WASHINGTON – The Trump administration has laid the groundwork for the past two years to get mortgage giants Fannie Mae and Freddie Mac out of the conservatory without help from Congress. Mortgage industry veterans predict these efforts will slow significantly or stop altogether following President-elect Joe Biden's victory.
Some have speculated that the future Biden administration may not view the reform of government-sponsored companies with the same urgency as President Trump-appointed companies and see the status quo – the two companies that remain in the Conservatory – as sufficient for the time being could.
To slow the Trump administration's progress, Biden's team could quickly attempt to remove Mark Calabria, the director of the Federal Housing Finance Agency, pending a critical case from the Supreme Court about the agency's governance structure. A new FHFA commissioner could then attempt to overthrow Calabrian initiatives, such as a rule set on Wednesday for the capital level of GSEs after the conservatory.
Even if Calabria stayed, it would likely struggle to meet its goals, observers said, because Treasury Department officials appointed by Biden had a different philosophy of reform.
"I can say with great confidence that a Biden administration will view policy on GSEs very differently than this administration," said Jim Parrott, owner of Parrott Ryan Advisors and a former Obama administration official.
Former Freddie Mac CEO Don Layton, an employee of the Joint Center for Housing Studies at Harvard, argued in a paper last week that the Biden administration shouldn't make GSE reform a priority at all for at least its first two years in office. This view contradicts the efforts of Calabria to free the companies from state control.
"The issue of GSE reform need not be completely ignored, but it does not seem sensible to pursue it in a way that consumes large administrative resources or political capital," Layton said.
With Congress still stuck in an impasse over the GSE's legislative reform, the focus for some time has been on tools available to the FHFA and the Treasury Department to end the 12-year conservatoire.
But much like some other Democrats, Biden could see the conservatory's status quo as tenable and choose to prioritize housing in a very different way than the Trump administration, said Tim Mayopoulos, former CEO of Fannie and now President of Blend , a digital credit platform. In government hands, Fannie and Freddie have restricted certain activities and mitigated their risks revealed in the 2008 property crash.
"Fannie Mae and Freddie Mac are not the companies they were before the crisis, so there have been very extensive reforms," Mayopoulos said. “There's a real estate crisis in the United States [but] the crisis isn't Fannie Mae and Freddie Mac. The crisis is the lack of affordable housing. "
Since Calabria took over the helm of the FHFA in April 2019, he has made his goal clear to finally return the GSEs to private hands. He has taken steps to enable companies to keep more of their earnings, a move that should ultimately enable them to become self-employed. The final capital rule, released on Wednesday, forces the GSEs to hold unprecedented amounts of capital once they re-enter the private sector.
However, the incremental steps the FHFA has taken to free companies from preservation under Calabria could run counter to the priorities of the new Biden administration, which could create tension, Parrott said.
"The FHFA is driving the real estate finance ship in one direction at breakneck speed, and that is not the direction the Biden government wants to lead it," he said. "The question is how and who turns the ship?"
Much of the leverage the Biden government can exert on real estate finance depends on the Supreme Court, who will hear a case that will challenge the structure of the FHFA as a sole director. If the court makes as many decisions as many expect – that presidents can fire FHFA directors for no reason – it would give Biden the opportunity to replace Calabria well before it ends in 2024.
But even if the Supreme Court decided otherwise or Biden refused to dismiss Calabria, it could be a challenge for Calabria to find common ground with certain Biden candidates who would have a say in the future of Fannie and Freddie. That includes who Biden appoints finance minister.
"[Calabria's] goal is to eventually get Fannie Mae and Freddie Mac out of the Conservatory," Mayopoulos said. "It's hard to see how you can do this after January 20th without the collaboration and support of Biden's Finance Department."
In the remaining two months of the Trump administration, the FHFA has announced that it will negotiate further changes with the Treasury Department to the preferential stock purchase agreements, which will establish government ownership of Fannie and Freddie. Until last year, these agreements meant that companies had to deliver almost all of their profits to the Treasury to repay taxpayers for the 2008 bailout.
Calabria and Treasury Secretary Steven Mnuchin changed the PSPAs last year so the GSEs can collectively make $ 45 billion. Calabria has said it plans to lift the cap altogether so that companies can raise enough capital to eventually exit the conservatory, and the agency hopes to close that sometime in the fourth quarter, FHFA officials said.
However, it is still unclear whether the Treasury Department is also on board, Parrott said.
"We know the FHFA is committed to this course, even though it may be faster than the market would like, but it's pretty unclear whether or not the Treasury Department is in the same place in this regard," Parrott said. "It probably depends more on the Treasury Department's focus, interest and breadth than the FHFA."
It remains to be seen whether Mnuchin and Calabria can reach an agreement on changes to the accords before Biden takes office – which could include codifying the reforms Fannie and Freddie went through in the Conservatory area.
With a finite timeframe, "every day that goes by makes it less and less likely," said Scott Olson, executive director of the Community Home Lenders Association.
"Obviously you need two for tango, in the sense that … the FHFA alone couldn't pull the trigger to move forward," Olson said of changes to the PSPAs. "If the Biden administration doesn't support this, this type of process will slow down or stall significantly."
Even if the FHFA and Treasury are able to raise the cap on the capital Fannie and Freddie can have available, new appointments under Biden may want to renegotiate those changes, Parrott said.
"At some point, at some point, it might take a new FHFA to agree with the new Treasury Department to change the PSPAs again, and all that back and forth could be disruptive," he said.
However, Olson theorized that changes to the PSPAs before Biden took office "could put a lot more pressure on the new administration" to seriously consider GSE reform.
"If the die is cast, if you're already on the field … then one approach would be to think about how you're doing this job," he said.
Although the FHFA has only just finalized its new post-conservatory capital framework, which requires GSEs to hold bank-like amounts of capital more than five times the amount currently available, the Biden government could seek to repeal this rule.
Consumer advocates, Democratic lawmakers, and even Fannie and Freddie themselves have raised concerns that the capital plan will make mortgages more expensive and require companies to raise fees.
"The Capital Rule is a good example of how the path in which Calabria took the GSEs is likely to run counter to the way a new Biden government will think about what will help with the policy around the GSEs is taking place, "said Parrott.
Based on the positions of other Democrats, a Biden government GSE plan could focus on increasing the supply of affordable housing and providing low- and middle-income families with access to mortgage credit.
But these goals could be achieved without the GSEs, some argue.
"The biggest argument for fighting GSE reform … is that the government is embarrassed that these two privately owned companies have been in their hands for so long with no end in sight," wrote Layton. Still, the practical consequences of a long-term conservatory are limited. "Failure to complete the GSE reform is a problem in theory, but it doesn't seem to be in practice."
Others warn that an aggressive reform plan could hurt the stability of the mortgage market.
“One argument is, things work, why turn it around? Just let it be as it is indefinitely, ”said Olson.
“The downside of this is that sooner or later [GSE reform] something can happen. So shouldn't you put the time and effort into figuring out how to get it right permanently and make sure it lasts? They are both equally valid viewpoints. "