David Fiderer on the GSEs

SOURCE: Bill Maloni

"I hope you have been following David Fiderer's [Author of insidersgame.com] new GSE blog, which he started a few weeks ago."

Here is the link:


"This week David has a small piece of mine, which I sent to friends last week when the AEI's Jim Glassman and Alex Pollock proposed reviving Fannie and Freddie, but with conditions."

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The Big Short

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#FannieGate goes viral on Twitter

SOURCE: Housing Wire

There’s little middle ground in Fannie Mae, Freddie Mac war of words

The hashtag #Fanniegate is blowing up on Twitter, with a war of words between those who think the government overstepped its bounds with the third amendment sweep and those who think the government was well within its rights.

First a little recap, and a warning: GRAPHIC LANGUAGE.


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Taking Back the Takings Clause: Investment-Backed Expectations Could Be The Key

I feel privileged to be able to include an opinion piece on the current constitutionally challenged conundrum that is composed of the Fannie Mae/Freddie Mac shareholder lawsuits against the Government. As a sixth-year attorney, my memories of constitutional law at Cardozo Law School in New York City are still very fresh. Specifically, what stands out most vividly is the moment, at the end of the course, when our professor (a former Federal Prosecutor) slammed her hand on her desk and said, “Look, it all comes down to this. We still don’t know who makes the law- Congress or the Supreme Court. There is a constant tension there, and some will call it a “balance of powers,” but really, that is the question.”


The significance of this concession has been highlighted in every discrimination, harassment, and other constitutionally derived lawsuits I have litigated since beginning to practice, but never has this issue been more significant than when I read the decisions (most recently, Judge Lamberth) and the statute involved in these cases (HERA).


What attorneys learn through law school academics is that the law is plastic. This plasticity is revered as the emblem of a democratic society, but really, the plasticity means that law is often never absolute. Attorneys and lawmakers, and most importantly, the Supreme Court, evolve precedent through silence. They analyze whether Congress was “silent” as to a specific issue, leaving it exposed to interpretation” and possibly, being overturned. The Supreme Court can, in most cases, declare a law or statute passed by Congress to be unconstitutional, and that analysis, which lends the Supreme Court the power to analyze and describe the dimensions of a particular statute, has many tiers of factual analysis, often described as “scrutiny,” that the Supreme Court will use when determining whether a law is unconstitutional, typically dependent upon the right or class of persons affected. Some fundamental rights recognized by the Supreme Court are: the right to marry, the right to contraception, and the right to privacy – to name a few.


Here, we have a class of persons (the shareholders) who have been disenfranchised. There is no doubt that the shareholders of Fannie Mae and Freddie Mac live under the threat of being completely stripped of their assets due to the legislation allowing the FHFA broad discretion, which has resulted in a sweep of all profits to the Government.


One of the arguments set forth by counsel for the Plaintiffs is that shares of Fannie Mae/Freddie Mac constitute “property” under the takings clause of the 5th Amendment of the U.S. Constitution, which holds that the government must provide “just compensation” when property of private citizens is acquired. Courts have found difficulty in interpreting the takings clause where some government regulation, such as HERA, is enacted to secure some sort of public benefit, in turn causing loss of value to some property owners.


Currently, the Supreme Court uses a test to determine whether a particular situation falls within the parameters of the takings clause, which essentially examines a case on its own particular set of facts. The Supreme Court has identified several factors to consider when analyzing a takings clause case, such as: the economic impact of the regulation; the degree to which the regulation interferes with investor-backed expectations; and the character of the government action. This means that there is a lot of “wiggle room” for argument as to how, and when, these various factors should be weighed. In this position, the “investment-backed expectations” factor is one that the Plaintiffs might focus on in the multiple class action litigation.


But will this argument work in a scenario where the “property” in question are securities? On September 28, 2014, trial began in the case of Starr International v. United States. Starr, the largest shareholder of A.I.G. stock in 2008, is alleging that the Government’s 2008 bailout of A.I.G. amounted to an unconstitutional takings. The Government seized 80% of A.I.G.’s common stock amid the bailout (a proportion that eventually rose to 92 percent). At the heart of the Starr case is that the Government took an ownership interest in A.I.G., as opposed to merely lending them money, as it did with numerous other institutions. One could argue that this scenario relates to the current GSE’s net-sweep agreement. Our eyes should be following this trial, as the takings argument will be before the jury, and has not thus far been dismissed in motion practice. Which means, in laymen terms: the takings argument has been found plausible by at least one Federal Court, when applied to a securities situation in the 2008 bailout by the Government.


