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What would Mark Calabria as FHFA director mean for the future of Fannie and Freddie?

Analysts weigh Calabria’s potential impact

Reports began to surface this week that the Trump administration is considering naming Mark Calabria to be the next director of the Federal Housing Finance Agency when Mel Watt’s term is up early next year.

[Update: Late Tuesday night, the Trump administration officially nominated Calabria to serve as FHFA director. For coverage of that, click here.]

But what would Calabria bring to the FHFA and what might that mean for the future of Fannie Mae and Freddie Mac? Those in the know are not quite so sure yet.

Calabria, a long-time housing reform advocate, already serves in the administration. Calabria is currently Vice President Mike Pence’s chief economist, taking that role nearly two years ago.

Calabria previously served as the director of financial regulation studies at the Cato Institute, a think tank that is “dedicated to the principles of individual liberty, limited government, free markets and peace.”

Before joining the Cato Institute in 2009, Calabria worked on Capitol Hill as a member of the senior professional staff of the Senate Committee on Banking, Housing, and Urban Affairs.

Earlier in his career, Calabria also served as deputy assistant secretary for regulatory affairs at the Department of Housing and Urban Development and held positions at Harvard University’s Joint Center for Housing Studies, the National Association of Home Builders, and the National Association of Realtors.

So, Calabria has the housing experience and has long been outspoken about housing issues. In one example, the same week that he was named to Pence’s staff, Calabria posted a blog, found here, where he addresses the Mortgage Bankers Association’s plans for the future of Fannie Mae and Freddie Mac.

In his role in the administration, Calabria has also spoken about the administration’s desire to end the conservatorship of Fannie and Freddie.

Analysts at Keefe, Bruyette, & Woods, writing about Calabria as potential FHFA director, say that Calabria has a “libertarian bent” and call Calabria an “outspoken critic” of Fannie and Freddie, but they caution that Calabria’s personal views on the government-sponsored enterprises may end up being subservient to the Trump administration’s views.

“The knee-jerk reaction to the news might be to expect that Dr. Calabria will make policy changes that hurt the housing and mortgage markets, but we think he will implement the administration's agenda rather than his own personal one, so his impact might be more limited than expected,” KBW analysts Brian Gardner, Bose George, Jade Rahmani, and Michael Michaud write this week.

Despite that, the KBW analysts say they expect the administration to end the conservatorship of the GSEs one way or another, something the Trump administration has previously proposed.

One way that the administration may do this is without the aid of Congress, which may not be as supportive of the administration’s plans considering that one of the chambers is soon to be under Democrats’ control.

“We think it is possible the administration does not wait for Congress to act (on ending the GSE conservatorship) and instead decides to act on its own to end the conservatorship by recapitalizing and releasing the GSEs,” the KBW analysts write. “The fact that Dr. Calabria has said that amending the conservatorship was illegal suggests that he would end the profit sweep and allow the GSEs to start rebuilding capital. We think this view has support within the administration.”

But, again, they caution that Calabria may not have as much of an impact as you might think.

“Calabria has been a critic of the GSE model so his nomination might be seen as a negative for the housing and mortgage markets on the belief that he would try to reduce the GSEs’ footprint but legal and political considerations lead us to believe that some fears about Dr. Calabria’s impact might be overdone,” the KBW analysts write.

“For example, FHFA lacks the legal authority to lower the GSEs conforming loan limits, which is one limit on the director’s ability to shrink the GSEs,” they continue. “Also, as we get closer to the 2020 presidential election, we doubt the administration will take steps that may disrupt the housing market, which could, in turn, hurt the president’s re-election chances.”

KBW also suggests that Calabria’s potential impact on the GSEs’ multifamily business could be limited, even citing Jared Kushner’s influence in the administration and his family’s real estate business as reasons that the Trump administration may not upset the multifamily apple cart.

Regardless, even if Calabria is nominated, KBW believes that a vote on his nomination may take some time, with Senate Majority Leader Mitch McConnell, R-Kentucky, likely prioritizing other legislative issues over Calabria’s nomination.

“We think it is possible the administration nominates Dr. Calabria but also replaces Director Watt in January with a temporary director, possibly Comptroller of the Currency Joseph Otting, while it waits for the Senate to confirm Dr. Calabria,” the analysts conclude.

FTN Financial Group analyst Jim Vogel, on the other hand, posits that Calabria’s views could play more of an impact than those at KBW think.

“At a minimum, agency debt and mortgage investors will wonder how hard he will press his conservative principles to accelerate change in housing finance,” Vogel wrote Tuesday in a note to clients.” At an extreme, he could require Fannie and Freddie to raise guarantee fees sufficiently to further reduce credit to residential real estate. The 2008 law that created FHFA gives the director that kind of power.”

According to Vogel, housing industry lobbyists have pushed for someone other than Calabria to be the next FHFA director, given Calabria’s divisive views on the GSEs.

“Even though housing is an election issue – see the defeat of Republican house candidates in high-tax states partly due to elimination of that deduction last year – it’s quite possible the Administration sees housing finance in the black/white terms it applies to trade negotiations,” Vogel wrote. “In other words, don’t go for incremental change when the system needs a complete reboot.”

But, the problem with a “complete reboot” of the country’s housing finance system, other than it perhaps being wholly unnecessary, is that it would be incredibly complicated.

“The problem with complete reboots – of course – is the risk of systemic cracks during the transition to the new system. That’s certainly appears to be the case for trade right now. Housing finance is equally delicate and equally important to the U.S. economy,” Vogel wrote.

“It is important to remember, of course, that large scale change takes time,” Vogel continued. “U.S. support for Fannie and Freddie’s outstanding liabilities was designed to carry over after housing finance reform.”

And while the KBW analysts suggest that Calabria may take a more rational view on GSE reform if he’s confirmed, Vogel writes that we only need to look at recent history to see that just the opposite may take place.

“Some argue Calabria would take a more pragmatic view of GSE reform once he’s one of the most powerful people in housing,” Vogel concluded. “To date that is not how this Administration has worked, where principle and loyalty command the highest respect. Rest assured that if Calabria does moderate his tone, the other side of the aisle will amplify his previous opinions to stoke additional controversy.”

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