Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=230603
Story Retrieval Date: 12/21/2014 11:17:30 AM CST
Osahon Okundaye / MEDILL REPORTS
The federal housing regulator’s planned easing of mortgage-lending standards reveals a core conflict of interest between private investors seeking to earn a profit on their troubled investment, and the government’s mandate to serve the public interest.
Mel Watt, director of the Federal Housing Finance Agency, said Tuesday that mortgage buyers Fannie Mae and Freddie Mac, now government-run in conservatorship, should direct their focus toward making more credit available to homeowners, sharply reversing his predecessor’s plans to restrict credit and wind down the two agencies.
Following Watt’s remarks, Fannie and Freddie shares leaped 8 percent to $4.57 and 7 percent to $4.49 respectively, but economists and lenders express concern about the sharp shift away from post-recession efforts to tighten mortgage-lending standards.
The Federal Housing Finance Agency is now seeking to attract private investors back to the housing market by raising the cost of government-backed lending.
"I don't think it's FHFA's role to contract the footprint of Fannie and Freddie," Mr. Watt said during a speech at the Brookings Institution in Washington. Scaling back the companies without convincing proof that private investors are willing to step back in "would be irresponsible."
Jin Man Lee, research director at the Institute for Housing Studies at DePaul University, averred that easing standards was “absolutely positive news for the housing market.”
“The Chicago area is a great example; a majority of the housing market didn’t get to recover, we haven’t reached 2004 levels,” he said. “We are just trying to increase inventory and make the market more liquid."
But Watt's predecessor, Edward J. DeMarco, continues to argue that weakening underwriting standards and underpricing risks cannot be correlated with helping people or promoting market efficiency.
“Rather than striving to preserve a system that failed so spectacularly and in so many ways, we need to find our courage and our creativity to build a new system," he said in a Charlotte, N.C. speech Tuesday.
The dueling speeches came just ahead of approval Thursday by the Senate Banking Committee of the contentious Johnson-Crapo bill, which would dissolve Fannie Mae and Freddie Mac, and further restrict access to mortgages.
Watt declined to comment on the legislation, saying that “Congress and the administration have the important job of deciding on housing finance reform legislation, not FHFA.”
As the regulators attempt to juggle shareholder and public interests, the housing market’s recovery and its long-term health, all parties profess to be wary that they're not opening the door to another boom and bust fueled by unsustainable consumer credit.