The WSJ reports,"Mel Watt, the new director of the Federal Housing Finance Agency, signaled a clear pivot on housing-finance policy in his first public speech Tuesday morning. A few hours later, his predecessor, Edward DeMarco, offered some parting reflections on housing policy at a banking conference in Charlotte, N.C.
Their views couldn’t have been more different.
In his talk, Mr. DeMarco made an impassioned plea to abandon the housing-finance system dominated by Fannie MaeFNMA +7.78% and Freddie MacFMCC +6.90%, the companies he oversaw as the FHFA’s acting director for the past five years. “Rather than striving to preserve a system that failed so spectacularly and in so many ways, we need to find our courage and our creativity to build a new system,” he said in prepared remarks.
Mr. Watt, earlier in the day, said he wanted to broaden the role of Fannie and Freddie and labeled as “irresponsible” any move to wind them down without clear proof that private investors were poised to take their placez".
A little context: several bills have been introduced in Congress to replace Fannie and Freddie, but none of them appear capable of garnering enough votes to move anywhere fast. In the House, Republicans passed on a party-line vote in the financial-services committee last summer a bill to replace Fannie and Freddie with a mostly private mortgage market. In the Senate, the banking committee is gearing up to pass a bipartisan bill with a slim majority on Thursday that would construct a new system of federal reinsurance of mortgage-backed securities to replace the loan giants.
If these approaches flame out, the odds rise that lawmakers could eventually coalesce around restructuring Fannie and Freddie rather than crafting some wholesale replacement. Leaders of some consumer and industry groups, including the California Association of Realtors, have suggested that when it comes to housing-finance overhauls, smaller changes may trump big ones.
Mr. DeMarco disagreed strongly with that view. “Restoring Fannie Mae and Freddie Mac is not the solution. They failed and their business model failed,” he said. “Going backwards to an obviously failed model cannot be dressed up with some promise of higher capital or explicit rather than implicit guarantees.”
Mr. DeMarco pushed back against the idea, made repeatedly by critics of the House and Senate bills, that “something new is ‘risky’ or that we cannot do better than what we had,” he said. “Often you will find someone protecting an existing interest…in preserving the status quo.”
Finally, he warned against calls for the government to help unqualified borrowers buy homes. “A government effort to assist families with limited resources and poor credit history take on increased leverage seems a curious public policy,” he said.
As acting director of the FHFA, Mr. DeMarco had focused on contracting the footprints of the companies in a bid to crowd-in private investment. He also established a new company, jointly owned by Fannie and Freddie, to develop an industry-wide platform for mortgage securitization.