For those disheartened by the decision by Judge Lamberth in the Perry lawsuit, take heart. The issues on appeal are interesting. For example, an argument that could be made on appeal is that the FHFA’s actions in the net-worth sweep did not occur within its role as a conservator or a receiver. HERA’s language states that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” 12 U.S.C. section 4617(f). While Judge Lamberth seemed to assert that HERA grants broad authority to the FHFA to act within its discretion as it sees fit, the decision does not explain how the net-sweep agreement, which donates massive profits of Fannie Mae and Freddie Mac to the Government, in perpetuity, can be seen as a legitimate act of a “conservator.”


We are in a holding pattern, but we have before us unchartered waters and novel approaches to Constitutional Law. It goes without saying that the result of this litigation will impact the meaning of the 5th Amendment as we know it.

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Court Throws Out Lawsuits Related to Fannie Mae, Freddie Mac Profits

From The Wall Street Journal:

A group of Wall Street investors on Tuesday suffered a blow in their attempts to sue the federal government over their treatment of the shareholders of mortgage finance giants  Fannie Mae and  Freddie Mac  after the financial crisis.

A judge in the U.S. District Court for the District of Columbia dismissed claims brought against the federal government and U.S. officials for sending nearly all profits generated by Fannie Mae and Freddie Mac to the U.S. Treasury, a sweep which began last year.

The dismissal included lawsuits brought in the summer of 2013 by investors Perry Capital LLC and Fairholme Funds Inc., managed by mutual-fund manager Bruce Berkowitz.

In his opinion, filed on Tuesday, U.S. District Judge Royce Lamberth said Congress had in effect given the Federal Housing Finance Agency, Fannie Mae and Freddie Mac's regulator, and the Treasury Department the power to take the companies' profits as a provision of the Housing and Economic Recovery Act.

"It is understandable [for the profit sweep] to raise eyebrows, or even engender a feeling of discomfort," wrote Judge Lamberth, who added that the act and the language of the companies' stock certificates compel "the dismissal of all of the plaintiffs' claims."

It is unclear whether the plaintiffs will appeal Judge Lamberth's decision, and other similar cases are ongoing before different judges.

A Fairholme spokesman declined to comment. A Perry spokesman couldn't be reached for comment.

The dismissal didn't cover a lawsuit filed against the U.S. government by Pershing Square Capital Management LP, which made a similar argument but for a different group of shareholders. A spokesman for Pershing Square declined to comment.

In a research note to clients late Tuesday, Isaac Boltansky, an analyst for Compass Point Research & Trading LLC, wrote that the ruling "represents a material setback for [Fannie and Freddie] shareholder claims both in court and on Capitol Hill," and said that attention would now turn to the cases in the U.S. Court of Federal Claims.

Those cases, which also include Fairholme, involve similar claims against the federal government and are continuing.

The U.S. faces nearly 20 lawsuits from investors, with most challenging the treatment of shareholders in the firms' preferred stock. The Perry and Fairholme cases were among the most prominent and closely watched cases.

Fannie and Freddie were taken over by the U.S. government in 2008 in a so-called conservatorship.

The government didn't wipe out shareholders but received warrants to acquire up to 80% of the firms' common stock and avoided bringing their assets and liabilities onto the federal ledger.

The government also received a new class of "senior preferred" shares in the companies that initially paid a 10% dividend. But in August 2012, the FHFA and Treasury changed the terms of the bailout, eliminating the dividend but requiring that the companies send nearly all of their profits to the U.S. Treasury.

The companies don't need to pay a dividend when they see losses.

Fannie Mae and Freddie Mac have been a popular investment for many hedge-fund managers who believe that the U.S. government didn't have the right to change the terms of the government's bailout.

The court cases have taken on increased importance after a U.S. Senate plan to replace Fannie and Freddie as part of broader housing-finance overhaul stalled in May.

The companies received nearly $188 billion in government aid during the crisis but as of September had paid $218.7 billion to the U.S. Treasury in dividends.

In the past six months, the stocks of both companies have fallen about 25%. On Tuesday, shares of Fannie Mae fell 6.6% to $2.69, while shares of Freddie Mac fell 7.4% to $2.64.

