July 30, 2013

Mel Watt’s Risky Record

President Obama’s nominee to run the Federal Housing Finance Agency, Congressman Mel Watt, was wrong on housing issues in the lead-up to the financial crisis. There is no indication that his policies have changed. Fannie Mae and Freddie Mac, both government sponsored enterprises, are badly in need of reform – but not in the vision of Congressman Watt.

Watt ‘On the Record’

In a May 2013 interview with the Wall Street Journal, Watt didn’t know answers to some fundamental questions. Selected excerpts:

WSJ: What would be the biggest difference between having you in that position and [Acting FHFA Director Edward] DeMarco?

Mr. Watt: I don’t know that I can answer that …

WSJ: What should be the mission of the FHFA, and how would you measure success in achieving those goals?

Mr. Watt: I’m not sure I can answer that question, either …

WSJ: What do you think are the most important issues facing the FHFA and the broader housing-finance space right now?

Mr. Watt: I don’t think I can answer that question …

WSJ: For refusing to permit principal write-downs, Mr. DeMarco has faced a storm of criticism from the left, including many people who are supporting you in your upcoming confirmation hearing. Should that decision be revisited?

Mr. Watt: I can’t answer that question either …

WSJ: What are the most important components for any overhaul of the housing-finance market?

Mr. Watt: I can’t comment on that …

Congressman Watt’s understanding of financial regulation is questionable. He has admitted so in various instances.

• According to the New York Times, during the Dodd-Frank Conference Committee, Congressman Watt asked “Can somebody explain to me what’s in Tier 1 capital? I just don’t have enough knowledge in this area.”
• In 2011, Congressman Watt said, “For all of the last term of Congress, I sat in the Financial Services Committee, and a lot of these arguments that I am hearing today are the same arguments that I heard about derivatives. Well, I didn’t know a damn thing about derivatives. I am still not sure I do.”

Watt’s Record in His District

In 2002, Congressman Watt, whose congressional district includes Charlotte, N.C., helped launch a program called “Pathways to Homeownership for Welfare-to-Work Graduates.” This program sought to get Freddie Mac and others to provide risky mortgages in the Charlotte area. Watt bragged about the program at the time:

Moving Past “Traditional Homeownership Hurdles.” “Pathways to Homeownership is … designed to help borrowers overcome traditional homeownership hurdles like insufficient credit and downpayment savings.”

Freddie Mac Spending Billions in Charlotte. “Freddie Mac plans to buy eligible mortgages made as part of Pathways to Homeownership to ensure a steady supply of mortgage credit for additional homebuyers … Over the past five years, Freddie Mac has purchased $9.5 billion in mortgages made to an estimated 82,000 Charlotte area residents.”

The bursting of the housing bubble hit all communities hard, but Charlotte was particularly hard hit. In 2010, Charlotte had a foreclosure rate of one in 50 homes and was ranked among the top five foreclosure hotspots.  

Blocking Fannie and Freddie Reform

In 2003, the Bush Administration recommended reform for Fannie Mae and Freddie Mac. The reform included new supervision by the Treasury Department to ensure Fannie and Freddie were managing risk appropriately. At that time, the two enterprises had about $1.5 trillion in debt; today it is $5 trillion.

Completely Missing the Financial Crisis. Congressman Barney Frank, supported by Congressman Watt, stated at a congressional hearing on the reform proposal: “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

Faulting the Private Sector. Like Congressman Frank, Congressman Watt believed the private sector is biased and that it was the government’s role to facilitate homeownership, using the GSEs to carry that out. At the same hearing Watt said: “It is a very powerful statement in your testimony, Secretary Snow, and that you have reinforced, that this Administration views the GSEs as, quote, ‘private enterprises.’ Private enterprises really have not done very well in achieving things other than making money. Most of them do not really give much of a damn about poor people and whether they have housing or not, and it seems to me that an overemphasis in that direction can only make matters worse.”

Arguing Against Reform, Missing the Purpose of GSEs. Congressman Watt continued at the hearing arguing against reform saying: “I just don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poor people and lower income and middle income people who need housing, when it is quite obvious to me that the private enterprise mentality of the GSEs and this Administration is directly at odds with the public mission of providing more housing to lower income people.”

Bad Policies Leading up to the Financial Crisis

In 2004, Congressman Watt wrote to President Bush, criticizing the Administration for focusing on the “safety and soundness” of GSEs.

Ignoring Risk. Congressman Watt’s letter asked the President “to support our efforts to push the GSEs to do more affordable housing.”

In 2005, when a GSE reform bill was on the floor of the U.S. House of Representatives, a series of amendments were offered to strengthen the oversight of the GSEs. Specifically:

• Rep. Jim Leach offered an amendment to strengthen the minimum capital requirements for Fannie and Freddie. (Watt opposed it.)
• Rep. Royce offered an amendment to rein in the Fannie and Freddie based on the systemic threat they posed. (Watt opposed it.)
• Rep. Ron Paul offered an amendment to eliminate the ability of Fannie and Freddie to borrow from the Treasury. (Watt opposed it.)

In 2007, while the country was spiraling toward financial crisis, Congressman Watt teamed up with Congressman Frank to propose the “Affordable Housing Fund.” Among other things, the fund provided money for extremely low- and very low-income families. CBO estimated GSEs would contribute $3 billion to the fund, paid for by low- and middle-income homebuyers through a percentage on their mortgages. At a time when significant GSE reform was needed, Congressman Watt played politics by trying to tack this provision onto critically needed legislation -- essentially asking GSEs to take greater risks. Fannie and Freddie went into conservatorship in 2008, and taxpayers spent $188 billion to bail them out.

Ignoring Risk, Again. Congressman Watt said about his bill, “The real benefit of this bill is that it will provide a big stimulus for more affordable housing.”

On the eve of the financial crisis, when the Treasury Department and the Federal Reserve came to Congress warning of the threat posed by Fannie and Freddie, Congressman Watt went so far as to ask the Treasury Secretary and the Fed Chairman to “be a little more careful” in projecting their “animosity … toward the GSEs.”

No Lessons Learned

As late as December 2012, during the “fiscal cliff” negotiations, Congressman Watt wrote to the President and congressional leadership seeking principal forgiveness for home loans. He referenced a July 2012 FHFA study that estimated net savings of up to $1 billion to taxpayers.

Disregarding FHFA Decisions. Acting FHFA Director DeMarco issued a statement on July 31, 2012, regarding principal reduction, saying: “After extensive analysis of the revised HAMP PRA, FHFA has concluded that the anticipated benefits do not outweigh the costs and risks … FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”