Discussing GSE Reform with Mark Calabria, Director of the FHFA

Dr. Calabria, nominated by President Trump in January 2019, was confirmed by the U.S. Senate and sworn in as Director of FHFA in April 2019. Immediately prior to joining FHFA, Dr. Calabria was Chief Economist for Vice President Mike Pence, handling all economic policy issues with a focus on taxes, trade, manufacturing, financial services, and labor and housing. He holds a doctorate in economics from George Mason University.

You have been vocal about your objective to end GSE conservatorship during your term as FHFA Director. Can you accomplish that goal purely through administrative reform, or must there be legislation to accompany your efforts?

Ending the conservatorships of Fannie Mae and Freddie Mac (the GSEs) is not an objective, it’s FHFA’s statutory responsibility. As a staff member on the Senate Banking Committee, I helped write the Housing and Economic Recovery Act of 2008 (HERA). Endless limbo is not an option under statute. FHFA has the power and the responsibility to end the conservatorships of the GSEs. Congress authorized FHFA to do this by either reconstituting the GSEs into a successor entity or entities, restoring them to a position of financial stability and shareholder control, or placing them in receivership. HERA does not require congressional action to end the conservatorships.

Since I joined FHFA in April 2019, we have taken several steps to prepare the GSEs to operate in a safe, sound, and solvent condition outside of conservatorship, consistent with our statutory authorities and duty to protect taxpayers. We have begun the process of building capital at the GSEs to match their risk profiles, while also reducing their risk exposure to better align with their still limited capital buffers.

At the same time, we are working internally to improve the Agency’s supervisory capabilities. FHFA had existed for only two months when the GSEs were put into conservatorship. Today, it is still one of the youngest federal agencies. Therefore, while we work to ensure the GSEs are safe and sound enough to be operate outside of government control, we are also preparing FHFA internally to be a strong, effective regulator once the GSEs exit conservatorship.

Congress has already given FHFA the authority and the duty to end the GSE conservatorships. I intend to carry out that statutory responsibility in a way that protects taxpayers, minimizes disruption to the housing finance system, and ensures stable access to mortgage credit. At the same time, I will continue to advocate for Congress to pass legislation that will make our housing finance system stronger and more resilient through the cycle. For instance, I have asked Congress for the authority to grant enterprise charters to new market participants, the power to examine third parties that do business with the GSEs, and the discretion to appropriately tailor risk-based capital requirements and leverage limits for the GSEs and any other future guarantors of mortgage backed securities.

Where do you see the GSEs making the greatest strides in helping address the affordable housing crisis in the U.S.? Where is there is more work to be done?

Today, too many Americans lack what each of us deserves: an affordable place to call home, whether it is rented or owned. Expanding access to a diverse range of housing options at market-affordable prices is a top priority of mine.

Our affordability challenges boil down to what I call the “3 Ls” – land, labor, and loans – and in many ways land is at the heart of the problem. Driving the lack of affordable housing are state and local policies that have stifled growth of housing supply and fueled rapidly rising asset prices in recent years. Examples of policies that limit the supply and lower the quality of housing include rent control laws, land-use restrictions, building codes, and permitting requirements.

The burden of these local and state policies is borne disproportionately by low-income Americans and working families. This crisis will not be solved until state and local governments lower the barriers that make it harder and more expensive to build and deliver new affordable housing in their communities.

But our mortgage finance system has a role to play, too. The GSEs exist to ensure mortgage credit availability through the economic cycle. This mission is critical to supporting sustainable homeownership and affordable housing, especially when the economy is weak and mortgage credit tightens. But in their current condition, the GSEs will fail in a downturn, and as we learned in 2008, when the GSEs fail, America’s housing affordability problems get even worse. Building capital and reducing risk at the GSEs to the point that they are strong enough to withstand another downturn is not only essential to responsibly ending the conservatorships – it is also the best way to ensure that the GSEs continue providing the stable mortgage access upon which affordable housing depends, especially in times of stress.

The 2020 FHFA Scorecard calls for the GSEs’ multifamily business to do 37.5% of their originations on affordable properties. The Scorecard also eliminated cap exclusions and raised the GSEs’ lending limits to $100 billion from 4Q’19 through 4Q’20. Why did FHFA revise the multifamily caps in these ways?

We revised the loan purchase caps to ensure that they fulfill their original purpose, which is to support liquidity in the multifamily market, especially in affordable housing and traditionally underserved segments, without crowding out private capital. In recent years, growth in the multifamily market has been outpaced by the expansion of the GSEs’ share of multifamily loan originations, putting them in a procyclical role in the multifamily market. From 2015 to 2017, GSE multifamily loan purchases increased 54 percent while the overall multifamily market grew just 14 percent. This outsized growth of the GSE multifamily market share is largely attributable to the exclusion of green loans from the caps starting in 2016. By 2017, and continuing in 2018, approximately 50 percent of GSE loan production was excluded, rendering the previous caps wholly ineffective.

Underlying these trends is the increasing prevalence of energy and water efficiency products in multifamily properties. Reducing utility costs attracts potential tenants, which increases the demand for more energy and water efficiency products during and after initial construction. These financial incentives will continue to support the expansion of green projects in multifamily housing. Meanwhile, FHFA has revised the caps to focus the GSEs’ multifamily businesses on fulfilling their core mission, which is to support sustainable homeownership and affordable housing, without crowding out private capital. The new multifamily caps eliminate loopholes, provide ample support for the market, ensure the GSEs play a more countercyclical role, and significantly increase affordable housing support over previous levels. Under the caps, FHFA directs that at least 37.5 percent of the GSEs’ multifamily business be mission-driven, affordable housing. This new minimum of 37.5 percent, approximately 10 percent more affordable housing than previous levels, responsibly assures that the GSEs’ multifamily businesses have a strong and sustained commitment to tackling our nation’s housing affordability challenges.

The Mortgage Bankers Association’s current estimate for the multifamily lending market size in 2020 is $390 billion. If Fannie and Freddie do a combined $160 billion of lending next year, their market share will be 41 percent. Is that market share high, low, or just about right from your perspective, and why?

FHFA closely monitors the multifamily market to ensure that the volume caps are furthering the goal of supporting affordable rental housing without crowding out private capital. A 41 percent market share is consistent with where the GSEs have been in recent years. However, their market share today is much larger than it was as recently as 2013 and 2014 when the GSE’s multifamily market share was 28 percent. With that said, we will continue to monitor the GSEs’ market share to maintain a competitive market and ensure that the GSE’s are serving a counter cyclical role.

If you had a magic wand and could change one thing about the current housing finance system, what would you change, and why?

I would put private capital in the first loss position instead of the taxpayer. In addition, I would make the secondary mortgage market more transparent, increase market discipline, and reduce the government’s footprint.

Due to the government’s involvement, our current mortgage finance system is characterized by opaqueness and a severe lack of market discipline. The government’s oversized role in the secondary mortgage market insulates investors from risk and accountability which disincentivizes market participants from doing the kind of due diligence they would normally undertake when investing.

These fixes, which we are in the process of implementing, will protect taxpayers by ensuring the GSEs are well-regulated and well-capitalized outside of conservatorship.

Read the full Multifamily Outlook.