FHFA Director Watt Speaks at Brookings
Bipartisan Policy Center
“Address by FHFA Director Mel Watt”
Thursday, February 18, 2016
Key Topics & Takeaways
- Enterprises’ Declining Capital Buffers Pose Risk: FHFA Director Mel Watt stated that starting January 1, 2018, the government sponsored enterprises will have no capital buffer and no ability to weather quarterly losses – such as the non-credit related loss incurred by Freddie Mac in the third quarter of last year – without making a draw against the remaining Treasury commitments under the PSPAs.
- Housing Finance Reform: Watt said the conservatorship is not a desirable end state and that Congress needs to tackle the important work of housing finance reform.
- Single Security Timeline: FHFA has a target for Freddie Mac to start using the Common Securitization Platform (CSP) in 2016, and a target for the Single Security to go into effect with both Enterprises using the CSP to support their major securitization activities in 2018.
Speakers
- Mel Watt, Director, Federal Housing Finance Agency
Keynote Address
In his keynote address, Federal Housing Finance Agency (FHFA) Director Mel Watt discussed FHFA’s management of Fannie Mae and Freddie Mac in conservatorship by noting what has been accomplished since conservatorship began as well as challenges the FHFA will face in the future.
Conservatorships of Fannie Mae and Freddie Mac
Watt’s speech began with an overview of Fannie Mae and Freddie Mac (the Enterprises) since conservatorship. Watt stated, “During the first four years of conservatorship, the Enterprises drew a total of $187.5 billion from Treasury, but neither Enterprise has made a further draw since 2012. Fannie Mae has approximately $118 billion of its PSPA (Senior Preferred Stock Purchase Agreement) commitment remaining, and Freddie Mac has approximately $141 billion remaining.” Watt noted that the Enterprises paid approximately $241 billion in dividends to the Treasury Department. He also stated that the dividend payments do not offset the amounts drawn from Treasury.
FHFA’s Role as Regulator
Watt walked through FHFA’s four key approaches used to manage the conservatorships: 1) the overall strategic direction for the Enterprises is set in the FHFA’s Conservatorship Strategic Plan and in annual scorecards that outline policy expectations; 2) the FHFA delegates the day-to-day operations of the companies to their boards and senior management; 3) the FHFA flags actions that are not delegated to the Enterprises that require advance approval by FHFA; and 4) oversight and monitoring of Enterprise activities.
Enterprises’ Declining Capital Buffers
Watt highlighted declining capital buffers as the greatest risk for the Enterprises. He stated, “Starting January 1, 2018, the Enterprises will have no capital buffer and no ability to weather quarterly losses – such as the non-credit related loss incurred by Freddie Mac in the third quarter of last year – without making a draw against the remaining Treasury commitments under the PSPAs. There are a number of non-credit related factors that could lead to a loss and result in a draw on those commitments: interest rate volatility; accounting treatment of derivatives, which are used to hedge risk but can also produce significant earnings volatility; reduced income from the Enterprises’ declining retained portfolios; and, the increasing volume of credit risk transfer transactions, which transfer both the risk of future credit losses as well as current revenues away from the Enterprises to the private sector. A disruption in the housing market or a period of economic distress could also lead to credit-related losses and trigger a draw.”
Managing the Enterprises
Watt stated that the FHFA faces the challenge of answering the question of how the Enterprises should or should not compete against each other. He said competition is healthy for the Enterprises, good for the housing financing market, and good for borrowers, but added that he believes that alignment is necessary at times. Watt stated, “However, we have also made a number of decisions that require the Enterprises to adopt aligned standards in certain areas, such as aligned counterparty requirements, to avoid excessive risk being placed on taxpayers. In conservatorship, we carefully determine when to allow competition and when to require alignment, requiring, of course, that all operations be executed in a safe and sound manner.”
Question and Answer
Housing Market Views
Asked to share his views on the housing market, Watt stated that the housing market is in a “much, much, much” better position now than at the onset of the crisis. He noted that housing values are continuing to stabilize and in some cases rise and that substantial progress has been made, more so in some geographic areas than other.
Private Sector
Asked about the role of the private sector in housing, Watt replied that the FHFA is trying to remove uncertainty so that investors can enter into the housing market. For example, he noted the importance of having a clear representations and warranties framework. Watt noted that there is only so much that the FHFA can do and that any significant movement on this front would come from housing finance reform.
Credit Risk Transfers
Answering a question on the credit risk transfer program, Watt stated that the program has been successful. In regards to the private sector, Watt expressed uncertainty of whether there will be enough private investor money to sustain the success level of the credit risk transfer program in the event of an economic downturn.
