WASHINGTON — Despite recent speculation that the White House and Federal Housing Finance Agency were planning a dramatic shake-up of Fannie Mae and Freddie Mac, observers say the nominee poised to run the FHFA will have a more targeted agenda on the job.
Some experts expect Mark Calabria, an administration official who could be confirmed as early as this month, to prioritize a plan for letting the government-sponsored enterprises retain more capital once he takes the helm of the agency.
Greater capital retention would most likely be achieved by the Treasury Department and FHFA renegotiating the agreement requiring Fannie and Freddie to hand over profits to pay for their bailouts — to allow the GSEs to retain more of their earnings.
“Our expectation would be that there would be capital retention, but that that’s not a day one action and there is probably something collective that will be proposed by the administration, of which capital retention is going to be part of that,” said Bose George, a managing director at Keefe, Bruyette Woods.
Calabria, currently a top aide to Vice President Mike Pence, is also expected to continue policy initiatives already in process. This includes completing the rollout of an integrated mortgage security for Fannie and Freddie as well as a common securitization platform, and finalizing a rulemaking imposing risk-based capital requirements on the two mortgage companies for whenever they re-enter the private sector.
But most notably, all signs indicate Calabria wants to end or at least alter the government’s “net worth sweep” requirements for Fannie and Freddie that were implemented in 2012. That agreement requires Fannie and Freddie to deliver nearly all of their profits to the Treasury Department and has left the mortgage giants with a thin capital cushion of $3 billion each.
Calabria has long bemoaned Fannie and Freddie’s weakened capital position. While at the Cato Institute, he wrote in a 2016 op-ed for American Banker that the “most pressing problem resulting from the government’s poor decisions is the lack of significant capital.”
Calabria reaffirmed these views at his Feb. 14 nomination hearing before the Senate Banking Committee. “I support the concept of having significantly more capital at the GSEs,” he said.
Allowing Fannie and Freddie to hold on to more capital would be a significant change to how the government manages the GSEs’ conservatorships.
The companies were allowed their $3 billion capital buffers as part of a December 2017 agreement between Treasury Secretary Steven Mnuchin and then-FHFA Director Mel Watt, avoiding a potential crisis. But some experts say that was insufficient to returning the GSEs to fiscal health. Others view the GSEs’ access to a line of credit with Treasury as sufficient while the enterprises remain in conservatorship.
Still, a capital retention plan would be less ambitious than other proposals to more drastically upend the housing finance system, such as releasing Fannie and Freddie from their conservatorships without Congress legislating structural changes to the system.
Earlier this year, acting FHFA Director Joseph Otting drew attention for his comments at a staff meeting where he indicated the administration wanted to move forward on GSE reform without Congress. “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market,” Otting said at the Jan. 17 meeting.
But since then, some officials, including Calabria, have said legislative GSE reform is the preferred route. “I want to very clearly state to this committee that if confirmed my role as the director of FHFA is to carry out the clear intent of Congress, not to impose my own vision,” Calabria said at his nomination hearing.
Scott Olson, the executive director of the Community Home Lenders Association, said that although Calabria will probably be cautious about recapitalizing the GSEs, capital retention will undoubtedly be something he will consider if confirmed.
“He’s a great believer that capital is one of the most important things to guard against problems, and so I think that he would be certainly open to it in the short run,” Olson said.
However, capital retention will likely not be the first thing on Calabria’s agenda if he is confirmed. He would likely spend his first few days in office getting acquainted with the agency and making hiring decisions. Otting spent his first week in the position in January meeting with top agency officials, participating in an IT briefing and leading an executive staff and administrative meeting, according to a copy of his schedule obtained by American Banker.
The FHFA is also quickly approaching the June deadline for the launch of the uniform mortgage-backed security, and will be particularly focused on a smooth adoption of the common securitization platform during what would likely be Calabria’s first few weeks on the job.
“The launch of the UMBS is a significant deadline for the GSEs, FHFA” and the Treasury Department, “so there should be a fair amount of focus on crossing the goal line there,” said Isaac Boltansky, director of policy research at Compass Point Research Trading.
Though Calabria could be confirmed by the Senate as early as this month, the June 3 deadline for the launch of the uniform MBS will consume the majority of the energy at the FHFA, Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a note.
“We believe there is little that can happen in the short term as Fannie and Freddie convert on June 3 to the Uniform Mortgage Backed Security,” Seiberg said.
But the mortgage industry will be closely watching Calabria after the common securitization platform is rolled out for announcements on capital retention, as well as for movement from the Trump administration on the issue.
After Otting’s comments were reported, the White House acknowledged last month that the administration was preparing to release a housing finance reform framework.
“It’s clear that they want the GSEs to retain capital, but I feel like it’s likely to be tied in more broadly with whatever proposal the administration is going to come out with,” George said. “Next year is an election year and I think they’d like to address this relatively soon, so I would even think this summer or in a few months as opposed to an extended time frame.”
And even though Calabria has made his stances on capital clear, he is likely to be deliberate in formulating an official FHFA policy on capital retention, Olson said.
“If he was going to do [capital retention], it could come this year, but I don’t think it’s going to be in the first 30 days,” he said. “He’s a thorough guy. I think he wants to take the measure of the place.”
Calabria will also have to decide how exactly the GSEs would retain capital, Boltansky said.
“Capital retention is likely, but the form and timeline is unknown,” he said. “In terms of the form, triggering the periodic commitment fee in the [preferred stock purchase agreements] would allow capital retention while still sending some cash to the Treasury Department.”
Calabria will have to contend with other unfinished business at the agency.
The FHFA has yet to finish rulemakings on credit score models, housing goals for the Federal Home Loan banks and — most notably — a proposed risk-based capital framework that would be implemented if the GSEs exit conservatorship.
“It makes sense that they could do something to finalize that as well, because in order to recapitalize them, you need a capital requirement and a lot of the heavy lifting has been done already with the rule that was proposed by Mel Watt,” George said.
As for the risk-based capital rule, some believe that Calabria would not simply sign off on a final rule, if there is one, prepared by agency staff before his arrival. He could examine the more than 70 comment letters the agency received on the proposal in November, and decide to take a new approach.
“A major effort like that, when someone else develops it, it would be normal for someone to take a second look at it as opposed to just finalizing it,” Olson said. “It would be something that he’d be interested in working on; it’s just that I don’t think he’s just going to accept the premises and the background without a thorough review and perhaps change.”
Olson said that, regardless of Calabria’s past comments on GSE policies, he is likely to want to conduct an extensive review of both minor and major policy issues before making a decision.
“He has a job to do and I think he takes that seriously, and I don’t think he’s going to go off the deep end and try to be something he’s not,” Olson said. “That’s not his job.”