5 things to watch at FHFA nominee's Senate hearing

WASHINGTON — All eyes will soon be on Mark Calabria.

The Trump administration’s nominee to serve as director of the Federal Housing Finance Agency, Calabria is set to testify Thursday before the Senate Banking Committee. The nomination hearing could provide an important window into the White House's plans for a future housing finance system, including how reforms might be carried out.

Senators almost certainly will grill Calabria on what he knows about an administrative framework that acting FHFA Director Joseph Otting has promised is forthcoming, but he will likely have to convince lawmakers that Congress still has a role in reforming the government-sponsored enterprises if he hopes to secure his confirmation.

Calabria will also have a tall order in tempering past criticisms of Fannie Mae and Freddie Mac, especially if the administration ultimately seeks to recapitalize the GSEs under his watch. Before joining the Trump administration as Vice President Mike Pence’s chief economist, Calabria was the director of financial regulation studies at the Cato Institute, where he regularly advocated for constraining the footprint of Fannie and Freddie.

"As the members of the Committee are perhaps aware, I have an extensive record of writings in the area of mortgage finance. I have on a few occasions expressed strong opinions on the history and future of our mortgage finance system," Calabria said in his written testimony, published on Wednesday in advance of the hearing. "I have most definitely expressed, and express here today, a frustration with the current state of our mortgage system and the need for reform."

"Despite that frustration, I want to very clearly state to this Committee, that if confirmed, my role as Director of FHFA is to carry out the clear intent of Congress, not to impose my own vision," he added.

Following are five key questions to consider ahead of the hearing.

Comptroller of the Currency Joseph Otting
What does Calabria know about the administration’s plans for housing finance reform?
Crucially, the nomination hearing could be the first chance senators have to drill down into the mechanics of the administration’s framework for housing reform.

Otting reportedly told agency employees at a staff meeting last month that “Mark has signed off on” the administration’s proposal to overhaul the housing finance system.

Sen. Sherrod Brown, D-Ohio, the ranking member of the Senate Banking Committee, along with House Financial Services Committee Chair Maxine Waters, D-Calif., sent Otting a letter after his comments were reported, requesting that Otting provide the committees with “a copy or detailed description of the mission that Treasury and the White House have outlined to which you referred.”

But Otting sidestepped the inquiry in his response, instead saying he welcomes congressional Democrats' “insight and perspective” on how to end the conservatorships of Fannie Mae and Freddie Mac.

Now lawmakers, including Brown, will have the opportunity to ask another administration official about the White House's plans, especially if Calabria did approve the plan, as Otting previously indicated.

“Even if the new blueprint isn’t yet formally out there, Mark will be called to discuss where he understands the administration to be on Fannie and Freddie,” Charles Gabriel, the president of Capital Alpha, said in a Jan. 25 research note. “And why would Otting have spilled the beans if he and others hadn’t pre-thought how Congress might react?”

Any questions about the White House’s plans for GSE reform will be scrutinized, as administration officials have put out conflicting information, with Otting suggesting that an end to conservatorship was in sight, while a White House spokeswoman has said that the administration plans on working with Congress and will ask federal agencies to propose reform plans.

“It is possible Dr. Calabria provides some details about how the Trump administration plans to end the GSEs' conservatorships, but… any comments he makes are likely to be general in nature and highlight the administration's preference to work with Congress on the matter while preserving its option to act unilaterally if Congress fails to pass legislation,” analysts from Keefe, Bruyette & Woods said in a research note.
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Will Senators express concern that the Trump administration might bypass Congress?
Calabria can only afford to lose three Republican votes, and so he may spend his hearing reassuring Republican lawmakers that a legislative solution is not off the table.

This will also be the first Senate Banking Committee hearing in the new congress, and will include for the first time freshmen Republican Sens. Kevin Cramer from North Dakota and Martha McSally from Arizona, who have not previously made their views on housing finance reform clear.

After the White House announced that it was planning to release a framework for housing finance reform, Sen. Mike Crapo, R-Idaho, released a blueprint of his own that signaled a potential desire from Congress to reassert its role in the debate.

Even Sen. Richard Shelby, R-Ala., whom Calabria worked for as a staffer on the committee, appeared concerned that the Trump administration could sidestep Congress.

