President Donald Trump’s nominee to lead the Federal Housing Finance Agency (FHFA), Mark Calabria, faced questions about his views on reforming the secondary mortgage market to increase competition and the necessary regulatory certainty to continue to guarantee 30-year mortgages and affordable housing goals, among other things, during his confirmation hearing before the Senate Banking Committee.
Several Democrats pressed Calabria on views he expressed in past blog posts and other writings in which he was critical of the FHFA and its model for overseeing the government-sponsored enterprises (GSEs). Calabria offered several specific, detailed answers – which were noticeably absent during the Senate’s confirmation hearing for Consumer Financial Protection Bureau (CFPB) Director Kathy Kraninger.
Similarly to Kraninger and her predecessor, former acting director Mick Mulvaney, Calabria stated that he intended to hew closely to the statute in his governance of FHFA if confirmed. To that point, he said he believes most of the fundamentally important GSE reforms must be made by Congress and should be done in a bipartisan manner.
“Foremost, I believe we need an open, competitive market,” Calabria said. “There’s certainly part of me that has a suspicion of monopolies and duopolies. I don’t like to see exclusive privileges handed out. I think anyone who meets [the criteria for] these charters should be able to get them.”
He said he agrees with a majority of the secondary market reforms Committee Chairman Mike Crapo (R-Idaho) recently proposed, which includes provisions intended to open the secondary market by privatizing Fannie Mae and Freddie Mac and creating government-issued charters for multiple privately-owned guarantors to operate in the marketplace.
Having several chartered guarantors in the secondary market could alleviate the risk inherent with relying on two “too-big-to-fail” entities that eventually could need to be bailed out by the government, as they were during the financial crisis along with other large financial institutions, he said.
When asked by Sen. Richard Shelby (R-Ala.) what would be the risk of not reforming the GSEs after 10 years of conservatorship, he said it likely would be extremely costly to taxpayers.
“I believe if we do not reform the GSEs that there could be significant losses – we could be looking at tens of billions, if not hundreds of billions, in taxpayer losses,” Calabria said. “I believe we potentially would be putting a tremendous number of families through the same sort of struggles and foreclosures and losses to their wealth that we saw [during the crisis]. So, if I’m driven by anything, it’s by fundamentally having served on this committee and lived through the crisis and not ever wanting us to do that again.”
Calabria further said he believes the government bailouts of Fannie and Freddie and other institutions bred significant cynicism among the public about the U.S. political and financial systems. Any future bailouts of such a nature could be further detrimental to the public psyche, he added.
Ranking Member Sherrod Brown (D-Ohio) asked Calabria about his use of the word “deadbeats” in one past writing to describe borrowers who defaulted on their mortgages, noting that many people who fall behind on their mortgage payments simply are unable to pay.
Calabria said he only was referring to people who had the ability to repay but chose not to, reflecting his belief that the mortgage market should “set an expectation of those who can pay should pay.” He also said he believes the FHFA should try to assist people who are unable to pay because of unexpected financial hardship, such as the loss of a job.
“There were conversations I was involved in, for instance in December of 2017, the amendments that allowed a $3 billion cushion to be built up for the GSEs – I was part of those conversations,” Calabria said. “This is an example of where I supported allowing a modest capital buffer so that we would not have to force a draw (from Treasury), partly because, of course, the impact of tax reform of the deferred tax losses being held by the GSEs.”
Noting that Calabria has advocated for bills proposing the elimination of affordable housing goals for Fannie Mae and Freddie Mac, Brown asked if he also supports eliminating the GSEs’ Duty to Serve (DTS) requirement pertaining to low- and moderate-income families.
“My concern about the affordable housing bills in the past have taken place in the context of two large institutions with essentially zero capital,” Calabria said. “I do believe that we can get to a spot where we can have risk-taking via affordable housing goals if we can have an appropriate regulatory structure that has capital backing those goals. I am very concerned about any large financial institution where we push it to take additional risk without the appropriate regulatory structure in place.”
Sen. Elizabeth Warren (D-Mass.) asked Calabria if he would commit to affordable housing goals in a way that would address the “racial wealth gap,” given the ongoing struggles minority families often encounter when trying to get mortgages. Calabria said that he would use his power within the statute to help credit-worthy minority borrowers gain access to homeownership.
Regarding his past comments about getting rid of the GSEs, Calabria said such comments were premised on the notion that the fundamental economic model under which the GSEs operate should be reformed because it is based on “privatized gains and socialized losses.”
“I believe all large financial institutions need to be well-capitalized, well-managed and well-regulated,” he said. “I believe it is fair to say the GSEs were none of the above before the crisis, and so my concern is this fundamental model [in which] the heads of Fannie and Freddie walk out with lots of money while the rest of us get left holding the bag. I want these entities to be good corporate citizens. I want them to be the model of how other corporations should want to behave.”
Calabria said he believes those same principles apply in regard to the government’s ability to guarantee 30-year fixed rate mortgages, responding to question from Sen. Jon Tester (D-Mont.) about whether Calabria intended to preserve such a guarantee.
“I believe that any sort of guarantee brings a sort of moral hazard,” Calabria said. “My concern, fundamentally in the past, was that we have lacked the appropriate regulatory structure to control the risks that are there. I believe we can take all sorts of risks if we have a regulatory structure that supports it.”
Tester pressed Calabria about whether he truly wants to be FHFA director, given his past indications that he does not believe the agency should exist and more recent assertion that it should be significantly restructured.
“I farm in my real life and if I hated farming I guarantee you I wouldn’t be in that business,” Tester said. “So, I’ve got to ask, why do you want this job?”
Calabria answered that he believes qualified people must be “willing to stand up and take public service and take responsibility.” He also noted that he helped create FHFA when he was a member of the Senate Banking Committee and believes that “FHFA is an absolutely necessary agency” and wants to “raise the stature of FHFA” – echoing language Mulvaney used to describe the CFPB in his aspirations to bring the agency on par with the SEC or FDIC.
Calabria has said that conforming loan limits should be reduced to $200,000. Given that median home prices in some states are more than that, Sen. Robert Mendenez (D-N.J.) asked if Calabria has considered how many potential homebuyers would be pushed out of the market as a result of such an action. Calbria said that the FHFA director does not have power to change loan limits, based on his statutory interpretation; Congress does. He did not address what he would do in regard to loan limits if he had the authority to change them as FHFA director.
The committee also heard testimony from Trump’s two nominees to join the National Credit Union Administration (NCUA) Board of Directors – Rodney Hood and Todd Harper – as well as his nominee to become the Treasury Department’s assistant secretary of financial institutions – Bimal Patel.
Prior to the hearing, the Credit Union National Association (CUNA) and the National Association of Federally-Insured Credit Unions (NAFCU) sent letters to Senate leaders regarding the nominees.