FHFA director Mel Watt defended recent policy decisions, including controversial Housing Trust Fund payments, to House Committee on Financial Services

Federal Housing Finance Agency director Mel Watt spoke in front of the House Committee on Financial Services (which he once sat on as a US representative), and while Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s 3% down payment programs were heavily discussed, the most adversarial moments had to do with his decision to start payments to the Housing Trust Fund.

Fannie Mae: Watt defends his position on the Housing Trust Fund

At the end of last year Watt sent letters to Fannie Mae and Freddie Mac asking them to start setting aside money for the Housing Trust Fund because he judged that doing so wouldn’t cause the GSEs to become unstable or to need additional withdrawals from Treasury to meet their commitments. There’s also a requirement that the payments not cause the GSEs to become undercapitalized, which many of the Republican committee members brought up as evidence that Watt isn’t sticking to his statutory role as he so often claims.

Watt’s position is that the law says Fannie Mae and Freddie Mac can’t make payments to the Housing Trust Fund if it would cause them to become undercapitalized, but since the Treasury’s full income sweep prevents them from accumulating capital the trust fund payments can’t be the cause of undercapitalization.

Fannie Mae: Watt clarifies criteria for principal reduction program

Watt also clarified the criteria that he’s using to decide whether to engage in principal reduction, something that Democratic representatives and senators have been pressing him on. He said that he’s looking for situations where principal reduction would benefit homeowners and still be net present value positive for Fannie Mae and Freddie Mac. The first criterion isn’t a challenge (who wouldn’t want their principal reduced?), but the second is a major limiting factor. It did sound like Watt is generally supportive of principal reduction for distressed homeowners, but he didn’t give any specifics.

Fannie Mae: Watt and Hensarling find something to agree on

Throughout the hearing Watt repeatedly pointed out that if the representatives take issue with any of his actions they have the authority to legislate change with comments like “everything you just talked about you can change by doing GSE reform,” and that his decisions were being made “in the interim until you all do GSE reform.”

There was also a moment of rare agreement between Watt and committee chair Jeb Hensarling, a frequent critic of the GSEs, who said that he was tempted to give Watt more time to explain how it wasn’t his job to decide if thirty year mortgages were important, leaving the decision either to Congress or simply to the mortgage market.

Fannie Mae: FHFA Director Watt Testifies In Front Of His Former House Committee