For more information on this event, please click here.
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Bipartisan Policy Center
“Address by FHFA Director Mel Watt”
Thursday, February 18, 2016
Key Topics & Takeaways
- Enterprises’ Declining Capital Buffers Pose Risk: FHFA Director Mel Watt stated that starting January 1, 2018, the government sponsored enterprises will have no capital buffer and no ability to weather quarterly losses – such as the non-credit related loss incurred by Freddie Mac in the third quarter of last year – without making a draw against the remaining Treasury commitments under the PSPAs.
- Housing Finance Reform: Watt said the conservatorship is not a desirable end state and that Congress needs to tackle the important work of housing finance reform.
- Single Security Timeline: FHFA has a target for Freddie Mac to start using the Common Securitization Platform (CSP) in 2016, and a target for the Single Security to go into effect with both Enterprises using the CSP to support their major securitization activities in 2018.
Speakers
- Mel Watt, Director, Federal Housing Finance Agency
Keynote Address
In his keynote address, Federal Housing Finance Agency (FHFA) Director Mel Watt discussed FHFA’s management of Fannie Mae and Freddie Mac in conservatorship by noting what has been accomplished since conservatorship began as well as challenges the FHFA will face in the future.
Conservatorships of Fannie Mae and Freddie Mac
Watt’s speech began with an overview of Fannie Mae and Freddie Mac (the Enterprises) since conservatorship. Watt stated, “During the first four years of conservatorship, the Enterprises drew a total of $187.5 billion from Treasury, but neither Enterprise has made a further draw since 2012. Fannie Mae has approximately $118 billion of its PSPA (Senior Preferred Stock Purchase Agreement) commitment remaining, and Freddie Mac has approximately $141 billion remaining.” Watt noted that the Enterprises paid approximately $241 billion in dividends to the Treasury Department. He also stated that the dividend payments do not offset the amounts drawn from Treasury.
FHFA’s Role as Regulator
Watt walked through FHFA’s four key approaches used to manage the conservatorships: 1) the overall strategic direction for the Enterprises is set in the FHFA’s Conservatorship Strategic Plan and in annual scorecards that outline policy expectations; 2) the FHFA delegates the day-to-day operations of the companies to their boards and senior management; 3) the FHFA flags actions that are not delegated to the Enterprises that require advance approval by FHFA; and 4) oversight and monitoring of Enterprise activities.
Enterprises’ Declining Capital Buffers
Watt highlighted declining capital buffers as the greatest risk for the Enterprises. He stated, “Starting January 1, 2018, the Enterprises will have no capital buffer and no ability to weather quarterly losses – such as the non-credit related loss incurred by Freddie Mac in the third quarter of last year – without making a draw against the remaining Treasury commitments under the PSPAs. There are a number of non-credit related factors that could lead to a loss and result in a draw on those commitments: interest rate volatility; accounting treatment of derivatives, which are used to hedge risk but can also produce significant earnings volatility; reduced income from the Enterprises’ declining retained portfolios; and, the increasing volume of credit risk transfer transactions, which transfer both the risk of future credit losses as well as current revenues away from the Enterprises to the private sector. A disruption in the housing market or a period of economic distress could also lead to credit-related losses and trigger a draw.”
Managing the Enterprises
Watt stated that the FHFA faces the challenge of answering the question of how the Enterprises should or should not compete against each other. He said competition is healthy for the Enterprises, good for the housing financing market, and good for borrowers, but added that he believes that alignment is necessary at times. Watt stated, “However, we have also made a number of decisions that require the Enterprises to adopt aligned standards in certain areas, such as aligned counterparty requirements, to avoid excessive risk being placed on taxpayers. In conservatorship, we carefully determine when to allow competition and when to require alignment, requiring, of course, that all operations be executed in a safe and sound manner.”
Question and Answer
Housing Market Views
Asked to share his views on the housing market, Watt stated that the housing market is in a “much, much, much” better position now than at the onset of the crisis. He noted that housing values are continuing to stabilize and in some cases rise and that substantial progress has been made, more so in some geographic areas than other.
Private Sector
Asked about the role of the private sector in housing, Watt replied that the FHFA is trying to remove uncertainty so that investors can enter into the housing market. For example, he noted the importance of having a clear representations and warranties framework. Watt noted that there is only so much that the FHFA can do and that any significant movement on this front would come from housing finance reform.
Credit Risk Transfers
Answering a question on the credit risk transfer program, Watt stated that the program has been successful. In regards to the private sector, Watt expressed uncertainty of whether there will be enough private investor money to sustain the success level of the credit risk transfer program in the event of an economic downturn.
For more information on this event, please click here.