The Federal Housing Finance Agency (FHFA) took another step toward its goal of ending the conservatorship of Fannie Mae and Freddie Mac with Mark Calabria’s announcement that such a goal was built into the agency’s newly finalized 2020 Scorecard and Strategic Plan for the government-sponsored enterprises (GSEs) at the Mortgage Bankers Association’s 2019 Annual Convention.
Perhaps the most significant factor working against FHFA, according to Calabria, is not Congress but time. Stressing how critical raising capital is to releasing the GSEs from conservatorship, he explained that time is of the essence to get that done before the economy becomes less favorable.
“I don’t know when we’re going to see a turn of the (economic) cycle,” Calabria said in an intimate press briefing following his presentation before MBA attendees. “I’d be delighted if my term has a strong housing market the entire time but, quite frankly, my gut is I’ve probably got two or three years to kind of build a foundation under these companies before there’s a stressed environment.”
He explained that he believes it is crucial for FHFA to take advantage of its current window of economic growth to put things in place for the GSEs to build capital.
“I feel that the thing working against me the most is the clock,” Calabria said. “And I emphasize that on the administrative things that I have to do.”
Preparing for the worst, hoping for the best
Clarifying that FHFA is not forecasting an economic downturn, Calabria stated that if one were to happen today, the GSEs would become insolvent. He noted that he believes Congress recognizes that the GSEs’ leverage ratio far too high to withstand such an event.
“I think there may be a few people who aren’t as bothered by that, but I do think that it’s important for me as a regulator to express to Congress the urgency – these two institutions will fail if there is a downturn. You’ve been put on notice,” Calabria said.
He also acknowledged that it is important to build political support for allowing the GSEs to raise capital and to get them out of conservatorship, adding that he has gotten the sense that most members in the House and Senate agree that “the status quo is unsustainable.”
Speaking to MBA attendees during a general session, Calabria reiterated a point he has made previously in emphasizing the need to recapitalize the GSEs – that Fannie and Freddie were leveraged at 1,000-to-1 when he became FHFA director. At roughly 500-to-1 today, the GSEs remain far more leveraged than the 10-to-1 ratio of the country’s largest banks.
“This should be obvious, but it is worth emphasizing: No policy change will matter unless Fannie and Freddie are financially viable and strong enough to withstand a downturn in the economy,” Calabria said in prepared remarks. “That is why the second objective of the new Strategic Plan and Scorecard is to ensure Fannie and Freddie operate in a safe and sound manner. Fannie and Freddie cannot change their risk profiles overnight. But the Strategic Plan and Scorecard direct them to begin the process of calibrating their risk to their capital levels.”
Reform priorities
Noting during the press conference that the Trump administration’s housing reform plan’s priorities essentially can be divided into two buckets – legislative and administrative – Calabria stated that the FHFA primarily is concerning itself with determining what actions it can take under its current authority to implement aspects of the plan.
As for the legislative aspects, he said those primarily will be for the Treasury Department and the Department of Housing and Urban Development (HUD) to work out with Congress.
“For the most part, I’m leaving the legislative push to Treasury and HUD,” Calabria said. “They’re going to be the ones really pushing with Congress to get those suggested things. We’ll be helpful. We’ll offer feedback.”
Chartering authority
Among the recommended legislative changes that would impact FHFA dramatically is a provision Calabria broached in his first report to Congress – granting FHFA chartering authority.
“I think [chartering authority] would be helpful in a number of ways,” Calabria said. “One, I’m a believer in competition. I do think that competition is what drives down prices and brings innovation so I think having the ability to charter more agencies would be very helpful in the long-run.”
He noted that he does not want to see a secondary market environment such as that seen before the crisis in which Fannie, Freddie and the Federal Housing Administration (FHA) were fighting for market share, and wants to take a more holistic approach to creating a marketplace that works for all parties and does not negatively impact the credit quality of FHA or result in the need to raise premiums.
Chartering authority also would benefit FHFA in terms of making its supervisory efforts more impactful, Calabria said.
“I don’t think any financial regulator ever wants to threaten to revoke a charter, but the fact that you can revoke a charter gets an institution to pay attention to you as a regulator,” Calabria said. “It’s nice to be able to have some tools to force the entities in question to pay attention and perhaps be a little better behaved.”
Calabria highlighted three pivots of the new scorecard that he believes separate it from its predecessors.
First, he pointed out that the new scorecard was developed with the goal of ending the conservatorship, rather than maintaining it as was the goal with previous iterations.
Second, he stated that the new scorecard is more focused on matters impacting the broader mortgage market, such as Qualified Mortgage (QM) standards.
Third, the new scorecard is intended to remind the GSEs that although FHFA’s ultimate goal is releasing them from conservatorship they remain subject to its terms and conditions for the time-being.
MBA President and CEO Robert Broeksmit noted his appreciation for the approach taken by FHFA with regard to the GSEs and that Calabria announced the finalization of the new Scorecard at MBA Annual 2019 in Austin, Texas.
“Now is the time to address the long-term future of Fannie Mae and Freddie Mac, and we’re pleased to hear that meaningful progress is being made to prepare for a responsible end to their conservatorships,” Broeksmit said in a statement. “We look forward to continuing our work with FHFA to establish a housing finance system that protects taxpayers, allows equal access to lenders of all sizes and business models, and ensures a liquid and stable mortgage market for single-family and multifamily loans. Preserving the GSEs’ core mission of providing affordable and sustainable mortgage credit to markets at all times will remain MBA’s focus as FHFA implements this plan.”