October 16, 2019 - 14:12 — Peter Klensch Mark Calabria is moving FHFA in a new direction and making taxpayers his top priority.
Under the apathetic five-year tenure of FHFA Director Mel Watt, the government sponsored enterprises (GSEs) pursued risky private-sector strategies and an expansionary agenda, abusing the comforts of government control and exposing taxpayers to the risk of another massive bailout. Director Calabria has already done more to curtail unnecessary GSE expansion and protect taxpayers than was accomplished during the entirety of Director Watt’s term.
This includes ordering the GSEs to limit base salary for any employee to less than $600,000. While this cap was enacted by Congress in 2015, Fannie and Freddie skirted it by splitting one combined position of chief executive officer (CEO) and president into two, then claiming the law only applied to the CEO. This meant that other executives, like the newly created position of president, could continue to reap huge paydays. Following the slick change in title, annual compensation for the newly-created President at Fannie increased to $3.6 million and at Freddie to $3.25 million.
On September 30, 2019, FHFA released its agreement with the Department of the Treasury to increase capital retention for Fannie and Freddie. The GSEs had been required to send all their profits to Treasury until a decision in 2017 allowed Fannie and Freddie to retain $3 billion in capital each. But, for two mortgage giants that provide $6.3 trillion in funding for the housing market, this buffer is completely inadequate. The new agreement allows Fannie to keep $25 billion and Freddie $20 billion in capital reserves, a significant step toward practical reform.
Director Calabria has also corralled the unrestrained growth in the GSEs multi-family loan portfolios. Since 2008, the GSEs have increased their share of multi-family acquisitions by 15 percent, holding nearly 40 percent of the total outstanding multi-family loan debt. A rapidly increasing multi-family housing portfolio puts taxpayers in a high-risk loss position. During the Obama administration, caps were put in place to curtail this rapid expansion, with the goal of decreasing multi-family acquisitions by 10 percent. However, a large portion of those loans were exempted from the cap, if they were designated “green loans” under Fannie’s Green Rewards and Freddie Mac’s Green Up programs. These multi-family loans finance energy and water efficiency improvements in order to encourage a reduction in consumption. Between 2015 and 2017, these loopholes allowed multi-family acquisitions to grow by 14 percent, ballooning GSE loans by 41 percent above the overall market. Roughly 50 percent of those loans, largely made up of green loans, were excluded from the caps.
On September 13, 2019, Director Calabria revised the cap structure for multi-family loans, increasing the caps from $35 billion to $100 billion for Fannie and Freddie. The higher caps would “apply to all multi-family business,” eliminating loopholes that discourage private investment and tightening the eligibility requirements for those seeking energy and water efficiency loan exemptions. The revision also directs the GSEs to ensure that at least 37.5 percent of their multi-family business be “mission-driven, affordable housing.” FHFA’s decision forces the GSEs to dole out their multi-family loans more responsibly and refocuses them on their core mission to provide affordable housing to low- and medium-income renters.
Another way the GSEs have expanded outside their core mission is through pilot programs that have allowed Fannie and Freddie to unfairly compete in the private sector. None of the pilots launched under Director Watt had a public comment period, a practice that stymied a transparent and accountable review process.
Unsurprisingly, many of these pilot programs subsequently failed to achieve their desired impact. For example, on August 21, 2018, Fannie and Freddie announced that they were pulling the plug on their single-family rental pilot program, belatedly recognizing that the private sector has had no trouble backing the purchases of such homes and the sector did not need government intervention. Had this reality been recognized at the outset during a pre-implementation comment period, taxpayer dollars would not have been wasted. This is exactly the type of unnecessary dabbling the former regulator should have put a stop to before it got off the ground.
Under the leadership of Director Calabria, FHFA is conducting a thorough review of the GSEs’ pilots to ensure their activities comply with their Congressional charters. On September 18, 2019, FHFA announced the end of the GSEs’ Mortgage Servicing Rights (MSR) pilot program. Established in 2018, the pilot was intended to provide liquidity to non-bank servicers. While both GSEs were approved for the program, only Freddie went ahead. In his press release explaining the termination of the MSR program, Director Calabria stated: “The MSR market is already served by a wide assortment of highly competitive private sources of capital and financing. Going forward, the Enterprises should focus on activities that are core to the guaranty business, mitigate risk, and are essential to end the conservatorships.”
FHFA should apply this incisive logic to any other pilots that allow the GSEs to push into markets and engage in activities that are already thriving. For example, Freddie Mac’s Integrated Mortgage Insurance (IMAGIN) and Fannie Mae’s Enterprise-Paid Mortgage Insurance (EPMI) pilot programs aim to compete in a sector that is currently well served by private-sector mortgage insurance companies. It is promising that Director Calabria is reviewing all pilots and new activities that expand the GSEs’ market dominance and encourages the enterprises to expose taxpayers to additional risk.
Both the Treasury Department and the Department of Housing and Urban Development have released plans for housing finance reform, so now is the perfect time for Director Calabria to press forward with a measured but ambitious program to rein in the GSEs, require them to accumulate more private capital in order to protect taxpayers, and ultimately, unwind the government’s dominant role in the nation’s mortgage markets.
Conservatorship was never meant to last forever. As Director Calabria said, quoting President John F. Kennedy, “The time to repair the roof is when the sun is shining.”
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