Calabria: Housing Finance System Status Quo ‘Not an Option’

NEW YORK–Federal Housing Finance Agency Director Mark Calabria reiterated his vow to end the conservatorships of Fannie Mae and Freddie Mac and called for new legislation in Congress to address meaningful housing finance reform.

“Mortgage finance reform has been the great unfinished business of the financial crisis,” Calabria said here yesterday at the Mortgage Bankers Association’s National Secondary Market Conference & Expo. “I hope you agree that these facts compel us to finally finish it.”

Calabria said he’s old enough to remember when people used to say that the wrong time for reform is in the middle of a crisis. “We saw this in the early 1980s, as housing finance reform was postponed because the economy and the housing sector needed time to recover from the stagflation and double-digit interest rates of the late ‘70s,” he said. “And we saw it again in the years that followed the 2008 crisis. But today, there are some who would have us believe the opposite. They argue that now is a bad time to reform our mortgage-finance system precisely because we are not in the middle of a crisis. This is exactly the kind of shortsighted thinking that fueled the last housing market collapse.”

Since coming aboard as FHFA Director on April 15, Calabria said he’s been taking the time to “look under the hood” at FHFA itself and the GSEs. “My objective is to get a clear understanding of both where we are today and where we can go over the next five years during my tenure as Director,” he said. “There’s still more listening and learning to be done. But it’s also time to start taking action–to move the agency forward and fulfill our statutory mandate to ensure a well-functioning national housing finance system.”

Calabria said after 10-plus years of conservatorship, the case for GSE reform remains urgent. “It’s important that this debate proceed from a shared understanding of why we need reform in the first place, and why we need it now,” he said. “The ‘why’ is pretty straight-forward. We need to reform our housing finance system because we never really fixed it after the housing collapse more than a decade ago.

Calabria noted reforms have been implemented since the crash. “Some have been helpful, many others have not,” he said. “And thanks to the booming economy of the past two years housing prices have largely recovered to pre-crisis levels. But since 2008, the basic structure of our mortgage finance system, centered around the federal government, has remained largely unchanged. In fact, Washington’s command of the nation’s housing industry has grown even larger in the nearly 11 years since the crash, while the private-label securitization market has been and remains sluggish.”

Calabria said later this year the Trump Administration, through FHFA, will release a Housing Finance Reform Plan. “Once that plan has been finalized, hopefully sometime this fall, I will sit down with my counterparts at Treasury to develop a responsible plan to end the conservatorships, with a clear road map and mile markers, and to adjust the Treasury share agreements accordingly,” he said. “And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital. At that point, the path out of the conservatorships will depend not on the calendar but on Fannie and Freddie meeting the mile markers we set out for them.

Calabria added it was “insufficient capital that triggered the conservatorship, and it’s going to be sufficient capital that triggers an exit. But building private capital to stand between mortgage credit risk and American taxpayers is just one of our strategic objectives.” Toward that end, he said FHFA will also pursue regulatory reforms that “prepare the Agency to transition into the post-conservatorship world and that ensure Fannie and Freddie are first-in-class in corporate governance and risk management.”

In the years leading to the crisis, Calabria said regulators and Congress had “ample warning signs and ample opportunities” to improve a system that a small number warned was flawed.

“But instead of trying to save the system from itself–and save hardworking Americans from the financial crisis–policymakers and regulators chose to wait,” Calabria said. “More to the point, as we learned from the 2008 crisis–and as I saw firsthand from my front-row seat in the Senate Banking Committee–in the middle of a crisis it is simply impossible to develop comprehensive and long-term solutions to complex and deeply entrenched problems.”

To paraphrase President John F. Kennedy, Calabria added, “the time to repair the roof is not in the middle of a downpour, but when the sun is shining. Reform shouldn’t have to wait for the next crisis. Reform is about avoiding the next crisis. Now is the right time to enact bold reforms to our mortgage finance system, because the sun is shining on our economy and our housing market…If we fail to act now to make our mortgage finance system stronger, more resilient, and more equitable for American taxpayers and working families–the question will not be if the next crisis will hit, but when.”

As a regulator, Calabria added, “my job is to hope for the best but prepare for the worst. And that means ensuring that the entire housing finance system is strong and stable enough to weather the next downturn…we have not solved the business cycle or the housing cycle–and I don’t expect that we will any time soon. But what we can do is address the vulnerabilities and inequities that remain at the heart of our mortgage finance system, to ensure that the next housing downturn doesn’t spark another global financial catastrophe. And that’s exactly what I’ll be focused on for the next five years as Director of FHFA.”

But Calabria emphasized that housing finance reform also involves a legislative element. He said FHFA will continue to consult with Congress on legislative reforms, but is prepared to move forward “whether Congress is ready or not.”

“I’m hopeful that we’ll be able to find broad bipartisan agreement on some key issues, as we have in the past. But while I’m committed to working with Congress, I’m not going to wait on Congress,” Calabria said. “If you look at the statute, it contemplates an end to the conservatorships. The model is very similar model to how the FDIC operates. The law requires me to do what I can within my powers to fix the GSEs and then release them from conservatorship–and that’s exactly what I intend to do.

Calabria lamented that the FHFA conservatorship has lasted “far longer than anyone expected. Back in 2008, as it was being debated and developed, I remember thinking that any conservatorship was unlikely to last more than six months. It has now been more than a decade. And while leaving Fannie and Freddie in this state of limbo may be comfortable for some, it is unsustainable as a matter of economic policy and it is unfair to American taxpayers and families.”

Calabria said as FHFA director, “five more years of limbo is not an option. It would be tantamount to economic malpractice. I don’t make a habit of predicting the future, but if there’s one thing I know for sure it’s that Fannie and Freddie will look much different at the end of my five-year term than they do today…the status quo is no longer an option. The status quo is over. And my arrival at FHFA should be seen as the opening bell for change.”

While Calabria said he could not say what a new GSE model would look like, “as a regulator, what I do know is that the future role and structure of Fannie and Freddie will be determined by the amount of private capital they’re able to build up. This is a central tenet of finance–whether it’s Citibank and Wells Fargo or Fannie Mae and Freddie Mac, for any financial institution, capital is the foundation of stability. Just as the mortgage rate should reflect the underlying risk of the loan, the role and structure of Fannie and Freddie should reflect their capital levels. Institutions that have a lot of capital can afford to take more risk. Those that don’t must de-risk.”

As the GSEs’ regulator, Calabria said his primary concern is that Fannie Mae and Freddie Mac maintain capital levels commensurate with their risk profiles. “And over time I think Fannie and Freddie ought to operate under essentially the same capital rules as other large financial institutions,” he said. “So, the path out of the conservatorships that we will establish for Fannie and Freddie is not going to be calendar-dependent. It will be driven, first and foremost, by their ability to raise capital.”

Calabria acknowledged that at FHFA, “we have our work cut out for us. By anyone’s standards, the agenda I’ve just laid out is ambitious, even in the best of political climates. But I remain optimistic and determined–and I hope all of you do, too.”