In a statement, Tim Pagliara, executive director of shareholder group Investors Unite, wrote that the group disagreed with the judge's decision and "doubts Congress ever intended for the conservatorship to lead to nationalization of [Fannie and Freddie] with no compensation for shareholders."

Spokesmen for the Treasury Department and Justice Department declined to comment.

An FHFA spokeswoman couldn't be reached for comment.

— Juliet Chung

 contributed to this article.


Write to Joe Light at joe.light@wsj.com

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Pershing Square Sues U.S. Over Fannie Mae and Freddie Mac




William Ackman's Pershing Square Capital Management LP, which has taken sizable stakes in the common shares of Fannie Mae FNMA +3.64%  and Freddie Mac, FMCC +3.93%  filed a lawsuit Thursday against the U.S. government challenging its bailout terms for the mortgage-finance giants.


Pershing Square's suit, filed Thursday in the U.S. Court of Federal Claims in Washington D.C., is the latest investor action challenging the government's 2012 decision to force Fannie and Freddie to send nearly all of their profits to the U.S. Treasury as dividends. The New York hedge fund is joined in the suit by three individuals who are longtime investors of Fannie Mae common shares.


While the U.S. faces nearly 20 lawsuits from investors, including hedge-fund firm Perry Capital LLC and mutual-fund company Fairholme Capital Management LLC, most investors have sued to challenge the treatment of shareholders in the firms' "preferred" stock, a form of equity that is senior to common stock and that made regular dividends before the government took the companies over.


Pershing Square's suit focuses on the treatment of common shareholders.


While Pershing Square owns some preferred shares, the vast majority of its holdings are in common stock. In filings last November, Pershing Square disclosed it had spent a total of about $400 million on a nearly 10% stake in each firm. Mr. Ackman believes the common stock has more upside than the preferred shares, The Wall Street Journal previously reported, though they are seen by some as riskier investments.


The suit seeks "just compensation" for the plaintiffs but doesn't specify an amount.


The lawsuit alleges that the government's "brazen conduct…is illegal."


A Treasury spokesman declined to comment. Spokesmen for Fannie Mae and Freddie Mac also declined to comment.


Pershing Square's lawsuit against the U.S. adds a new, high-profile front to the multiple battles the nearly $15 billion hedge-fund firm is already fighting. Allergan Inc. AGN +0.45%  has filed a federal lawsuit challenging the legality of Pershing Square's joint takeover bid with Valeant Pharmaceuticals International Inc. VRX.T +1.47%  and accusing them of profiting from insider information—claims Pershing Square and Valeant have said are baseless.


The Journal reported on Thursday that the Securities and Exchange Commission was looking into whether the bid violates securities laws. A Pershing Square representative said the firm "welcome[d] the SEC's review of the facts."


Mr. Ackman also continues to campaign against Herbalife Ltd. HLF +0.77%  , which he believes is a pyramid scheme. Herbalife has denied the allegation.


Fannie Mae and Freddie Mac don't make loans. Instead, they buy them from lenders and package them into securities, providing guarantees to investors to make them whole if the loans default.


In 2008, the government put Fannie and Freddie into conservatorship and ended up giving the companies nearly $188 billion in aid. In return, the government received "senior preferred" shares of the companies, which initially paid a 10% dividend, along with warrants to acquire 80% of the companies' common stock.


Since the existing Fannie and Freddie stock wasn't completely wiped out, investors continued to trade shares. Hedge funds such as Perry and Paulson & Co. bought preferred shares at large discounts.


However, the Treasury Department changed the terms of their new class of shares in August 2012, eliminating the 10% dividend and instead sweeping nearly all of Fannie's and Freddie's profits. Beginning last year, the companies don't owe a dividend in periods where they run a loss, but they must pay nearly all of their profits out as a dividend.


The lawsuit alleges the government's action violates the Fifth Amendment protection against the taking of private property for public use without just compensation.


The investor lawsuits are getting increased focus as legislative efforts to overhaul the housing-finance system, and possibly eliminate Fannie and Freddie, have stalled.


The common shares of Fannie and Freddie are up more than 1400% since the end of 2012, while classes of the preferred shares are up nearly 700%.


Pershing Square's paper profits on its common shares are more than $300 million since it disclosed its stake and have contributed to the firm's 25% return for the year through June.


