FHFA's Calabria details next steps on GSE reform

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WASHINGTON — A day after Federal Housing Finance Agency Director Mark Calabria testified in front of lawmakers about the administration’s plans for ending the conservatorship of Fannie Mae and Freddie Mac, he offered new details about his timeline and vision for reform, including what options are on the table for building capital.

The presidentially directed reports issued last week by the Treasury Department and Department of Housing and Urban Development sent a clear signal that the administration could accelerate its own reform plan to privatize the government-sponsored enterprises if bipartisan legislation does not pass in the foreseeable future.

The first steps of that administrative action to reform the housing finance system should come before the end of the year, Calabria said Wednesday at a National Association of Federally-Insured Credit Unions event.

The first step could be to cease an agreement among various parties that the GSEs sweep all of their profits into the Treasury. The aim is for the mortgage companies to retain earnings so they can rebuild capital.

“I’m hopeful, extremely hopeful, by the end of the year that we will have ended the net worth sweep and have started to build capital … and we may even be able to do that before the end of the year,” he said in a conversation with Dan Berger, NAFCU’s president and CEO.

While no decision has been made regarding a risk-based capital framework for the GSEs — proposed under former FHFA Director Mel Watt — Calabria said he will have a better idea within the next month if he will re-propose the framework. A risk-based capital rule would go into effect once Fannie and Freddie are released from conservatorship.

“We’re going through all the different elements of it,” he told reporters after the speech. “Capital was such a foundational element of this, that it’s so critical in my view to get it right.”

If the agency goes forward with Watt's proposal, Calabria is aiming to finalize it around December, but if he decides to re-propose the rule, it would likely be completed closer to May, he said.

“This may be the most important rulemaking that I will undergo in my time there … so we need to get it right and that is more important,” said Calabria.

In comment letters to the FHFA submitted last November, a number of lenders and other stakeholders called for the GSEs to hold a higher amount of capital post-conservatorship than Watt’s proposal suggested, and expressed concern that the framework was too procyclical.

Calabria has repeatedly said that one of his top priorities as FHFA chief is to build up Fannie and Freddie’s capital arsenal, and has noted that the first step of that process would be to suspend the 2012 provision of the government's stock agreement with Fannie and Freddie resulting in the net-worth sweep.

He is also exploring different avenues for building capital outside of retained earnings. He said it would “probably take a decade” to collect the kind of capital needed to exit conservatorship just through profit alone.

“I feel real pressure and urgency to build a lot of capital to get them well-capitalized so they can survive a downturn without ever having to call Treasury or anybody else, and that’s my objective and we’re going to look at any options on the table to do that,” he said.

In its report, Treasury laid out a number of options for the GSEs to build capital, including putting Fannie and Freddie into receivership. But Calabria said that receivership is not one of the possibilities he’s currently considering.

“It’s in the statute, so if the conditions under which [receivership] is required are met, then it’s in the statute as an option,” he said. “I don’t believe those conditions exist today.”

The FHFA director also clarified his stance on designating Fannie and Freddie as systemically important financial institutions.

In a May interview, Calabria suggested that a designation would make sense, and that it would be appropriate for the Financial Stability Oversight Council to at least consider the label.

But when asked about designating the GSEs at a Senate Banking Committee hearing Tuesday, Calabria appeared to backtrack, saying he agreed with Treasury Secretary Steven Mnuchin that regulators should be cautious about the implications of the GSEs being deemed SIFIs.

Speaking Wednesday, Calabria said he believes there is sufficient evidence to consult with the Financial Stability Oversight Council about a designation, but that it is premature to go further until FSOC has deliberated on the matter.

“I think the analogy is you’re watching a court case and you say, ‘Boy, I think that guy’s guilty.’ That’s easy for you to say as a spectator, but when you’re the judge, you can’t say that,” he said to reporters. “And so my view is, as a member of FSOC, my perspective has to be, anybody who comes before it gets the benefit of the doubt until we’ve done the process, so I believe I just have to have an open mind.”

He also mentioned that the FHFA is beginning to review membership issues at the Federal Home Loan Banks. A 2016 FHFA rule prevents captive insurance companies from becoming FHLB members.

“We’ve begun a review of the whole entire membership question,” said Calabria. “The core advanced business to me is so critical to provide liquidity in times of stress. … I don’t want to ever see anything that threatens that core business,” he said.

He added that he wants to ensure that the Home Loan banks are focused on smaller members and smaller financial institutions, and that he’s seen nothing so far that “raises a red flag.”

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