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Trump's FHFA director will shrink Fannie/Freddie

The Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, is under new management this month. President Donald Trump has nominated Vice President Mike Pence’s chief economist, Mark Calabria, to become the new FHFA director. In the interim, the Joseph Otting, Comptroller of the Currency, will serve as the acting director of the FHFA.

Jim Parrott, a nonresident fellow at the Urban Institute and owner of Falling Creek Advisors, discussed the implications of the change. Parrott was a senior adviser for several years at the National Economic Council in the Obama White House.   

In a recent article for the Urban Institute, why did you write that the most important question in housing policy this year will be what sort of FHFA director will Mark Calabria become?

jimparrottIt is important to keep in mind just how powerful the FHFA is. People tend to forget that, in part, because [former FHFA Director Mel Watt] has been pretty conservative in how he has used his role. He has been pretty careful to manage the GSEs [government-sponsored enterprises] as a steward of the status quo. He has basically told Congress, "Look, you guys are responsible for any structural change, so if you want structural change, you guys need to give us all a new system."

So, I think we have been lulled into this sense that the regulator is not a big deal. There is nothing in statute or elsewhere that requires that the regulator be quite as nonforward-leaning that Mel has been, and Calabria comes into this with much less comfort with the status quo than Mel has had. He has a long history of believing that the system that we have got today is unhealthy, and really ought to be overhauled pretty significantly. He has got levers at his disposal to change pretty dramatically the role that Fannie and Freddie play in the market.  

How long do you expect it will take the Senate to confirm Calabria?

Mark is not likely to face meaningful opposition within the Republican ranks. And if he doesn’t face meaningful opposition in the Republican ranks, then of course he will get confirmed. It feels like that is where this is headed. It also feels like the [Senate] banking committee — and remember, that is where he [Calabria] was a staffer for Sen. [Richard] Shelby a long time — will likely make him something of a priority. So, he will get out of committee relatively easily and quickly I would guess.

The bigger question is how long it takes him to get confirmed on the floor. We have got a large slate of judicial nominees that didn’t make it through last year. They are likely to be re-nominated this year by the Trump administration. You have also got some high-profile cabinet level folks who will also likely end up in the front of the line. So, you have a lot of folks standing in line ahead of Mark. All that suggests that, even in a normal Congress, it would take many months for him to get confirmed. Add to that is that we are in anything but a normal Congress.

Otting, the chief officer of the Office of the Comptroller of the Currency (OCC), will serve as the interim director of the FHFA. Do you expect many changes during this interim period?

There are a couple of variables. One is that Otting, at least thus far, has not planned to leave the OCC. He will be divided in much the same way [Mick Mulvaney] was divided between [the Consumer Financial Protection Bureau, or CFPB, and the Office of Management and Budget]. That constrains a little bit how active he would be at FHFA.

FHFA really is a full-time gig. It manages a big and important piece of the day-to-day economy. That is going to require more time from him than CFPB probably required of Mulvaney. Adding to that, a significant, dramatic reform of some sort would probably be a prohibitively heavy lift. However, I think you are going to learn a lot about how Otting manages his regime by who he puts in key positions of authority. Does he bring on board a team of ideologues? If he does, that is meaningful and suggests change. Or does he pick folks that are more pragmatic, with more industry experience, who are perhaps more comfortable with some continuity with the previous regime. If that is what we see from him, then I would expect much more continuity and less disruption between now and the time we see Calabria.

If Congress doesn’t take steps in 2019 to end the decade-long conservatorship, do you believe the FHFA under Calabria and the Treasury Department under Secretary Steve Mnuchin will move reforms forward on their own?

I think the answer is probably yes. Here is how I think about it. My sense is that they probably give Congress a run first, just because we have heard Mnuchin and his deputies signal the importance to them of legislative reform. Mnuchin has made it pretty clear that he views it as a priority to get them [the GSEs] out of conservatorship. That has led many to speculate that they will consider some version of recap and release [a plan to recapitalize the enterprises and release them from conservatorship]. My guess is that we will see at least some consideration given to some version of privatizing the two. I would suggest caution in reading too much into that, simply because Mark himself has a long, clear record of deep skepticism for the system that we had prior to the crisis, that is with a government-backed duopoly at the center of the system standing behind much of the flow of the mortgage credit in the system.

I find it highly unlikely that you would see a re-privatization that looks anything like what we had prior to the crisis, given how critical of that kind of outcome he has been. I would guess that the only version of this he would be comfortable with would be a very conservative version of recap and release. That likely translates into a version in which Fannie and Freddie are capitalized like banks. Much, if not all of government support for the two of them, is drastically reduced, if not removed altogether.