Write to Juliet Chung at juliet.chung@wsj.com, Joe Light at joe.light@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

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Judge Sweeney Rules on Jurisdictional Discovery

Following today’s status conference in the Court of Federal Claims, Judge Sweeney issued a ruling on the issue of jurisdictional discovery.

Jurisdictional discovery to proceed as expected and the production of documents to commence (to occur in phases as detailed below).

Documents will be subject to a protective order.

Some interesting and notable comments from Judge Sweeney as part of this ruling:

"With respect to defendant’s claim that the court lacks the authority to affect the exercise of the FHFA’s powers or functions, the court agrees with the case law of the United States Court of Appeals for the Ninth Circuit, which states that the “FHFA cannot evade judicial review. . . simply by invoking its authority as conservator."

"Indeed, "Congress did not intend that the nature of the FHFA’s actions would be determined based upon the FHFA’s self-declarations . . . ." Leon County, 700 F.3d at 1278."

"Here, defendant has not provided a privilege log explaining why documents identified as responsive to plaintiffs’ discovery requests would be protected. Indeed, defendant admits that even it has not reviewed some of them, and yet claims that the documents are privileged."

"Without more detail regarding the content of the documents, or the opportunity to review them, the court cannot make a finding that they fall under the privilege."

"However, even as it is difficult to evaluate the likelihood of the fallout from disclosure that defendant describes, out of an abundance of caution, the court will exercise care in attempting to avoid the dire consequences that defendant claims will occur. Accordingly, as outlined in the June 19, 2014 hearing, the court has fashioned a solution to balance the parties’ competing needs, and to comply with the dictates of the deliberative process privilege."

"Jurisdictional discovery in this matter will proceed in phases. In the first phase, defendant shall respond to discovery requests regarding information from: April 1, 2008, up to and including December 31, 2008; and from June 1, 2011, up to and including August 17, 2012. Defendants shall prepare a detailed privilege log for all documents from these respective time periods that it asserts are privileged. In addition, defendant shall respond to discovery requests for non-privileged information from August 18, 2012, up to and including September 30, 2012, regarding topics other than the future profitability of the enterprises or whether and when the conservatorships might end. Subsequently, plaintiffs shall inform the court as to whether they believe that discovery for documents created after these time periods are necessary."

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A Perspective on the Johnson-Crapo Proposal

Fannie and Freddie on Steroids

Posted by the 


By John Berlau - National Review
Hardly a reform, Johnson-Crapo expands government intervention in the mortgage industry.

A corollary to Shakespeare’s adage “A rose by any other name would smell as sweet” is that “garbage by any other name would smell as awful.”

The latter seems apropos to the “reform” of the government-sponsored housing enterprises, Fannie Mae and Freddie Mac, introduced by senators Tim Johnson, (D., S.D), and Mike Crapo, (R., Idaho) — the top Democrat and Republican on the Senate Banking Committee — and set to be marked up on Tuesday. A new letter signed by 26 conservative and free-market groups — including the Competitive Enterprise Institute, Club for Growth, FreedomWorks, Americans for Tax Reform, National Taxpayers Union, and the American Family Association — argues that Johnson-Crapo “does not constitute real reform, but an expansion of the type of government intervention that fueled the housing crisis in the first place.”

While the media often characterizes this plan as “ending” Fannie and Freddie, most of the two government-sponsored enterprises’ functions would simply be transferred to a new giant government entity, the Federal Mortgage Insurance Corporation — or what we might call Feddie Mic. Not only would the government’s role in subsidizing and micromanaging housing not be reduced, in many ways it would be substantially increased.
Further, the legislation would create an explicit taxpayer guarantee of the government-sponsored enterprises’ $5.6 trillion in debt, and housing “trust funds” would be created anew within Feddie Mic. These trust funds, a brainchild of former representative Barney Frank (D., Mass.), are potential slush funds for politically motivated “housing advocates” such as the now-defunct ACORN.

Worst of all, and sending the worst possible signal to the potential private-sector investors who are needed for a private housing market to thrive, Fannie and Freddie’s shareholders would be wiped out permanently under the bill’s Section 604.

Fannie was created as a government agency in 1938 and spun off as a government-sponsored enterprise (GSE) in 1968. Freddie was created as a sister GSE two years later. Even though they had private shareholders, they always retained government privileges: They were exempt from state and local taxes, and, importantly, each had a $2 billion line of credit with the U.S. Treasury.