“We should all want to" end conservatorship, he told Roll Call earlier this month. “There are a lot of things he can do over there without an act of Congress, but to reform the whole of Fannie and Freddie? He can’t do that alone.”
FHFA Director Mark Calabria
Will Calabria reaffirm the views he championed at Cato?
While at the Cato Institute, Calabria wasn’t shy about criticizing the government’s approach toward Fannie and Freddie, calling securitization, a core business for the GSEs, a “false god.”

Senators are particularly likely to ask him about his views on a dividend agreement — referred to as the net worth sweep — that requires the GSEs to deliver nearly all of their profits to the Treasury Department.

Calabria has been opposed to the sweep, and even co-wrote a paper in 2015 with Michael Krimminger, former general counsel for the Federal Deposit Insurance Corp., claiming that the 2012 dividend agreement violates the Housing and Economic Recovery Act of 2008 and that the FHFA and Treasury have used Fannie and Freddie as “cash cows.”

“It manipulates the conservatorship process to redirect billions of dollars to the government’s general operating budget, with no accountability over how funds are spent,” the paper says.

Calabria has also proposed eliminating the 30-year fixed-rate mortgage, a view that is likely to come under fire on Thursday, as lawmakers on both sides of the aisle have expressed support for maintaining that feature of the market.

“Some would argue that the 30-year fixed is worth subsidizing because it provides certainty to the borrower. But if borrowers do value that certainty, they should be willing to pay its true cost,” Calabria wrote in 2011.

And no matter what Calabria does to convince lawmakers that the administration would be willing to work with Congress on GSE reform, that doesn’t change the fact that he has bemoaned lawmakers’ inaction and has advocated for the FHFA and Treasury placing Fannie and Freddie in receivership.

“We are where we are today due to the failures of both FHFA and the Treasury Department to pursue this strategy,” Calabria wrote in a 2016 op-ed for American Banker. “The most pressing problem resulting from the government's poor decisions is the lack of significant capital.”
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What will Calabria say about Otting’s decision not to defend FHFA’s constitutionality?
Shortly after Otting took the helm of the FHFA in January, the agency announced it would no longer defend the constitutionality of the agency’s single-director leadership structure in the en banc review of a federal appeals court ruling from July.

“To the extent the Court concludes it is necessary to reach the constitutional issue, FHFA will not defend the constitutionality of [the Housing and Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in Section II.A of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority,” the brief said.

Waters and Brown derided this decision in their joint letter to Otting requesting details on the administration’s GSE reform plan.

“Your comments call into question the independence of the FHFA under your leadership,” the lawmakers said. “So, too, does your decision to direct the FHFA to change its position in a case currently pending before the Fifth Circuit Court of Appeals.”

Other Democrats on the Senate Banking Committee could grill Calabria on this call to see if he would follow suit or decide that the agency should defend its single directorship.

Otting’s decision is similar to how the Trump administration has viewed claims that the single-director structure of the Consumer Financial Protection Bureau — an agency created under the Obama administration — is unconstitutional.
Sen. Mark Warner, D-Va.
How will Calabria respond to Democrats’ concerns about affordable housing?
Democrats have long criticized many housing finance reform plans as not going far enough to defend and facilitate affordable housing, and some have already expressed worry that Calabria’s appointment could diminish current protections.

“I have serious concerns about the expected nomination of VP Pence's economist, Mark Calabria, to be FHFA Director,” Sen. Mark Warner, D-Va., said on Twitter in December. “I'll have plenty of questions on his past statements calling in to question his commitment to affordable mortgages and even the 30 year fixed-rate mortgage.”

Some of Calabria’s past comments on affordable housing may not help his case with Democrats. In a 2012 article for “Investing in What Works for America’s Communities,” Calabria wrote that the problem with community development is not a lack of resources, but instead “poor governance.”

“The existing resources available to community development would be more than enough to revitalize struggling communities across the country if local governments were run better, allowing the market to work more efficiently to provide the goods and services communities need,” he said.

And with the Senate Banking Committee playing host to several potential 2020 contenders, including Brown and Sen. Elizabeth Warren, D-Mass., the issue is all the more likely be thrust into the spotlight.

“One also needs to be on the lookout for a solution on the affordable housing front,”Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note. “This is a big political problem for those seeking to change the system, especially because key Democrats involved in this issue are running for President.”
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