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Fannie Mae, Freddie Mac Incoming Regulator Signals Policy Shift

Stocks in this article: FNMA FMCC

NEW YORK (TheStreet) -- U.S. Representative Mel Watt (D., N.C.) soon-to-be-director of the Federal Housing Finance Agency, signaled last Friday that he may be reversing some of the recent changes announced by current acting director Edward DeMarco.

According to press reports, the Congressman said that when he is sworn in on Jan. 6, he would delay a recently announced hike in the guarantee fees charged by Fannie Mae (FNMA) and Freddie Mac (FMCC).

DeMarco had announced ahead of Watt's confirmation that beginning in March/April 2014, the guarantee fees or g-fee would rise by an average of 11 basis points overall, representing a 14 basis-point increase on typical 30-year mortgages and a 4 basis-point increase on 15-year mortgages. 100 basis points equal one percentage point.

The agency would also for the first time assess a higher fee for four states where foreclosure timelines are significantly longer than national average and where, the FHFA contends, the cost of disposition of problem loans is higher.

The FHFA action would also increase fees on borrowers who make a low down payment or have a poorer credit score.

DeMarco said the fee hikes were designed to attract more private capital into the market.

Watt said he would need to evaluate the "full rationality of the plan." The mortgage industry has protested the hikes, arguing that they were too sudden and steep and would hurt the fragile housing market.

Reacting to the statement, KBW analysts Brian Gardner and Michael Michaud said the announcement raises questions about how FHFA policy would evolve under Watt's leadership.

The analysts expect that Watt would likely try to adjust the risk-based fees so that the overall hike is not as sharp but will still go ahead with the increases.

However, if the FHFA decided to reverse the initiative altogether, that would be a sign of a significant policy change at the regulator. "We would take that as a sign that Mr. Watt will not follow the Obama Administration's call for FHFA to take action to attract private capital into the mortgage market," the analysts wrote.

A separate proposal to lower the size of the loans purchased by Fannie and Freddie is also likely to "die or be dragged out for a considerable period of time," according to the analysts.

Most housing policy analysts viewed the confirmation of Mel Watt as a win for the Obama administration. While current acting director DeMarco was more focused on reducing taxpayer losses and the GSE footprint in the mortgage market, in line with his role as conservator of the agencies, Watt is expected to lean toward preserving the government's outsized role in housing.

"It is too early to know what path Mr. Watt will take on the g-fees but if he effectively scraps the announced changes and does not increase g-fees, we think the perception will be that FHFA will no longer be actively trying to reduce the GSEs' role in the mortgage market and we think the market interpretation of such an announcement (no g-fee increases) will be to assume that the GSEs are as secure as ever and that it will be increasingly difficult to unwind Fannie Mae and Freddie Mac," the analysts said.

-- Written by Shanthi Bharatwaj in New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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