WASHINGTON — With the Federal Housing Finance Agency intensely focused on setting Fannie Mae and Freddie Mac on a path out of conservatorship, it is sometimes easy to forget that the agency still supervises the mortgage giants on a daily basis. And Mark Calabria, the agency's director, is not giving them an easy pass.
Calabria made that clear Thursday as he described certain practices at the government-sponsored enterprises that he stopped after joining the agency in April, noting that they were not in line with his expectations.
“I’ll certainly say I have yet to meet anybody who wants to get out of conservatorship" as much as Fannie and Freddie do, Calabria said at a meeting with reporters. “But certainly what you’ve been seeing over the last few years is not the kind of day-to-day behavior that you would expect from companies that are in conservatorship.”
For example, Calabria was surprised to learn when he took the helm of the FHFA in April that despite a previously issued directive that banned the two GSEs from offering volume discounts to lenders, Fannie and Freddie were still engaging in that practice.
“There were a number of exceptions granted to lenders, and again, these are private deals, so I’m not going to talk about any one of them. But the fact that they existed was contrary I think to the spirit of the previous directive,” he said.
In September, the agency announced that it had formally communicated to Fannie and Freddie that they are prohibited from offering volume discounts to larger market players, and that the FHFA would review the GSEs’ compliance through regular reporting.
And up until recently, one of the GSEs awarded compensation based on its market share, which Calabria also found inappropriate for companies still under government control. (He would not disclose whether it was Fannie or Freddie.)
“The top line of this is to remind them that you’re in conservatorship, and everything you do should be geared toward getting yourself out of conservatorship,” Calabria said. “And some of this was quite frankly driven by my sense that there had developed a complacency over the conservatorship.”
Yet in response to Calabria's comments, the two companies claimed they have never strayed from the agency's policy on volume discounts.
"FHFA issued guidance to not offer volume discounts some time ago, and we have operated under this guidance since then. We do not offer volume discounts," a Fannie Mae spokesperson said.
That was echoed by a spokesperson for Freddie Mac who said, "Simply put, we do not provide volume discounts."
"We have adhered to FHFA’s guidance in this regard for several years, and we remain committed to providing a level playing field for lenders of all sizes,” the spokesperson said.
Focusing on supervisory issues is just one of the agenda items that Calabria mentioned the agency will be working towards over the next year. Since its creation in 2008 the FHFA has issued more than 300 directives that Calabria is in the process of reviewing, and he will be looking to issue “a whole host of them” as regulations, he said.
“You'll likely see in the middle of next year, a hodgepodge rulemaking that is a number of things that we've done via directive that we will instead be issuing for regulation so we can do supervision,” said Calabria, noting that those directives include “every element of the business” from pricing to underwriting and credit risk transfers.
Calabria also said the onus is on the two firms to rebuild their capital, which is a key prerequisite for them exiting conservatorship.
Calabria said he hopes to have hired a financial adviser by the end of November to help explore a wide range of options for the GSEs to strengthen capital outside of retained earnings. But once the FHFA hires an adviser, Fannie and Freddie will also hire their own financial advisers, he said.
“Fannie and Freddie have to be the ones that come up with the plans to raise capital,” Calabria said, noting that the FHFA will then evaluate those plans. Fannie and Freddie would then likely start to enact those plans to build capital after at least a year of retaining earnings, he said.
At the end of September, the FHFA announced that it had reached an agreement with the Treasury Department that would allow the GSEs to retain a combined $45 billion in earnings, after only being allowed to retain $3 billion in profits each for a number of years.
The FHFA will also announce soon whether or not it intends to re-propose the post-conservatorship capital framework that was developed under Calabria’s predecessor, Mel Watt. That rule is both a prerequisite for exiting conservatorship and for Fannie and Freddie to raise capital, Calabria said.
And in the next 12 months, Calabria also plans to enhance the FHFA’s own capability as a regulator and build the agency’s analytic capabilities, which will include launching a macro forecasting unit that would be able evaluate Fannie and Freddie’s house price forecasts.
But Calabria is less sure of what he may be able to negotiate in the next year with Treasury Secretary Steven Mnuchin as part of changes to the preferred stock purchase agreements, which could codify changes made during conservatorship and end the so-called net worth sweep. The agreements currently require Fannie and Freddie to sweep profits into the Treasury to pay for their bailout.
“Do I know what I’m going to be able to negotiate with Steven Mnuchin? Not yet, because I don’t control that part of the timeline," Calabria said. But "I believe that we should be able to make considerable progress by then.”
However, he did add that he hopes in the next couple of months "to be able to lift" the $45 billion retained earnings cap altogether.
Calabria said he isn’t particularly optimistic that he will be able to persuade Congress to pass housing finance reform legislation in the next year.
“I believe the amount of time it would take to really put a number of things in place where they would leave conservatorship is a sufficient amount of time that if Congress were to choose to legislate, they will have time to do so,” he said. “I don't say that dismissing the usual difficulties of legislating as a general matter, which I recognize are always considerable.”
Calabria also weighed in on the constitutional debate over the FHFA’s leadership structure.
Both the FHFA and the Consumer Financial Protection Bureau have been criticized for statutory protections granted to their directors from being fired by the president. Both can be removed only “for cause.” But some view that limitation as giving them too much power, especially since neither agency is governed by a board.
The Supreme Court has agreed to hear a case on the issue related to the CFPB, and the high court has been asked to take up the matter with the FHFA as well.
The FHFA director disagrees with the Justice Department finding that the for-cause provisions are unconstitutional. He noted that the Dodd-Frank Act provision for the CFPB is distinct from HERA.
“My view has been that the CFPB is a different agency. I'll remind folks that the removal language actually is different. It's not the same as ours, so my view is the CFPB can continue to weigh in on theirs and we're going to continue to weigh in on ours,” he said.
CFPB Director Kathy Kraninger has said she believes her agency’s leadership framework is unconstitutional, while Calabria is still defending the structure of FHFA.
“I would say looking at our statutes versus Dodd Frank, our discretion in my opinion is rather limited compared to that CFPB,” Calabria added. “So our position has been CFPB is a different animal than us altogether.”
