Hours after the Supreme Court made clear his authority to do so, President Biden fired Federal Housing Finance Agency Director Mark Calabria. As a result, the FHFA, established to be an independent regulator, is now no different from any executive agency: with each new president, one may reasonably expect a swift replacement of the FHFA director.
With the FHFA director now fully accountable to the president, the director has a duty to carry out the president’s policy views and priorities. Yet the director also retains statutory responsibility to safeguard the operational and financial health of Freddie Mac, Fannie Mae, and the Federal Home Loan banks while ensuring that “the operations and activities of each regulated entity foster liquid, efficient, competitive, and resilient national housing finance markets.”
The primary concern of any safety and soundness regulator is market stability. Regulated financial institutions expect and rely upon consistency and transparency in prudential standards and supervision. The adverse consequences of politicizing regulatory oversight in a manner that could conflict with safety and soundness is why Congress created independent regulatory agencies in the first place.
While transparency and moderation are desirable characteristics for an FHFA director, already some are calling for the new acting director to make wholesale reversals of Director Calabria’s policies and rulemakings. Others are advocating for dramatic changes in lending policies and practices. Yet wild swings in housing policy and regulation from FHFA would disrupt market stability, introduce uncertainty, and ultimately harm credit access for consumers.
Two actions by FHFA in the final months of Director Calabria’s term pose useful examples for how Acting Director Sandra Thompson might address current market concerns without subjecting the FHFA and the housing finance market to added uncertainty. A steady and smooth recalibration where warranted would also establish a useful precedent for any FHFA director seeking balance and stability during regime change.
The most significant regulatory action taken by Director Calabria was the November 2020 capital rule for Fannie Mae and Freddie Mac. The rule built on the framework initially proposed by his predecessor but increased overall required capital.
In the absence of capital requirements that recognize the cost of capital and rely on market-based risk measurements, risk concentrates at the weakest-regulated link and capital allocation is inefficient. Both outcomes hurt consumers and pose risks to taxpayers and the economy.
Therefore, the capital rule is critically important. Yet it was finalized hastily last year, possibly without full consideration of public comments. For example, the FHFA received technical input recommending adjustments to various aspects of the rule, especially its treatment of credit risk transfers, a commonly accepted market approach to distribute risk. Many of these comments went unaddressed.
Given the significant time and level of engagement devoted to this regulation already, the entire rule does not need to be revisited to give a fresh look at comments on credit risk transfers. Doing so would further the FHFA’s public commitment to credit risk transfers.
The second FHFA action was the January amendment to the preferred stock purchase agreement, which provides Fannie and Freddie the capital necessary to operate. Changes made include new limits on second homes, investor properties, and risk-layered mortgages.
While some (quite reasonably) object to the use of this agreement to set such limits, the FHFA as safety and soundness regulator and as conservator is authorized to establish these types of business constraints. Further, it is understandable that the FHFA and Treasury collectively would set such limits, based on Fannie and Freddie’s conservatorship risk profile, taxpayer-provided capital, and market conditions. In a market constrained by insufficient housing supply, government-backed lending that subsidizes second homes and investor properties may conflict with housing affordability and ownership goals.
Beyond the FHFA’s authority and responsibility to consider risk and market conditions in setting appropriate limitations on the business of the regulated entities, how such restrictions are implemented also is important to market stability. In fact, it was the abrupt and clumsy implementation of these changes that was so disruptive.
Acting Director Thompson can smooth the transition rather than simply overturning all these policy changes. In doing so, she would model how a new director may improve upon their predecessor’s work rather than engage in an erratic and disorderly repeal.
While housing policy debates will always be with us, the housing finance system needs every FHFA director to embrace the core role of the agency as a safety and soundness regulator, to promote market stability while assuring both safety and soundness and housing opportunity for all. The Supreme Court ruling does not alter this core responsibility and should not be viewed as a means to introduce political considerations into the regulatory environment.
Sandra Thompson can show us the path forward, gradually and carefully recalibrating policy, as any prudential regulator would do. Policy resets should be in response to new data, improved risk analysis and changing market conditions and should be done in a manner that preserves and promotes market stability.
