After Federal Housing Finance Agency (FHFA) director Mel Watt spoke at the Brookings Institute last week, outlining his plans for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) for the first time, it sounded like a major change in direction for the GSEs. In a follow up interview on C-SPAN, Watt went to great lengths to emphasize the limits of his mandate, but Rafferty Capital Markets VP of equity research Richard X. Bove still sees Watt’s comments as a good sign for shareholders.
Watt sticks to mandate, refuses to speculate
“Mr. Watt sees his role in a very narrow sense. He believes that he must follow the mandates of the Housing and Economic Recovery Act (HERA) of 2008 which created the FHFA,” writes Bove in a note sent to clients on May 19th. “That requirement is to maintain Fannie Mae and Freddie Mac and provide for a safe and a sound, liquid, housing finance industry. It does not call for the end of the GSEs and Mr. Watt has no interest in even exploring that issue.”
While Watt refused to speculate on a number of different issues during the interview, that reticence didn’t seem to be a sign of resistance. If anything, Watt gives the impression of someone who is equally willing to wind down Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) or to recapitalize them and end the conservatorship. He is taking direction from Congress and executing as best he can.
The difference is that he doesn’t see the wind down of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) as part of his narrow mandate, as his predecessor seemed to. Watt does not equate reducing taxpayer risk with reducing Fannie and Freddie’s role in the housing market.
“If the private sector is not ready to step into the space and you shrink what Fannie Mae and Freddie Mac are doing then you do damage to housing finance in this country and that does damage to the economy,” said Watt.
Watt feels responsible to taxpayers, not Fannie Mae and Freddie Mac shareholders
Bove’s support for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) has been two-fold (he believes they are both good, if risky, investments and important for the nation), so it’s surprising that he didn’t have more of a reaction to Watt’s clear disavowal of any responsibility to shareholders.
“My responsibility in the conservatorship is not to the shareholders,” said Watt. “I don’t lay awake at night worrying about what’s fair to the shareholders. My responsibility is to think about how I can do what is responsible for the taxpayers.”
The longer that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are kept intact, the better chance activists will have of convincing Congress to recapitalize them, but it seems like a mistake to count Watt as on their side.
