U.S. Representative Mel Watt pushed back against lawmakers skeptical of his knowledge of housing-finance issues at a Senate hearing on his nomination to oversee mortgage giants Fannie Mae (FNMA:US) and Freddie Mac. (FMCC:US)
Watt, a North Carolina Democrat selected by President Barack Obama to head the Federal Housing Finance Agency, made his case before a panel including senators who this week offered a bipartisan plan to eliminate the two U.S.-owned companies and replace them with a new government reinsurer.
His two decades in Congress including service on the House Financial Services committee, which deals with housing issues, prepared him for the position, he said at the Senate Banking Committee hearing today in Washington.
“You can’t legislate unless you really have an understanding of the system that you’re legislating about,” Watt said.
His nomination is Obama’s second attempt to fill the FHFA post held since 2009 by Acting Director Edward J. DeMarco, who has been criticized by Democratic lawmakers and consumer-advocacy groups for doing too little to help homeowners struggling in the wake of the financial crisis. The president’s first choice, former North Carolina banking commissioner Joseph Smith, withdrew in 2011 amid Republican opposition.
“Our housing market and our economy need a confirmed director in place at FHFA,” Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said at the hearing. “Congressman Watt is well qualified for the job and should be confirmed without delay.”
Watt’s chances of gaining confirmation remain unclear. He would need support from at least five Republicans to get the 60 votes needed for Senate confirmation if he’s backed by all 55 lawmakers who caucus with the Democrats in the 100-member body. Senator Richard Burr of North Carolina is the only Republican who has endorsed him so far.
The National Association of Realtors yesterday sent a letter to the Senate endorsing Watt. The organization “has not seen eye-to-eye on all issues with Mr. Watt during his Congressional tenure,” the letter said. “However, our members respect the manner in which he is willing to engage the industry, stakeholders, and consumers to craft policy that is fair, meets most of the needs of those involved, and allows all parties to move forward.”
Brian Gardner, senior vice president for Washington research at Keefe, Bruyette & Woods Inc., gives Watt a 50/50 chance of winning confirmation.
“It’s not likely it’s going to happen but it’s not out of the question,” Gardner said in an interview.
Watt, 67, backed a measure that would let bankruptcy judges force lenders to cut principal owed on mortgages -- a tactic that he called a legal “sledgehammer” against banks.
Republicans have criticized that position, his past support for Fannie Mae and Freddie Mac, and his qualifications for the job. Watt, a lawyer, has served in Congress since 1992.
Republican resistance to the nomination has centered on a view that the leadership of FHFA is better suited to a person with technical rather than political expertise.
“I just hope for a technician that knew a lot about the substance of Fannie and Freddie,” Senator Bob Corker, a Tennessee Republican, said in an interview. “I’ve raised those personally with him and publicly but I’d hope we’d have a technocrat and not a politician.”
Mark Calabria, director of financial regulation studies at the Cato Institute, said that view is a bad sign for Watt.
“Corker’s usually a swing vote, so when the moderates come out against you it’s not a good sign,” Calabria said in an interview “It’s hard for me to see any Republican votes.”
On June 25, Corker and Senator Mark Warner, a Virginia Democrat, introduced a bill that would liquidate Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. The measure could restart debate on a sweeping overhaul of U.S. housing finance.
Watt embraced the general concept of that plan at the hearing.
“The good news is that a broad consensus has emerged on the direction that our next steps must take us -- towards a system driven by private capital that minimizes the risk to taxpayers,” he said.
Senator Mike Crapo of Idaho, the Banking Committee’s top Republican, said he still has “very significant concerns” about Watt’s nomination.
“I have previously expressed my concern about the president choosing to make an appointment that is political in nature,” Crapo said.
The FHFA director is responsible for overseeing the U.S. conservatorship of Fannie Mae and Freddie Mac, which have operated under federal control since they were seized amid soaring losses in 2008. The agency’s chief also has the power to set and modify terms for the 50 percent of existing U.S. mortgages owned or backed by Fannie Mae and Freddie Mac.
The two companies provide liquidity to the housing market by purchasing mortgages and packaging them into securities on which they guarantee payments of principal and interest.
The rebounding housing market has turned around the companies’ financial condition. Both are posting record profits after drawing $187.5 billion in taxpayer aid to stay afloat in the wake of the 2008 credit crisis.
Watt’s congressional district, which has the second-largest concentration of banking-industry operations next to the New York district that includes Wall Street, also includes pockets of poverty, according to Watt’s website.
In December, he signed a letter urging Obama to include in his budget talks with Republicans a provision that would require Fannie Mae and Freddie Mac to reduce principal on some of the loans they guarantee. Republicans may ask Watt to defend his calls for principal reduction of troubled mortgages, a step that DeMarco has opposed.
Watt said he would need to study the issue further before deciding whether he would pursue principal reductions as FHFA director. He also said he sees a continued role for government in mortgage finance because “there are circumstances in which the profit motive overtakes anything else.”
Watt also said he doesn’t think Fannie Mae and Freddie Mac “should ever have been in the business of carrying out any kind of social agenda.” In the run-up to the housing bubble, the companies were under a mandate to broaden homeownership in underserved communities, a rule that many Republicans blame for the resulting crisis.
Pennsylvania Republican Pat Toomey said he was concerned by Watt’s testimony.
“I think he reinforced my fear that he is deeply distrustful of the private sector as a general matter and he believes the profit motive apparently is a dangerous and counterproductive motive in some cases,” Toomey said in an interview. “I just think that runs contrary to history and reality.”
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