Federal Housing Finance Agency Director Mark Calabria said he hopes to have a roadmap for ending the federal conservatorship of Fannie Mae and Freddie Mac by the end of the year.
Speaking at a National Association of Realtors event Tuesday, Calabria said it was his job as FHFA director to develop a plan for recapitalizing and releasing the government-sponsored entities, or GSEs. The two mortgage giants have been under federal control since they accepted bailouts in 2008 in the wake of the housing market collapse.
Responding to critics who say that ending the GSEs’ conservatorship requires congressional action, Calabria said the statute creating FHFA was clear. “Congress did decide,” he said. “My responsibility is to try to set a path out of [conservatorship] where we are faithful to the law, where we carry it out as intended.”
While Calabria set the end of the calendar year as a goal for developing that plan, he emphasized that the plan itself wouldn’t follow a strict timeline. Rather, the roadmap would rely on “mile markers.”
“It’ll be up to the GSEs to hit those mile markers,” he said. “For instance, it was the lack of capital that triggered the conservatorship. They’re going to have to build sufficient capital to get out.”
A first step will be ending the net worth “sweep,” whereby the GSEs’ profits are transferred to the Treasury Department. Since they returned to profitability in 2012, the GSEs have transferred $297 billion, earning the government a sizable return on the $187 billion bailout in 2008.
“As long as there’s a sweep, they can’t build capital,” Calabria said. “So, they don’t have any control over getting out.”
Ending that sweep will require FHFA, on behalf of the entities, to negotiate with the department to rework the share agreement. Calabria said that will happen after the agency releases its plan on ending Fannie and Freddie’s conservatorship this summer.
But allowing Fannie and Freddie to retain profits wouldn’t be enough to recapitalize them fully, Calabria said. In order to develop a large enough capital reserve to give him comfort about releasing them from conservatorship, Calabria said the GSEs will need to make an initial public offering at some point.
Time to act
Calabria is only a month into a five-year term, a fact he repeated to emphasize how much time he had to implement a recap and release plan, even if the 2020 election brings a change in the White House.
“Let me emphasize: I really would like to see Congress act,” he said.
“I’ve got two entities, I’ve got the current business model. I’m stuck with that,” he added. “I can get them out of conservatorship, I can try to make sure they are better capitalized, better regulated, but essentially the model is the model.”
Changing that business model — currently one in which the two entities buy qualifying mortgages from originators, then bundle them into securities for sale to investors while giving them an implicit government guarantee — would require enacting new statutes, Calabria said.
Calabria said he would offer input on congressional proposals to change the business model, but declined to say what he would like to see. Before becoming FHFA’s director, Calabria called for privatizing the GSEs and ending the government guarantee on mortgage securities.
Senate Banking Chairman Michael D. Crapo of Idaho released a short outline for legislation overhauling the GSEs in February that would privatize Fannie and Freddie, allow new companies to compete against them, and provide all market participants an explicit government guarantee on qualifying mortgages through Ginnie Mae.
Calabria said he would move to shrink the GSEs’ market share by tightening credit standards for mortgages the companies purchase. He didn’t offer specifics on what metrics FHFA would use to tighten standards, saying it would be what he called a holistic approach rather than bright line rules on debt-to-income ratios, FICO scores, or down-payment minimums.
Instead, FHFA will focus on cutting the riskiest mortgages from Fannie and Freddie’s portfolios, Calabria said. “What we can do is dial this back a little bit, hardly noticeable at all in the marketplace — the vast majority of loans will stay where they are — but we can dial back the riskiest part of it and reduce a lot of risk that way.”
Calabria said that could be done without removing the GSEs’ obligations to support access to affordable housing.
“I expect the housing goals to stay in place, I expect the duty-to-serve to stay in place, but I expect them to be met in a responsible, safe and sound manner,” he said.
At his Senate confirmation hearing, Calabria suggested Congress, not FHFA, should take the lead on overhauling Fannie and Freddie.
“While I do believe that the regulator can make a number of changes that can try to get the GSEs on a stable footing for the next inevitable downturn so that we can minimize losses and minimize damage done to families,” he told the Senate panel, “I do believe the fundamental things that need to be changed by the system have to be changed by Congress.”
Last week, Senate Banking ranking member Sherrod Brown of Ohio told a group from the National Association of Real Estate Brokers, an African-American trade group, that any GSE legislation would need to address housing discrimination and affordability to gain his support.