Is GSE reform dead on arrival under Biden?
WASHINGTON — The Trump administration in the last two years has laid the groundwork to free mortgage giants Fannie Mae and Freddie Mac from conservatorship without any congressional help. But following President-elect Joe Biden's victory, mortgage industry veterans predict those efforts will slow considerably or stop altogether.
Some have speculated that the incoming Biden administration may not view reforming the government-sponsored enterprises with the same urgency as President Trump's appointees, and could view the status quo — the two companies remaining in conservatorship — as sufficient for the moment.
To slow the Trump administration's progress, Biden's team could quickly seek to remove Federal Housing Finance Agency Director Mark Calabria, pending the outcome of a crucial Supreme Court case about the agency's leadership structure. A new FHFA appointee could then try to overturn Calabria initiatives, such as a rule on the GSEs' post-conservatorship capital levels finalized Wednesday.
Even if Calabria stays on, he would likely face difficulty achieving his goals, observers said, because Biden appointees in the Treasury Department would have a different reform philosophy.
“I can say with great confidence that a Biden administration will think about policy as it relates to the GSEs very differently than the way this administration has,” said Jim Parrott, the owner of Parrott Ryan Advisors and a former Obama administration official.
Former Freddie Mac CEO Don Layton, a fellow at Harvard’s Joint Center for Housing Studies, argued in a paper last week that the Biden administration shouldn’t make reform of the GSEs a priority at all, at least in the first two years in office. That view flies in the face of Calabria’s efforts to release the companies from government control.
“The GSE reform question does not need to be totally ignored, but it does not seem to be worth pursuing in a manner that consumes major administration resources or political capital,” Layton said.
With Congress still at an impasse over legislative reform of the GSEs, the focus for a while has been on tools available to the FHFA and Treasury to end the 12-year-old conservatorships.
But similar to some other Democrats, Biden might view the status quo of conservatorship as tenable, and could choose to prioritize housing in a much different way than the Trump administration has, said Tim Mayopoulos, former Fannie CEO and now president of Blend, a digital lending platform. While in the government's hands, Fannie and Freddie have curtailed certain activities and their risks that were exposed in the 2008 housing crash have been mitigated.
“Fannie Mae and Freddie Mac are not the companies they were before the crisis, and so there's already been very substantial reform,” said Mayopoulos. “There is a housing crisis in the United States [but] the crisis is not Fannie Mae and Freddie Mac. The crisis is the lack of affordable housing.”
Since Calabria took the helm of the FHFA in April 2019, he has made clear his goal to eventually put the GSEs back into private hands. He has taken action to allow the companies to retain more of their earnings, a move designed to enable them ultimately to stand on their own. The final capital rule released Wednesday forces the GSEs to hold unprecedented amounts of capital once they reenter the private sector.
But the incremental steps FHFA has taken to free the companies from conservatorship under Calabria may be in conflict with priorities of the incoming Biden administration, which could create some tension, Parrott said.
“FHFA is driving the ship of housing finance at breakneck speed in one direction, and that is not the direction the Biden administration is going to want them to be heading in,” he said. “The question is, how and who turns the ship?”
Much of the influence that the Biden administration will be able to wield over housing finance depends on the Supreme Court, which is set to hear a case challenging the single-director structure of the FHFA. If the court rules as many expect — that presidents can fire FHFA directors without cause — it would give Biden the ability to replace Calabria well before the latter's term ends in 2024.
But even if the high court ruled a different way or if Biden declined to fire Calabria, it could be challenging for Calabria to find common ground with certain Biden appointees who would have a say on Fannie and Freddie's future. That would include whomever Biden appoints as Treasury secretary.
“[Calabria’s] goal is to ultimately get Fannie Mae and Freddie Mac out of conservatorship,” said Mayopoulos. “It's difficult to see how you can effectuate that after January 20 without the cooperation and support of the Biden Treasury Department.”
In the two months left of the Trump administration, the FHFA has said it wants to negotiate with the Treasury Department further changes to the preferred stock purchase agreements that lay out the government’s ownership of Fannie and Freddie. Up until last year, those agreements required the companies to deliver nearly all of their profits to Treasury to repay taxpayers for the 2008 bailout.
Calabria and Treasury Secretary Steven Mnuchin amended the PSPAs last year to allow the GSEs to retain a combined $45 billion in earnings. Calabria has said that he would like to lift the cap altogether in order for the companies to build up enough capital to eventually exit conservatorship, and the agency hopes to finalize that sometime in the fourth quarter, FHFA officials said.
But it’s still unclear whether Treasury is also on board, said Parrott.
“We know FHFA is committed to this course, even if it's on maybe a faster pace than the market would like, but it's quite unclear whether or not Treasury is in the same place on this,” said Parrott. “It depends probably more on Treasury’s focus, interest and bandwidth than it does FHFA's.”
It remains to be seen whether Mnuchin and Calabria would be able to reach an agreement on changes to the agreements — which could also include codifying reforms Fannie and Freddie have undergone in conservatorship — before Biden takes office.
With a limited time frame, “each day that goes by makes that less and less likely,” said Scott Olson, executive director of the Community Home Lenders Association.
“Obviously, it takes two to tango, in the sense that … the FHFA couldn't on their own pull the trigger on moving forward” with amendments to the PSPAs, said Olson. “If the Biden administration is not supportive of that, then that sort of process kind of slows down significantly or grinds to a halt.”
Even if FHFA and Treasury are able to lift the cap on the amount of capital Fannie and Freddie can have on hand, new appointees under Biden may wish to renegotiate those changes, Parrott said.
“Eventually, it may take a new FHFA at some point to come in and agree with the new Treasury to re-amend the PSPAs and all that whole back-and-forth could be disruptive,” he said.
But Olson theorized that amendments to the PSPAs before Biden takes office could “put a lot more pressure” on the new administration to seriously consider GSE reform.
“If the die is cast, if you've already moved down the field … then one approach would be to start thinking about how you make this work,” he said.
Although FHFA only just finalized its new post-conservatorship capital framework, which requires the GSEs to hold bank-like amounts of capital equal to more than five times the amount they currently have on hand, Biden’s administration might look to overturn that rule.
Consumer advocates, Democratic lawmakers, and even Fannie and Freddie themselves have expressed concern that the capital plan will make mortgages more expensive and require the companies to boost fees.
“The capital rule is a nice example of how the path that Calabria has the GSEs on is likely to run counter to the way in which an incoming Biden administration is going to think about what is helpful coming from policymaking around the GSEs,” said Parrott.
Based on the positions of other Democrats, a Biden administration GSE plan could focus on increasing the supply of affordable housing and providing access to mortgage credit to low- and moderate-income families.
But those goals could be accomplished without the GSEs, some argue.
“The biggest argument in favor of tackling GSE reform … is that it is an embarrassment to the government that these two companies, designed as privately-owned, are staying in its hands for so long with no end in sight,” Layton wrote. Still, he added, the practical consequences of a long-term conservatorship are limited. "The failure to complete GSE reform is theoretically a problem, but in practice it does not seem to be.”
Others warn that an aggressive reform schedule could risk harming stability in the mortgage market.
“One argument is, things are working, why screw around with it? Just let it stay the way it is indefinitely,” said Olson.
“The flip side of that is, sooner or later [GSE reform] may happen, so shouldn't you put time and effort to figure out how to permanently do it right and make sure this lasts? They're both equally valid viewpoints.”