Mel Watt: Here’s How I’ll Run Fannie and Freddie

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• NICK TIMIRAOS
 
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Mel Watt became the top regulator of mortgage giants Fannie Mae and Freddie Macin January and gave his first public speech this past week, outlining a turn in how he plans to run the companies. On Friday, Mr. Watt sat down for his first interview as director in a taping of C-SPAN’s “Newsmakers” program that will air Sunday.

Bloomberg News

Mr. Watt, the director of the Federal Housing Finance Agency, discussed how he sees his responsibilities toward taxpayers and shareholderswhile operating the companies through a legal process known as conservatorship. He also clarified his view on what the agency should and shouldn’t be doing in the absence of legislation to overhaul the companies. A shortened and lightly edited transcript follows:

ON HIS MANDATE AS CONSERVATOR: I try to make the distinction between shrinking the current footprint of Fannie and Freddie and shrinking their risk exposure. I’m committed to the latter. But I don’t think it’s our role necessarily to shrink the footprint of Fannie and Freddie…. We will certainly allow it to happen to the extent the private sector is ready to step into the space. But if the private sector is not ready to step into the space and you shrink what Fannie and Freddie are doing, then you do damage to housing finance in this country…. I think our responsibility is to reduce the exposure of taxpayers to risk and that’s different than reducing the footprint. It’s a subtle difference but it is different.

ON HOUSING LEGISLATION IN THE SENATE: I haven’t reviewed the bill…. There’s nothing in the statutory mandates for FHFA that gives us a role in forming what will happen next. Our role is in taking care of what we’re doing now.

ON ENDING THE CONSERVATORSHIP: I don’t think about it in terms of taking steps to end the conservatorship. The statute would tell us to back out, and the statute doesn’t tell us to back out. It tells us to continue to create a national resilient housing finance market in this country. That roll is there until Congress tells us that it is not there anymore. So I never think about it in terms of how am I going to end this. I think about it in terms of how are we going to perform what is our task under the statute today….I don’t think about what might happen two years from now or what might happen five years from now. I’m totally focused on what are our responsibilities today.

ON RESPONSIBILITIES TO SHAREHOLDERS: I have a responsibility to the taxpayers. My responsibility in the conservatorship is not to the shareholders, really. I don’t lay awake at night worrying about what’s fair to the shareholders. My responsibility is to think about how can I do what is responsible for the taxpayers.

ON CHANGES TO BAILOUT TERMS THAT DON’T LET FANNIE AND FREDDIE REBUILD CAPITAL: There would be no Fannie and Freddie but for the taxpayers. This arrangement was in place when I got there…. I don’t know whether I would have thought differently had I been there, but I don’t have that luxury. I’m operating under a set of agreements that were put in place. And they require that any monies that Fannie and Freddie are left over at the end of the year they get swept to Treasury for the benefit of the taxpayers. And I think they considered that a reasonable quid pro quo for keeping Fannie and Freddie afloat when they could have just gone out of business.

ON WHETHER THOSE TERMS SHOULD BE CHANGED: I don’t think it’s my role to change them. If I’m invited to have discussions about that, I certainly would have discussions about it with Treasury…. But right now that’s not my role. That’s not my responsibility. Most corporations would fight for the chance to have the government saying, ‘You know, you don’t really need any capital because the taxpayers are standing behind you.’ And that’s really where we are this junction. Capital is important for a private corporation but this is a corporation that is in a conservatorship with the taxpayers having committed to back it in conservatorship…. Right now it’s not creating problems for them to operate under this sweep structure. And I assume that the Treasury believes that this is reasonable compensation for saving Fannie and Freddie when they did it…. It’s an arrangement that I’m comfortable operating under.

ON ENCOURAGING BROADER ACCESS TO MORTGAGES: I try to make [skeptics] feel comfortable by always starting the sentence by saying, ‘We’re going to do this in a safe and sound way.’… While I advocated for people to have access to credit, I was also the first person to introduce a bill that said, ‘Don’t issue irresponsible, predatory credit to people.’ That’s a balance we’ve been walking in this country… Nobody should want to make a loan to anybody who’s not going to be able to repay it.

ON WHY FANNIE AND FREDDIE FAILED: Fannie Mae and Freddie Mac probably failed for the same reason the whole meltdown occurred. There were a bunch of irresponsible things going on. Everybody shared in the responsibility for that. Whether you were an appraiser, or a broker, or a lender, or Fannie and Freddie—everybody kind of lost sight of the objective to provide responsible housing finance in this country. And it became OK can I make money? Can I make money? So everybody wanted to make money. And everybody was making money but it was unsustainable. And so our responsibility now is to not worry about making money. We want to make sure we’re not going to lose money. But we want to provide housing finance in a sustainable way until somebody tells us to do it in a different way.