Back in 2000, the Competitive Enterprise Institute’s founder, Fred Smith, predicted in his testimony before Congress that “as long as the [government] pipeline is there, it’s very expandable. . . . It could be $200 billion tomorrow.”

Many dismissed Smith’s prediction at the time, but it turns out he underestimated the ultimate tab to taxpayers for the bailout orchestrated by the Bush administration, which put the GSEs under conservatorship at the height of the financial crisis in 2008. While the Obama administration estimates the cost at $188 billion, the Congressional Budget Office’s “fair value” accounting puts it at $317 billion.

But the real cost to taxpayers came from Fannie and Freddie’s role in partnering with banks in issuing new subprime mortgages. As documented in the groundbreaking book Reckless Endangerment, co-authored by New York Times’ Pulitzer Prize–winning business columnist Gretchen Morgenson and financial analyst Joshua Rosner, the GSEs had key roles in providing invaluable assistance to bad actors in the private sector, including the notorious Countrywide Financial.

The American Enterprise Institute’s Peter Wallison, a commissioner of the congressionally created Financial Crisis Inquiry Commission, points out in a Wall Street Journal op-ed that in September 2008, “half of all mortgages — 28 million — were subprime or otherwise risky and low-quality,” and of these, “74 percent were on the books of government agencies, principally the GSEs.”

After years of minimizing the role Fannie and Freddie played in the crisis, many liberals as well as longtime housing “subsidy suckers” (in the parlance of the intrepid Washington Examiner columnist Timothy P. Carney) in the real-estate and construction industries are hailing the Johnson-Crapo “reform” and saying the GSE model has “failed.” But it’s important to understand why they believe it has failed. Incredible as it may seem, they believe the GSEs are being too stingy and see Johnson-Crapo’s proposed Feddie Mic as a way of prying open government-backed credit spigots even further.

For instance, in Friday’s Wall Street Journal, Jason Furman and James Stock, respectively the chairman and a member of President Obama’s Council of Economic Advisers, hit Fannie and Freddie in an op-ed for “not making transparent sustained contributions to affordable housing.” They call for a “reformed housing finance system” in which the government would “stimulate broad access to mortgages for historically underserved communities.”

Under Johnson-Crapo, Feddie Mic would replace the GSEs’ purchase of mortgages by serving as the backstop for mortgage-backed securities issued by financial powerhouses. But this is likely to make the moral hazard even greater and entrench “too big to fail” even further. As Reckless Endangerment co-author Rosner has written, “Unfortunately, the bill replaces Fannie and Freddie with an untold number of new government-sponsored enterprises by handing a massive taxpayer backstop to the nation’s largest banks”

Much is made by Johnson-Crapo supporters of how private owners will take at least 10 percent of the loss on mortgage-backed securities that Feddie Mic insures. But that still leaves 90 percent to be absorbed by Feddie Mic, and even 100 percent when the government declares “unusual and exigent circumstances” in the housing market.
Other beneficiaries would be big-government housing advocates, since the “Housing Trust Fund” the Johnson-Crapo plan creates within Feddie Mic bears a remarkable similarity to that which used to exist within the GSEs. The trust fund lay mercifully dormant under the financial management of the GSEs by Bush administration holdover Ed DeMarco.

But advocates are hoping DeMarco’s replacement, former representative Mel Watt, a North Carolina Democrat, will restart it. And now, the fact that a bipartisan “reform” plan gives the “trust fund” its blessing will only strengthen Watt’s hand in bestowing this patronage.

And to foot the bill for this generosity to both advocacy groups and businesses, Johnson-Crapo codifies the Obama administration’s policy of wiping out completely Fannie and Freddie’s private shareholders, including community banks, pension funds, and middle-class investors.

In August 2012, then–treasury secretary Tim Geithner issued the “Third Amendment” to the GSE conservatorship in which all profits would be siphoned off to the U.S. Treasury Department in perpetuity, even after the GSEs paid back what they owed to taxpayers. Section 604 of Johnson-Crapo states that the Obama-Geithner policy “should not be amended, restated, or otherwise changed.”

As NRO’s Jillian Melchoir has written of the Obama-Geithner earnings raid codified by Johnson-Crapo, “It would have been one thing if the Treasury had barred shareholders from profits until taxpayers were repaid for the Fannie and Freddie bailouts, but an undisclosed and permanent ban on profits is extreme.” Ike Brannon and Mark Calabria make the point in a recent paper for the Cato Institute, “If we hope to rebuild our mortgage finance system on a foundation of private capital, then property and contractual rights must be respected.”

