NO LENDERS to replace Fannie, Freddie

WASHINGTON (Reuters) - The regulator of government-controlled mortgage finance firms Fannie Mae (FNMA) and Freddie Mac (FMCC) said on Sunday he would not oppose them having a smaller presence in the market but private capital had to be ready to take over first.

Watt said last week, in his first public speech since taking office, that he did not want to shrink Fannie and Freddie's footprint, marking a sharp departure from his predecessor.Federal Housing Finance Agency Director Mel Watt said the two companies, which own or guarantee about 60 percent of all U.S. home loans, needed to remain in the housing finance market to make sure it was liquid and resilient.

"It's not that I'm opposed to it and we will certainly allow it to happen," he told C-SPAN's "Newsmakers" program, when asked about the prospect of shrinking the lenders' activities.

"But if the private sector is not ready to step into the space, and you shrink what Fannie and Freddie are doing, you do damage to housing finance in this country and that does damage to the economy and that does damage to the possibility of affordable housing and home ownership."

Watt said on May 13 he would hold off on a proposed reduction in the size of loans the firms can buy and scrap plans to reduce the financing they provide for apartment building loans.

He said on Sunday he had not discussed his policy plans with the White House before the speech.

Fannie Mae and Freddie Mac have returned bumper profits recently, driven mainly by income from legal settlements, but Watt said these would not continue forever.

"The record level of profits that Fannie and Freddie have had over the last couple of years certainly are not sustainable because they result in large part from large settlements of litigation," Watt said.

HEALTHY RETURNS

Under their bailout terms, profits are paid to the Treasury as dividends on the controlling stake the government took when it seized the mortgage lenders at the height of the financial crisis in 2008.

They will have returned $213.1 billion to taxpayers by the end of June, more than the aid they received.

Watt said the agencies, which the White House and lawmakers from both parties have said they eventually want to wind down, were not constrained by the arrangement with the administration.

He said he was willing to talk about changing the rules stemming from the bailout but was happy with taxpayer backing.

"I don't think that's a bottomless pit or a bucket that can never be drained ... but right now it's not creating problems for them to operate," he said.