If you were to see Mark go far down this path, it would take on a character that is very different than the shareholder-owned Fannie and Freddie that we have known prior to the crisis. My guess is that would be so economically and politically disruptive that they are unlikely to go far down that road.

If you think about the stakeholders that have been largely supportive of recap and release — setting aside the shareholders for a minute —  small lenders, some consumer advocate groups, they were, in essence, arguing for something close to the status quo. That is not the version of recap and release that there is any chance of seeing under a Calabria-like regime. And so, as it becomes clear that the version of recap and release that is on the table is one in which Fannie and Freddie are much smaller and much more expensive for lenders to use, and backing a much tighter credit box and so forth, my sense is that even the current advocates of recap and release, with the exception of the shareholders, would likely turn against it. Without them, it is just hard for me to see how you would wind up with enough support for that kind of outcome. So I am skeptical that is where they go. All that said, I do take seriously their suggestion that if Congress doesn’t move on this, they will. My sense is what you are more likely to see are structural reforms to Fannie and Freddie that make Fannie and Freddie much less central to the system today, and make it much easier to transition with Congress’s help.

Will the new FHFA director reduce the footprint of Fannie and Freddie?  

I put that as, if not an inevitability, at least a very high likelihood. I am not sure how likely it is on Otting’s watch. If I had to guess, Otting and his team will tee these things up for consideration. Once Mark gets into office, I would frankly be very surprised if he didn’t do things to shrink Fannie and Freddie’s footprint. He’s only got four levers really to do that with. You have got loan limits. You have got pricing. You have got products, and you have got the credit box. There are some other creative notions, like spinning off multifamily, and that kind of thing. But, by and large, on the single-family side, you have got those four levers.

So, I would fully expect Calabria’s team to use some combination of those levers to shrink the general monthly flow of Fannie and Freddie. He’s likely to try to do it in a way that doesn’t simply send the flow over to FHA, which would defeat the purpose. And also try to do it in a way that doesn’t meaningful shrink the overall lending market. That is, the objective here is probably to shrink the government footprint without disrupting the economics of the market. A lot of lenders will be skeptical that is possible. A lot of folks view shrinking the government footprint, especially in the absence of a real [private-label securities] market, as going hand-in-hand with shrinking lending overall.

My assumption is that Calabria will at least start from the premise that he is trying to shrink the government footprint without shrinking overall government lending, and that means trying to find ways to push what Fannie and Freddie are supporting today into the private sector, finding ways to make what Fannie and Freddie are doing today more appealing for banks, for instance, or for other whole-loan purchasers. I would fully expect some combination of lower loan limits, higher pricing and some exclusion of products that are currently being backed, like cash-out refis and investment properties.  

Do you believe that Congress will be able to pass legislative reform over the next two years of divided government?  

The optimistic take is that [Sen. Mike Crapo, R-Idaho], who is chairman of the key committee in the Senate on this, has a clear record of caring pretty deeply about getting something done in this space. In the work that was done in the last Congress by Corker-Warner, you have got a pretty ready-made place to start. So, you combine bipartisan place to start and committee chairman anxious to see movement, and that is helpful. On the House side, [Rep. Maxine Waters, D-California, chair of the House Financial Services Committee] has also been pretty adamant that she wants to see reform done. One of the things that was holding the Senate back last year was, frankly, that progressives were very nervous about reform, and really for two reasons.

One is that they were always worried that, even if you had something decent come out of the Senate, once it went over to the House, it was going to get pulled to the right by [former House Financial Services committee Chair Jeb Hensarling]. So, they didn’t want to even negotiate in the Senate because they weren’t sure how things were going to go. Second reason they were nervous was that the status quo seemed fine. Well, both of those things have changed. Now whatever makes it out of the Senate is not going to be pulled to the right, it is going to be pulled to the left. And the status quo is not going to hold as we have been discussing. Maybe the progressive caucus is more helpful to the Senate exercise than it has been before. So, that is on the optimistic side of it.

On the pessimistic side, there are all kinds of signals out there now that this Congress is going to be at each other’s throats over the next two years. If they are at each other’s throats with investigations and just trying to get the lights of the government turned back on, and all that, it gets to be a little harder to see how they have got the aptitude to actually do any big structural legislation like this. I mean, legislation of this nature is enormous. It is once in a generation for the economic space that it applies to, and it requires a lot of compromise, a lot of mutual trust. These thing only happen in a world where the two sides are actually willing to sit down at the table and talk to each other. If we are in a world in which the two have the knifes out for each other, it is a little hard to see how something as big and complicated as this can get off the ground. That said, there are some reasons to be at least mildly hopeful that they try.  


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