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A new face at FHFA

admin | December 14, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Pending Senate approval, there will be a new head of the Federal Housing Finance Agency come January. Mark Calabria, the current chief economist under Vice President Pence, was nominated to run the conservator of Fannie Mae, Freddie Mac and Federal Home Loan Bank system. Calabria has been a vocal critic of the GSEs in the past, potentially marking a change in the direction of the enterprises whose footprints in both single and multifamily housing have expanded materially under the stewardship of current Director Mel Watt.

Calabria can be characterized as long-time housing and GSE reform advocate who, during his tenure in the Trump administration, has stated that the administration is committed to ending GSE conservatorship. Prior to working for Vice President Pence, he worked at the Cato Institute, a conservative think tank that looks to promote the ideals of smaller government. He has also held roles at the Department of Housing and Urban Development, Harvard University’s Joint Center for Housing Studies, the National Association of Home Builders and the National Association of Realtors.

While Calabria has been a vocal advocate of GSE reform and ending conservatorship, a scenario where the GSEs are recapitalized and privatized looks extremely remote. Instead, an initial reduction of the GSE footprint in both single and multifamily lending looks more plausible on the margin with an eye toward more meaningful changes later in his tenure.

Calabria could first set his sights on reducing the amount of high debt-to-income lending at the GSEs. The GSE patch allows Fannie Mae and Freddie Mac to securitize loans with greater than 43 DTI that would otherwise require risk retention. The patch is not set to expire until January 2021. But Calabria could roll back changes made in the spring of 2017 that allow the enterprises to write loans up to 50 DTI through their respective automated underwriting systems without additional compensating factors.

Calabria also could tighten multifamily lending. The enterprises have caps on the amount of multifamily loans that they can securitize, which currently stands at $35 billion for each enterprise. However, the GSEs can securitize volumes in excess of the cap if the loans help satisfy their affordable housing goals. The nominal caps look likely to remain relatively unchanged under new leadership, but it’s plausible that the affordable housing exemptions could be curtailed under Calabria.

Other more obvious areas where Calabria could focus on to reduce the Enterprises footprint and increase private capital would be to increase the base guarantee fee the enterprises charge, somewhat ironically at roughly the same time that UMBS would effectively eliminate Freddie Mac’s guarantee fee subsidy. Calabria could also look to increase risk based pricing by changing Loan Level Pricing Adjustments.

There is another means by which Calabria could work with Treasury in an effort to decrease the size of the Enterprises. In February of last year, Calabria penned a piece which laid out a plan for Treasury to invoke their unilateral power to put limits on Fannie and Freddie’s debt issuance. Per section 306(j)(1) of Freddie Mac’s charter. “Any notes, debentures, or substantially identical types of unsecured obligations of the Corporation evidencing money borrowed, whether general or subordinated, shall be issued upon the approval of the Secretary of the Treasury and shall have such maturities and bear such rate or rates of interest as may be determined by the Corporation with the approval of the Secretary of the Treasury.” Calabria then points out that Section 306(k)(1) gives Treasury similar authority for issuance of MBS by the GSEs suggesting that Calabria, working in conjunction with Treasury Secretary Mnuchin, could effectively deleverage the GSEs’ balance sheets by reducing debt issuance, capping MBS issuance or some combination thereof. Action on this front seems remote, however, since it would be a blunt tool for shrinking the enterprises.

In terms of implications of these potential changes to mortgage performance, an increase in overall guarantee fees should be modestly constructive for the basis and premium coupons as it would reduce overall supply and refinanceability. An increase in loan level pricing adjustments would likely be constructive for pay-ups on existing premium FICO pools. Changes to the DTI cap and LLPAs should reduce risk layering and improve the overall credit profile of GSE risk transfer bonds, potentially creating a wide basis between cleaner future issuance and current issuance with high concentrations of high DTI loans.

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