Even with new leadership, questions about FHFA’s agenda abound

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WASHINGTON — Although the White House has chosen new leadership of the Federal Housing Finance Agency, many questions remain about how quickly it will move to enact administrative changes to the housing finance system.

Congress appears unlikely to tackle housing finance reform anytime soon, but the FHFA has broad discretion to make changes to Fannie Mae and Freddie Mac, including potentially even recapitalizing them and returning them to the private sector.

The White House has answered one important question about its plans in recent days by naming successors to Mel Watt, the Obama administration holdover who ran FHFA and is due to step down Jan. 6. President Trump has said he intends to nominate Mark Calabria, the chief economist for Vice President Mike Pence, as Watt's permanent replacement. But because that nomination is likely to stretch well into the new year, Trump said Friday that Comptroller of the Currency Joseph Otting will serve as acting FHFA director once Watt leaves.

Otting's moves in the temporary role could signal the administration's broader GSE reform plans, observers said.

"The administration may have run out of patience with Congress and its inability to pass legislation to end the GSEs' conservatorship and make other changes in the mortgage finance system," wrote Brian Gardner and Michael Michaud of Keefe Bruyette and Woods in an analyst note on Friday.

How far Otting will go is unclear, but he has a strong background in the mortgage market. He was head of OneWest Bank, the successor institution to failed IndyMac, working under now-Treasury Secretary Steven Mnuchin.

Under the Federal Vacancies Reform Act, the White House had two options to fill the acting director role: it could name one of Watt's lieutenants as acting director, or appoint another temporary director who must have been previously confirmed by the Senate.

The administration's decision to appoint Otting instead of one of Watt's lieutenants is seen by some as a sign that the White House is looking to make immediate policy changes at the agency, similar to the appointment of Office and Management and Budget Director Mick Mulvaney as acting director of the Consumer Financial Protection Bureau in 2017.

"What’s significant is... how much the administration really feels like FHFA needs to have a course correction,” said Ted Tozer, a senior fellow at the Milken Institute’s Center for Financial Markets and former president of Ginnie Mae.

Mnuchin has made clear that GSE reform will be a priority next year, and isn’t likely to see a temporary agency director as a setback. Particularly since Mnuchin and Otting are known to be close, many observers suggest they will move quickly on a new policy for the government-sponsored enterprises.

“They’d like to take some administrative action starting this next year, so I don’t think they’ll wait,” said Anne Canfield, the executive director of the Consumer Mortgage Coalition.

Otting will potentially have a lot of leeway to act.

"The administration can end the profit sweep and allow Fannie Mae and Freddie Mac to retain earnings and rebuild capital," wrote Gardner and Michaud. "The administration can also sell Treasury's stake in the GSEs thus recapitalizing and releasing them to fully private ownership. Furthermore, we think FHFA can make additional changes to bring more private capital into the mortgage system via deeper mortgage insurance cover and expanded use of credit risk transfers both of which would, in our view, benefit the private mortgage insurers."

Still, others argue the White House might prefer to hold off on drastic changes until Calabria is confirmed.

“I don’t think they would want to disrupt something that they know is going to have a different person in charge,” said Ed Wallace, the executive director of the Community Mortgage Lenders of America. “They will just want to maintain status quo, or maintain as best they can the status quo until a permanent director is put in there.”

If that's the case, however, they may be waiting a while. Calabria is well-known for having strong views on Fannie and Freddie. He's advocated in the past to place the GSEs into receivership and significantly shrink the government’s footprint in the mortgage market through administrative actions instead of legislation.

Calabria will likely have to moderate some of his positions if he wants to ensure his confirmation. Though Republicans control the Senate, moderate GOP senators would be fearful of any changes that could hurt the mortgage market, including eliminating the 30-year fixed-rate mortgage.

Indeed, the Trump administration too may not want to take the dramatic steps Calabria has advocated given fears of an imminent recession.

“It doesn’t appear that there’s going to be any huge disruption to the mortgage industry,” said Wallace. “I don’t think they’re just going to go in there and hack away at things, because I don’t think they want to put that burden on the economy of trying to put something in place that may not work.”

If Calabria is confirmed as FHFA director, Tozer added, the new appointee may also moderate certain views simply of of his own accord.

“I’ve seen in Washington so many times where people when they’re on the outside tend to be a little bit extreme,” Tozer said. “Once they actually have the responsibility of doing something, they tend to be more realistic.”

Wallace agreed that there is a difference between working in the public and private sector, which forces officials to reconcile some of their beliefs.

“I know the nominee in the past has made comments about Fannie and Freddie but I think once he gets in there, if there are changes to be made, they won’t be so drastic that they will just totally disrupt the housing market,” he said. “The economy can’t sustain that.”

Although regulatory nominees have often faced lengthy confirmation processes under the Trump administration, there could be an increased pressure on the Senate to confirm nominees after Democrats take control of the House next year and begin conducting oversight hearings. House Democrats could push for a quicker confirmation process to get someone in the job full-time to answer for the agency's decisions.

“One of the things that happens when you don’t approve nominees on a timely basis is that they can’t testify,” said Anne Canfield, the executive director of the Consumer Mortgage Coalition. “That is a consideration though that might accelerate not only his nomination, but some of the other ones too.”

Ultimately, most people within the industry point to an initial confirmation hearing for Calabria’s nomination in the Senate Banking Committee in February or March, but with the timeline for a final Senate floor vote much murkier.

“We’re in such a partisan environment, who knows what will happen, but I would like to think that [the nomination] would move relatively easily,” said Tozer. “But the question is just going to be trying to get the floor time for the vote.”

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GSE reform GSEs Regulatory reform Housing market Mel Watt Richard Shelby Joseph Otting Steven Mnuchin FHFA Fannie Mae Freddie Mac Senate Banking Committee Cato Institute
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