In his first speech since taking over the role of Federal Housing Finance Agency (FHFA) director, Mel Watt finally shared his strategic vision for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). While he made it clear that he wouldn’t comment on Crapo-Johnson or any of the other legislative initiatives addressing GSE reform, the direction that Watt is taking shows a commitment to a strong Federal role in the mortgage market.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

Watt based his strategic plan for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) on three principles: maintaining liquid, competitive, and resilient national housing finance markets; reducing taxpayer risk by bringing private capital back to the mortgage market; and build a new common securitization platform (CSP) that can be used by the GSEs now and by other market participants down the road.

Watt shifts priorities to emphasize private capital, healthy markets

“The maintain goal is not a new one for the agency, but we are placing an increased emphasis on it,” said Watt. “We are leading with maintain as the first goal in our Strategic Plan and Scorecard. We have also doubled the Scorecard weight given to this goal, from 20 percent to 40 percent.”

To help maintain healthy markets Watt has made the rules surrounding mortgage repurchases (forcing originators to buy them back from the GSEs) less severe, allowing for two late payments in 36 months instead of just one, eliminating automatic repurchases if mortgage insurance falls through, and giving banks a way to appeal repurchase decisions. Watt also wants to find cures other than repurchases to deal with loan defects, all of which should promote more home lending. The FHFA also won’t reduce its current loan limits, which would have made many expensive home mortgages ineligible to be sold to the GSEs.

Details aside, this renewed commitment to the housing market is welcome after months of disappointing housing data, but it’s also a change of tone. Until now everything that we’ve heard has been about what will come after Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), which Treasury continues to wind down through quarterly income sweeps.

At first blush, Watt’s second strategic principle is more in line with the idea that taxpayers are protected by eliminating the GSEs, but here too his comments show a change in approach.

“We have reformulated this goal so that it no longer involves specific steps to contract the Enterprises’ market presence, which could have an adverse impact on liquidity,” said Watt.

That doesn’t mean he is picking a fight with Treasury, he acknowledges that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have to get their retained portfolios down to $250 billion by 2018 in line with Treasury policy, but he isn’t making this endpoint the driving consideration between now and then.

Creating a common securitization platform for Fannie Mae and Freddie Mac

While his first two objectives show changing priorities, the decision to create the CSP is a forward looking plan that anticipates Congressional action without penning it in.

“The agency’s top objective for the Common Securitization Platform is to make sure that it works for the benefit of Fannie Mae and Freddie Mac,” said Watt. “Because of the many variables involved, the main danger to the CSP effort would be pursuing too many objectives all at the same time.”

FHFA has been studying this problem for the last four months, so almost immediately after Watt took over, and it has found that the best way to create a CSP that won’t conflict with an unknown future state of the mortgage market is to “leverage the systems, software and standards used in the private sector wherever possible.” This also avoids reinventing processes that have already been hammered out in the private markets and should make it easier for private label securities to make a comeback.

“This illustrates to me that Fannie Mae and Freddie Mac can get it done,” said Tim Pagliara, CEO of CapWealth Advisers and executive director of Investors Unite, which campaigns for the fair treatment of GSE shareholders. “They’re already working on, and designing, and implementing the things that Crapo-Johnson said they’d like to do… and they’re getting it done with the brightest people in the housing industry.”

Pagliara has been a vocal opponent of Crapo-Johnson and the Corker-Warner plan before it on two different counts. First, he sees them as cementing the full income sweeps that have deprived Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders of contractually guaranteed dividends (a debate that is the subject of multiple lawsuits). More importantly for the housing market, he doesn’t think that the new government agencies in either plan would be more effective than a reformed and recapitalized Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

“It was very refreshing to hear [Watt] acknowledge his role as director in the conservatorship,” said Pagliara, who has criticized the government for ignoring the distinction between conservatorship and receivership (normally used for an orderly liquidation).

Planning ahead without a clear legislative path

Crapo-Johnson had more bipartisan support than any other Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform legislation floating around Congress, but now that even it has stalled out most people have given up hope for any progress this year at the very least. Watt wouldn’t discuss Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform specifically, but he did say that “conservatorship should never be viewed as permanent or as a desirable end state.” In a Q&A following the speech, Watt also suggested that he has the authority to end the conservatorship, though it’s not clear how he would actually do that as long as Treasury prevents the GSEs from recapitalizing.

No one expects Watt to attempt such a decision, but by keeping Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in the mortgage market as much as Treasury policy will allow him and by creating the CSP to make a transition to some future model easier to implement, it seems like Watt is planning for the GSEs to be around for a long time, if not in the exact same form.