not be more disappointed in this nomination. This gives new meaning to the adage that the fox is guarding the hen house,” Sen. Bob Corker, R-Tenn., said in a statement fired off minutes after news broke of Watt’s selection and well before the official White House photo op. “The debate around his nomination will illuminate for all Americans why Fannie and Freddie failed so miserably.”
Obama looked past the questions of qualification Wednesday when appearing before the cameras with Watt at the White House. He instead focused on the rise by Watt from a humble past to a lawmaker who’s defended the little guy.
“He’s helped protect consumers from the kind of reckless risk-taking that led to the financial crisis in the first place. And he’s fought to give more Americans in low-income neighborhoods access to affordable housing,” Obama said of Watt, who did not speak to reporters.
Spokesman Jay Carney defended the pick of Watt during the daily White House briefing, noting Obama “looks for people who are experienced in a broad variety of ways.”
The FHFA has been headed by an acting director, Ed DeMarco, since Sept. 1, 2009. DeMarco has frustrated the administration’s efforts to forgive some mortgage-holder debt and to loosen lending standards to help more borrowers take advantage of today’s low interest rates.
Liberal groups have rallied across the country urging Obama to fire DeMarco, and Corker, a member of the Senate Banking Committee that must confirm Watt, signaled in his statement that Republicans may fight the nomination in order to keep DeMarco in place.
“Before any nominee should be considered for this post, regardless of their qualifications, the administration should explicitly lay out how they will unwind these entities,” Corker said.
Fannie and Freddie purchase mortgages from banks and other lenders, then pool them together in a mortgage bond offered to investors. This process, known as securitization, allows banks to get a loan off their books and frees them up for more lending.
The Treasury Department in February 2011 actually laid out five potential paths to unwind Fannie and Freddie by paying off bad debts and collecting more money. Timothy Geithner, then the treasury secretary, signaled favor for a plan that eventually gets rid of Fannie and Freddie in favor of the private sector, with government providing an insurance function in the process.
Watt’s the second North Carolinian to be nominated for the post by Obama. His pick in 2010, North Carolina Bank Commissioner Joseph Smith, was rebuffed by Republicans. North Carolina, home to Bank of America, has been more aggressive than most states in policing lenders and forcing banks to work with homeowners who’d been given unsuitable mortgages.
Watt has served 20 years in Congress, many of them on the influential House Financial Services Committee. Sen. Elizabeth Warren, D-Mass., called him “a thoughtful policymaker with a deep background in finance and a long record as a champion for working families.” Rep. Elijah E. Cummings of Maryland, the top Democrat on the House Committee on Oversight and Government Reform, said Watt “has deep expertise in housing policy and a record of distinguished service” in Congress.
His nomination comes as Obama faced criticism for a lack of Cabinet diversity. On Monday, the president countered those criticisms when he nominated Charlotte Mayor Anthony Foxx to serve as transportation secretary.
A graduate of the University of North Carolina at Chapel Hill and Yale Law School, Watt served in the state senate before election to Congress in 1992. He also is a former chairman of the Congressional Black Caucus, which praised his selection.
Republicans are sure to scrutinize the nominee’s 20-year voting record in Congress. Close looks at past decisions made by Obama’s picks to head the Labor Department and the Bureau of Alcohol, Tobacco, Firearms and Explosives have delayed their confirmations.
Obama joked about this when ending his White House remarks on Watt and Tom Wheeler, who was nominated to head the Federal Communications Commission.
“And I’m going to go ahead and thank the Senate now for what I’m sure will be a speedy confirmation process so these two gentlemen can get to work right away,” the president said.
Up until the financial crisis and conservatorship in 2008, Fannie and Freddie operated as private enterprises with oversight from Congress and the Federal Housing Finance Agency’s predecessor, the Office of Federal Housing Enterprise Oversight.
How to “unwind” Fannie and Freddie is a complicated question. For now, they’re the only game in town. Before the financial crisis, sparked by a housing bubble and a collapse in lending standards, Wall Street banks had aggressively gone after Fannie’s and Freddie’s business, capturing a large share of the market long enjoyed by the two quasi-government entities.
Since late 2008, so-called private-label mortgage bonds bundled together by Wall Street banks and hedge funds have all but disappeared because investors won’t touch them. Wall Street banks have admitted to few controls over the quality of mortgages they were bundling for sale to investors. A special government commission showed how rating agencies such as Moody’s Investors Service were complicit in giving gold-plated AAA ratings to Wall Street mortgage bonds that turned out to be junk, and the Justice Department recently sued Standard & Poor’s for this.
Doing away with Fannie and Freddie has been a Republican rallying point, placing calls for their dissolution in the Republican Party platform during the 2012 elections.
“Fannie Mae and Freddie Mac were a primary cause of the housing crisis because their implicit government guarantee allowed them to avoid market discipline and make risky investments. Their favored political status enriched their politically-connected executives and their shareholders at the expense of the nation,” the platform read.
That looks past the lead role that Wall Street played in the housing crisis. But five years later, lawmakers continue to debate just what to do with both Fannie and Freddie. Legislation is expected late this year in the House of Representatives and the Senate, and since each are controlled by a different party, very different approaches are expected.
Experts such as Kim Wallace, who until recently was a Treasury Department liaison with Congress, don’t expect huge changes now. But Wallace thinks that both borrowers and lenders will face additional fees when taking out a mortgage to help cover regulatory costs and reduce taxpayer burden.
“Washington is still in a posture that they don’t want to risk derailing what’s left of this housing rebound, but at the same time, they have to deal with the increasing cost of the housing subsidies” through the two entities, said Wallace, now an analyst for Renaissance Macro Research.