Calabria’s ambitious FHFA agenda (it’s not just housing finance reform)

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Less than two weeks on the job, Mark Calabria has set a bold agenda for himself as the new director of the Federal Housing Finance Agency.

It’s not just helping to chart a future for Fannie Mae and Freddie Mac — a Herculean task that has stumped policymakers for more than a decade. Calabria also plans to do a deep dive into problems with mortgage servicing, repair issues with the “qualified mortgage” patch set to expire in 2021, and ensure a better cooperative culture between the government-sponsored enterprises and their regulator.

If there is an overarching theme to his goals, it is to ensure the mortgage market does not become what it was in the pre-financial-crisis days.

“Anything that's simply a return to sort of pre-2008, I would say is unacceptable,” Calabria said during a sit-down interview.

Housing finance reform

The biggest challenge, of course, is housing finance reform. Calabria is clear he intends to help force the end of the conservatorship of the GSEs, one way or another.

At the moment, he is waiting to see the results of a recent presidential directive to the Treasury Department and Department of Housing and Urban Development to deliver comprehensive plans for administrative and legislative reform. Calabria is hopeful to start implementing changes as early as this year.

If Treasury and HUD’s final reports on housing finance reform are completed as expected this summer, the FHFA would be set to begin discussing changes to the preferred stock purchase agreements in September or October, Calabria said. In 2012, the FHFA and Treasury altered the senior agreements to require Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers, leaving the GSEs with an incredibly small capital cushion of $3 billion each.

“To me, the GSEs may be able to retain earnings, may be able to build capital, but I think it will absolutely require a conversation and an agreement between the FHFA and Treasury on what are other avenues for raising capital,” Calabria said.

“My hope is that by us trying to build some momentum, that that helps enforce a sense of urgency for Congress to act.”

Changes to those agreements would accompany a plan for Fannie and Freddie to exit conservatorship, said Calabria, with no specific end dates in mind, but rather a checklist of progress.

“What I see coming out of this is a road map with mileposts, and at the end of the day it's really predominantly in the hands of the GSEs whether they meet those mileposts,” he said.

Calabria does recognize, however, that the FHFA and Treasury alone can only do so much. He has already pledged to work with Congress on changes to the mortgage finance system. He isn’t planning to produce his own plan, however, but rather disrupt the complacency around the status quo.

Though Congress has made attempts to craft housing finance reform, no plan has come close to final passage. Many lawmakers pay lip service to wanting change, but appear willing to live with the current system. Calabria wants to change that.

Part of his role will be “being a vocal advocate for congressional action,” he said.

“The debate on the Hill is kind of fuzzy in terms of what the downsides are, so how do I help illustrate the downsides and how do we do some and more internal stress testing?” he added. “It's important to recognize that just because some laws are passed and a lot of regulations were put in place by a whole suite of entities doesn’t mean that we're in a lot stronger place.”

It’s also clear Calabria hopes that by moving forward administratively, Congress will be prodded to action.

“My hope is that by us trying to build some momentum, that that helps enforce a sense of urgency for Congress to act,” he said. “To me right now, as long as it's kind of on autopilot, that lessens the pressure on Congress to act.”

As a result, he intends to move forward expeditiously with administrative reforms, though he makes it clear such moves will leave plenty of room for Congress.

“We can create with Treasury a path out of conservatorship,” he said. “That will take a substantial amount of time if in putting that roadmap out, if Congress comes in and says, ‘You know, we think your road map goes the wrong direction.’ That will give them an opportunity and again plenty of time.”

Ultimately, it should be up to Congress to determine what a future housing finance system would look like beyond the existing model, said Calabria, whether it be a multiple guarantor system, which Senate Banking Committee Chairman Mike Crapo, R-Idaho, has proposed, or a utility model. But Calabria’s preference is for more competition in the market.

“I’d ultimately like to see charters open up to anybody who can apply for them, but fundamentally, that’s a decision for Congress,” he said.

Mortgage servicing and QM patch

But GSE reform is not everything on Calabria’s plate. He also said he wants to do a “deep dive” on servicing.

“It’s fair to say that during the last downturn in the housing market, servicing was not where everybody wanted it to be,” he said. “Given what I saw last time, I feel like I want to be comfortable that that’s there, and if it’s not there, whatever I can fix, I can.”

Calabria also plans to work with the Consumer Financial Protection Bureau on the “qualified mortgage” patch. A home loan is eligible to be a qualified mortgage if it meets certain standards set by the CFPB, but the agency granted an exception for loans that are eligible for purchase by Fannie Mae and Freddie Mac. As a result, some loans that wouldn’t normally meet the QM criteria, including loans with higher debt-to-income ratios, have been able to be counted as such.

“If we had to extend the QM patch, I would consider that to be a failure on the part of Washington regulators.”

The different sets of rules for different entities has led to a “tremendous amount of uncertainty in some of the underwriting,” Calabria said.

Calabria said there should be one set of rules in place before the patch expires in 2021.

“My hope would be … that we get to a spot where we have a QM that works for everybody,” he said.

But he drew a red line at suggestions by some that the patch merely be extended.

“If we had to extend the QM patch, I would consider that to be a failure on the part of Washington regulators,” he said.

Protecting small lenders

At his April 15 swearing-in ceremony, Calabria emphasized that his primary goal was to cement the “tremendous progress” the FHFA has made since its inception in 2008.

One of those areas is preserving the access for small lenders to Fannie and Freddie. Before the crisis, small banks frequently complained about the volume discounts Fannie and Freddie would offer to large banks, including Bank of America and Countrywide. As a result, large banks frequently paid lower guarantee and other fees.

But the conservatorship put an end to that practice, and Calabria has no intention of bringing it back in a post-conservatorship world.

“Personally, I think the fundamental reason for Fannie Freddie and the Federal Home Loan Banks is for small institutions to have access,” he said. “What can we hardwire in so that we don’t see a return to the days where Countrywide pays 12 basis points and your small lender pays 20?”

His long-term goals also include solidifying the respectful and cooperative relationships the GSEs have with the FHFA, which were lacking in the pre-crisis period with the FHFA’s predecessor.

“Some of it was the regulator didn't have the tools they needed, the regulator wasn't respected, not just by the entities but also by Congress,” he said.

That has changed since the crisis, but he wants to make sure it doesn’t relapse when the GSEs are private again.

“I know it's a lot harder to lock culture in place than it is anything else, but I think it's a critical part of what I'm going to be trying to achieve,” he said.

And although there are still some calls to wind down Fannie and Freddie completely or fold the mortgage giants into a replacement, Calabria, for one, says Fannie and Freddie aren’t disappearing anytime soon.

“I certainly fully expect at the end of five years there still to be a company named Fannie Mae and a company named Freddie Mac,” he said.

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GSE reform GSEs Housing finance reform Qualified Mortgages Mark Calabria FHFA Fannie Mae Freddie Mac Senate Banking Committee