What Calabria at FHFA would mean for GSE reform
WASHINGTON — News that the Trump administration is considering Mark Calabria to lead Fannie Mae and Freddie Mac's regulator extinguished any doubt that the White House wants to turn over a new leaf with its approach to housing finance.
In contrast to current Federal Housing Finance Agency Director Mel Watt, Calabria — now the chief economist for Vice President Mike Pence — has often expressed skepticism about Fannie and Freddie's role in the mortgage system, and would likely use the perch atop the FHFA to significantly constrain their footprint.
“He has made a lot of public statements about his views around government guarantees in the role of government finance, and so it would indicate that if he stays true to those views that he’ll try to at minimum constrain the size and scope that the GSEs play in the housing market,” said David Stevens, former president and CEO of the Mortgage Bankers Association.
Citing unidentified sources, The Wall Street Journal reported Monday that the administration is seriously eyeing Calabria, a former senior Republican aide on the Senate Banking Committee, to succeed Watt. Before joining the Trump administration, Calabria was director of financial regulation studies at the Cato Institute.
It was unclear Monday how close the White House was to naming him. The administration has in the past seriously considered nominees for regulatory posts, but then gone with someone else.
Calabria has been vocal about his opinions on the best path forward following the government's 2008 takeover of Fannie and Freddie. He criticized the Obama administration for declining to deal with the government-sponsored enterprises and to take steps to create a more sustainable mortgage market.
In an op-ed for American Banker in January 2016 while serving at Cato, Calabria lamented lawmakers’ inaction on enacting GSE reform through legislation.
“Even without congressional involvement, Treasury and the Federal Housing Finance Agency still have considerable power to act administratively on the GSEs,” he wrote. “Yet there has still been no action. Whatever one's views on Fannie and Freddie, it is simply shocking that the president intends to just hand over the situation to the next administration.”
He suggested that the FHFA, rather than having put the mortgage giants into conservatorship in 2008, should have used its authority to go further and exercise its receivership power over the two mortgage giants, which would have enabled a more extensive restructuring of the GSEs.
"Receivership would have transformed Fannie and Freddie into 'clean' companies, ready to be released back into the private market," he wrote.
"We are where we are today due to the failures of both FHFA and the Treasury Department to pursue this strategy. The most pressing problem resulting from the government's poor decisions is the lack of significant capital. Compared to the current situation, the massive leverage of the GSEs going into the crisis almost looks responsible."
Calabria has long been rumored as one of the administration's possible choices, which included a diverse list of names. If he is nominated and confirmed, it is a sign the administration is open to a more conservative strategy than simply recapitalizing the mortgage giants and releasing them into the private sector again.
The FHFA director pick "is interesting because it will force the President to choose between a conservative like Calabria who wants to limit the GSEs and a GSE advocate who wants to facilitate a return to a system that more closely resembles what existed before the financial crisis,” wrote Jaret Seiberg, an analyst with Cowen Washington Research Group, in a Nov. 30 note.
Calabria has appeared to have differing views from Watt on the extent of the FHFA’s power. Watt has appeared to defer to Congress questions about conservatorship or receivership, as well as a 2012 dividend agreement that required the GSEs to deliver nearly all of their profits to the Treasury Department.
But Calabria pushed back on this view in 2015, arguing that the FHFA should be more in the driver's seat.
"I find it very puzzling when I hear asserted that, ‘Well my hands are tied and Treasury has to make this decision,’ ” he said. “That is contrary to the intent of the law.”
However, while working for the Trump administration, Calabria also appeared open to allowing Fannie and Freddie to retain capital.
“A modest decline in the housing market would result in an injection” of capital from the Treasury, Calabria said in 2017. “The taxpayer today is more exposed to the housing market than any other point in history.”
Calabria has suggested that the FHFA can take further steps to protect taxpayers, such as expanding the agency’s “modest attempts thus far to transfer risk out of the GSEs.”
“Mortgage insurers have been subjected to greater scrutiny while also taking a larger piece of GSE credit risk,” he said in 2016. “Regardless of their troubles during the crisis, mortgage insurers are less likely to be rescued by the taxpayer, offering some potential for market discipline. More can and should be done here.”
He has also expressed concern about Fannie and Freddie’s dense presence in the mortgage market in some areas of the country, particularly California.
“As we approach the next housing peak, FHFA would be wise to improve the credit quality" of the GSEs' mortgages "while also taking steps to reduce geographic concentration,” he wrote in 2016.
Although Calabria has extensive experience in housing and finance and served as a senior staffer on the Senate Banking Committee, he is likely to be met with pushback from Democrats and possibly independent mortgage bankers who depend on selling loans to the GSEs, said Stevens.
“I would expect a fairly challenging confirmation hearing that would take place, because the good thing is everybody knows Mark,” he said. “The bad thing is if you don’t like what he agrees with.”
However, with a Republican majority in the upcoming Senate, Stevens said Calabria should not face any real obstacles to confirmation.
In the short term, Calabria won’t be in a position to make some of the sweeping changes he has advocated, said Bose George, managing director at Keefe, Bruyette & Woods.
“I assume it will take a little while for confirmation and by the time that happens you’re heading into a presidential election, so it seems unlikely that anyone would want to do anything that destabilizes housing heading into 2020,” he said. “Longer term, the question is really reconciling what he’d like to do with the GSEs with what’s politically feasible.”