Speaking at the Mortgage Bankers Association’s Annual Convention and Expo in Austin, Federal Housing Finance Agency (FHFA) director Mark Calabria lamented the stagnant state of mortgage reform before he took office.
“As I suspect they would say here in Texas, mortgage-finance reform has been all hat, no cattle,” he quipped.
It’s an “unacceptable” status quo that posed “significant risk” to the entire mortgage-finance system, he said. And so, while Calabria acknowledged a healthy U.S. housing market, especially in the refinance sphere, he also noted its volatility and declared that now is the perfect time for additional reforms.
“I’m happy to say, in the six months I’ve been on the job, we’ve embedded and implemented a number of policies that I think really have made a big difference,” he said.
Calabria went on to reveal FHFA’s new strategic plan and scorecard for the conservatorships of Fannie Mae and Freddie Mac. These provide a framework for how the FHFA will guide the two government-sponsored enterprises not only toward a “responsible end” to their conservatorship statuses, but also toward fulfilling their statutory missions during and after their exits.
“I think the scorecard and strategic plan will chart a path for Fannie and Freddie during this important time for change and reform,” Calabria said.
His speech echoed statements about the plan distributed during its official announcement, in which he declared that “the vision for reform articulated in the Strategic Plan and advanced in the Scorecard will serve borrowers and renters by preserving mortgage credit availability, protect taxpayers by ensuring Fannie Mae and Freddie Mac can withstand an economic downturn, and support a strong and resilient secondary mortgage market.”
The plan has three objectives: for the GSEs to focus on their “core mission responsibilities” to foster competitive, liquid national housing markets that support sustainable homeownership and affordable rental housing; to operate in a safe and sound manner appropriate for entities in conservatorship; and to prepare for their eventual exits from conservatorship.
The plan seeks to accomplish the first of these three goals without weaker underwriting and loosening of standards, such as the GSEs’ revisions of loan criteria to serve those who may be better suited to borrowing through the Federal Housing Administration. Rather, Calabria said that the plan will ensure the commitment to efficient, viable policies and processes.
For example, the continued effectiveness of uniform mortgage-backed securities between Fannie and Freddie, which launched earlier this year, will remain a priority. The implementation of the Credit Score Rule, which directs the GSEs to solicit models from third-party credit-score developers, also will be a potential avenue to make borrowing standards more inclusive. And any potential moves will be weighed against a strict set of measures ultimately aimed toward keeping Fannie and Freddie out of the same conditions that contributed to the Great Recession.
“No policy change will matter unless Fannie and Freddie are financially viable and strong enough to withstand a downturn in the economy. … Are Fannie and Freddie equipped to withstand a downturn on the scale that we saw in 2007 and 2008?” Calabria said. “We know that they cannot meet that standard today, but I believe that they are capable enough and committed to getting there.”
That target, Calabria said, is reflected in the second leg of the threefold plan, which revolves around the “heightened need for safety and soundness” as the GSEs continue on their track toward release. Calabria called their previous capital cushions “inadequate” and touched on the need to build healthy capital foundations for both GSEs in order for them to exit conservatorship. For instance, he pointed to the Trump administration’s move earlier this month to allow the GSEs to retain up to $45 billion in combined capital as a key step into a new era.
Regarding the plan’s third goal, Calabria said that it instructs Fannie and Freddie to support the FHFA in developing and implementing “responsible, milestone-based plans” to facilitate their transition. This includes the aforementioned capital-restoration strategies, as well as addressing overlaps between their businesses and assessing whether their returns will be proportional to private-market thresholds, since the end goal is moving them to private ownership.
As for when that end goal will be reached, Calabria reiterated that it will be determined by progress, rather than a fixed timetable.
“I will measure progress by looking at whether they are moving in the right direction and as quickly as possible without jeopardizing their mission,” Calabria said. “Meeting this objective and implementing this strategic plan and scorecard will not be calendar-driven. It will be driven by meeting key mile markers between today’s unsustainable status quo and a reformed and safe housing-finance system.”