The best option to end the risk posed by the GSEs to taxpayers and the economy is an orderly liquidation of their assets, with no government-backed entity to replace them.

As Fred Smith urged Congress in 2000 — to mostly deaf ears — policymakers should “develop a divestiture or breakup plan for Fannie and Freddie.” And in such a plan, as in traditional bankruptcies, the rights of both taxpayers and private investors should be sacrosanct.

— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.


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Mel Watt Signals Broad Shift in Housing Policy

WASHINGTON—The Obama administration and federal regulators are reversing course on some of the biggest postcrisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery.

On Tuesday, Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac, said the mortgage giants should direct their focus toward making more credit available to homeowners, a U-turn from previous directives to pull back from the mortgage market.

FHFA director Mel Watt, pictured in Washington this month, took the helm of the agency in January.Bloomberg News

In coming weeks, six agencies, including Mr. Watt's, are expected to finalize new rules for mortgages that are packaged into securities by private investors. Those rules largely abandon earlier proposals requiring larger down payments on mortgages in certain types of mortgage-backed securities.

The steps mark a sharp shift from just a few years ago, when Washington, scarred by the 2008 crisis, pushed to restrict the flow of easy money that fueled the housing bubble and its subsequent bust. Critics of the move to loosen the reins now, including some economists and lenders, worry that regulators could be opening the way for another boom and bust.

For the past year, top policy makers at the White House and at the Federal Reserve have expressed worries that the housing sector, traditionally a key engine of an economic recovery, is struggling to shift into higher gear as mortgage-dependent borrowers remain on the sidelines.

Both Treasury Secretary Jacob Lew and Federal Reserve Chairwoman Janet Yellen last week noted the housing market as a factor holding back the economic recovery.

Mr. Watt, the former North Carolina congressman who took over as the director of the Federal Housing Finance Agency in January, used his first public speech on Tuesday to lay out the shift in course for Fannie and Freddie, and pegged executive compensation at the companies to meeting the new goals.

Fannie and Freddie, which remain under U.S. conservatorship, and federal agencies continue to backstop the vast majority of new mortgages being issued.

The FHFA has recently attempted to lure private investors back into the housing-finance market—and reduce the Fannie and Freddie footprint—by raising the cost of government-backed lending.


With few signs that private investors are returning on a large scale, Mr. Watt signaled a clear break with his predecessor, Edward DeMarco, who left the FHFA last month after nearly five years as its acting director.

"I don't think it's FHFA's role to contract the footprint of Fannie and Freddie," Mr. Watt said during a discussion at the Brookings Institution in Washington. Winding down the companies without clear proof that private investors are willing to step back in "would be irresponsible."

His comments signal a move away from treating Fannie and Freddie as "institutions in intentional decline" towards "institutions that should be better prepared to form the core of our system for years to come," said Jim Parrott, a former housing adviser in the Obama White House.

Mr. Watt's remarks are significant, given legislation to overhaul the mortgage-finance giants and replace them with a new system that reduces the government's role in housing appears headed for a dead end in the current session of Congress.

Mr. DeMarco in a separate speech at a banking conference in Charlotte, N.C., on Tuesday, urged restraint: "Do not confuse weakening underwriting standards and underpricing risk with helping people or promoting market efficiency."

The new steps are the fruit of three years of strenuous pushback by those opposed to tighter lending standards.

In the wake of the 2010 Dodd-Frank law, regulators proposed a spate of new rules intended to eliminate questionable mortgage products and remove any incentive banks had to make loans unlikely to be repaid.

Among the biggest changes that were proposed: Borrowers would either have to put 20% down, or the bank would have to retain 5% of the loan's risk once it was sliced, packaged and sold to investors.

The March 2011 proposal triggered a huge outcry from lawmakers, affordable-housing groups and the real-estate industry, all of whom said it would put the brakes on homeownership for millions of credit-worthy borrowers, particularly first-time buyers and minorities.

The potential for a high down payment also raised alarm bells at the Department of Housing and Urban Development, one of six writing the rule, according to government officials.

HUD officials agitated for a gentler approach, telling counterparts that a high down payment wasn't the only way to prevent defaults, but would likely destroy any chance for a housing-market recovery.

