WASHINGTON — The chief regulator of Fannie Mae and Freddie Mac reversed course Tuesday and no longer plans to have the companies retreat from the housing market, asserting that the government-controlled mortgage giants must help keep home loans flowing to the public.

About four months into his job as director of the Federal Housing Finance Agency, Melvin Watt said that his goal is to make sure the mortgage market is working smoothly while limiting the taxpayers’ exposure to lending risks. The vision reverses the strategy of his predecessor, who worked to wind down the companies. The end goal was to scale back the government’s outsize role in the mortgage market and lure the private sector back in.

Fannie and Freddie buy mortgages from lenders, package them as securities and sell them to investors. They also insure the mortgages and pay investors if the loans go bad. Watt’s strategy allays fears of dramatic near-term changes that could disrupt the lending market and potentially raise mortgage costs for borrowers.

On Tuesday, Watt said his plan is to keep Fannie and Freddie going strong while Congress sorts out how to revamp the nation’s housing finance system, a goal Watt said he supports. Various proposals before Congress would dismantle the companies and shift mortgage lending risks away from taxpayers to the private sector. But none are expected to gain traction this year.

“I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Watt said at an event hosted by the Brookings Institution. “Our role is to maintain an efficient credit market, and as private capital demonstrates that it will come into this market, it will be clear that Fannie and Freddie will step back.”

In his first public comments about Fannie and Freddie, Watt said that the government’s takeover of the companies should not be viewed as a “permanent condition or a desirable end state.” But to arbitrarily reduce the companies’ share of the market without having an alternative plan in place would be “irresponsible,” he said.


The Senate Banking Committee plans to vote this week on a complex bill that would shut down the two companies over five years. While the measure is expected to pass the committee, it is likely to stall after that.

With lawmakers in limbo, the former North Carolina congressman will be center stage in shaping significant housing finance policy as he oversees Fannie and Freddie, which together support about 60 percent of the mortgage market.

The government took control of the companies at the height of the 2008 financial crisis to keep them solvent and to ward off panic in the global financial markets. In the past two years, as the housing recovery has taken shape, the companies have made huge profits. But Watt said the profits are not sustainable.

Still, he wants to maintain the companies’ dominance, unlike his predecessor, Edward DeMarco, who spent four years pressing for policies to shrink the companies’ operations.

“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,” DeMarco said Tuesday. “Restoring Fannie and Freddie is not the solution.”

Watt said he is scrapping one of DeMarco’s proposals to lower the loan limits on mortgages backed by Fannie and Freddie. Requiring lenders to buy lower-balance loans would have been one of the easiest ways to roll back the companies’ presence in the market.


Watt also delayed a DeMarco plan to raise the fees that Fannie and Freddie charge lenders when they back lenders’ loans. The increased fees were thought to be a way of giving the private sector a competitive edge. But industry observers worry that the higher fees would be passed on to borrowers.

Watt wants public comment on that issue before proceeding.

Under Watt’s watch, Fannie and Freddie also plan to loosen some of the conditions under which lenders would have to buy back defaulted loans that they sell to the two companies, another move that could expand the number of loans backed by Fannie and Freddie.

“Watt is articulating the option for keeping Fannie and Freddie around, and nobody in the government has really done that before,” said Guy Cecala, publisher of Inside Mortgage Finance.

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