FHFA’s Mel Watt Puts Rate Hikes On Hold; Fannie Mae’s Fate Uncertain

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New Federal Housing Finance Agency (FHFA) director Mel Watt didn’t waste any time signaling that he intends to take the organization in a different direction than his predecessor Edward DeMarco. Mel Watt recently sent an email to reporters telling them that he has put a hold on plans to increase rates for insuring mortgage securities, report Jody Shenn and Clea Benson for Bloomberg Businessweek.

Rate hikes were intended to make Fannie, Freddie less competitive

While both parties eventually want to either get rid of or replace Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in order to get the federal government out of the secondary mortgage market, figuring out the details is no simple matter, and for now Mel Watt has a lot of discretion over how the two government sponsored enterprises (GSEs) interact with the market. The plan to increase rates would have made Fannie and Freddie less competitive, giving banks more incentive to look for private sources of mortgage insurance.

Plans to reduce the maximum size of loans that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are able to insure (the cap is location dependent) would have a similar effect, forcing banks to find private underwriters and probably pushing up the rates that homeowners ultimately have to pay.

Mel Watt expected to cooperate closely with Obama

The interest rate hikes had been set for March and April so it’s still possible for Mel Watt to push them through, but no one expects that to happen. In particular, Mel Watt’s confirmation was blocked by Republicans until the Democratic-controlled Senate changed filibuster rules to force his, and other, nominations through, so Mel Watt doesn’t have any obligation to conservatives who are most in favor of the government quickly exiting the housing market. While it’s unlikely that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will be completely wound down under Mel Watt’s tenure, he is expected to work more closely with President Obama than DeMarco had in the past, giving the president a much freer hand in what will be a crucial couple of years for the two GSEs.

Some analysts also think that Mel Watt will broaden the Home Affordable Refinance Program (HARP), which let homeowners with very little equity refinance to lock in lower interest rates on their mortgages, but with interest rates expected to rise this will have much less of an impact on the market than it might have a year ago.

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