At a meeting before the rule was proposed, a HUD official warned fellow regulators away from a 20% down payment, saying that "the impact is between uncertain and bad," according to a person familiar with the discussions.

When the five other agencies were not swayed, HUD took another approach and refused to sign off on the proposal unless a 10% down payment was included as an alternative. Regulators agreed.

By August 2013, more than 10,000 comment letters had poured in to the agencies, and the response was almost universal: Regulators should avoid a high down-payment level.

The groundswell caught the attention of U.S. policy makers, who began to worry about the collective impact of so much new regulation.

Regulators announced a series of steps Tuesday that they said could help ease standards—abruptly raised by lenders during the financial panic—and make it easier for first-time and other entry-level buyers.

Mr. Watt said that he would direct Fannie and Freddie to provide more clarity to banks about what triggers "put-backs," in which lenders have been forced to spend billions of dollars buying defective loans sold during the housing boom. To guard against future put-back demands, lenders say they have enacted standards that go beyond what Fannie, Freddie and other federal loan-insurance agencies require.

Mr. Watt said that he hoped that the changes would "substantially reduce" credit barriers, "and that lenders will start operating more inside the credit box that Fannie and Freddie" provide.

Shaun Donovan, the HUD secretary, announced on Tuesday similar changes designed to encourage lenders to reduce similar restrictions on loans insured by the Federal Housing Administration, which is part of his department.

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WASHINGTON, D.C. – Today, Congresswoman Maxine Waters, Ranking Member of the Financial Services Committee, released a comprehensive legislative proposal to reform the housing finance market. Known as the Housing Opportunities  Move the Economy (HOME) Forward Act of 2014, the legislation ends Fannie Mae and Freddie

Mac, and creates a new, cooperative-owned securities issuer.                   

For months, Waters has been working with her Committee colleagues, outside stakeholders, and consumer and affordable housing advocates to craft a measure that ends the incentives created by the ownership structure of the government-sponsored enterprises’ (GSEs) while preserving the role of small financial institutions,  providing a more flexible approach to placing credit risk in the markets, and ensuring access to affordable rental housing for low-income families.                    

“Reforming a 10 trillion dollar housing finance market is an immense undertaking that must be carefully considered,” said Congresswoman Waters.

“Fannie Mae and Freddie Mac’s return to profitability and repayment of taxpayer dollars has led some to rightly speculate  whether the enterprises need any reform at all. I believe that we have an opportunity to address some of the fundamental flaws of the current system, by ending the perverse incentives created by Fannie Mae and Freddie Mac's ownership structure and providing an explicit government guarantee that is paid for by industry.”                                               

The draft bill furthers a conversation started by legislation released by Senators Bob Corker (R-TN) and Mark Warner (D-VA) and, more recently, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID).      

The foundation of the HOME Forward Act is a number of principles for housing finance reform, released by Committee Democrats in 2013. They include maintaining the 30-year fixed rate mortgage, protecting taxpayers, ensuring transparency, stability and liquidity within a new market, and preventing disruptions  to the U.S. housing market during a transition to a new finance system. In addition, the legislation will maintain access for all qualified borrowers that can sustain homeownership and ensure continued affordable rental housing.

The HOME Forward Act establishes a new, lender-owned Mortgage Securities Cooperative that will be the single issuer of government-guaranteed securities and will be governed on a one-member, one-vote basis. The Act creates an explicit government  guarantee, paid for by industry and used to capitalize a catastrophic insurance fund. It improves upon bipartisan proposals in the Senate by, for example, providing for credit risk sharing on a more flexible basis. Small financial institutions will have direct  access to a "cash window" in order to preserve their access to the secondary market. And the legislation recognizes the important role of the National Affordable Housing Trust and Capital Magnet Funds, and fulsomely addresses the multi-family market.                                                       

The HOME Forward Act would empower the government to provide for liquidity in the secondary mortgage market and ensure access to sustainable homeownership for creditworthy borrowers of all backgrounds and in all regions of the country.  At the same time, it would appropriately price for risk, protect taxpayers and level the playing field for large and small banks.               

Waters added, “I am hopeful that this legislation will continue to move the conversation on housing finance reform forward. While there are differences, this legislation and the two bipartisan proposals in the Senate embrace a number of  common themes. These include preserving the 30-year, fixed rate mortgage, protecting taxpayers from the costs of a housing downturn by establishing a strong new regulator, and ensuring that small and community financial institutions can participate in the  new system.”

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