Efforts to prepare Fannie Mae and Freddie Mac for their transition out of conservatorship were discussed by Mark Calabria, director of the Federal Housing Finance Agency (FHFA), during the Mortgage Bankers Association’s (MBA) Annual Convention ad Expo in Austin.
“Now is the time to reform our mortgage finance system because our economy and housing market are strong,” Calabria said in his prepared remarks.
“Last month, the Treasury Secretary Mnuchin and I signed a letter agreement modifying the terms of [Fannie and Freddie’s] Preferred Stock Purchase Agreements,” Calabria said. “Under that agreement, Fannie and Freddie can retain capital of up to $45 billion combined. This is a significant step forward.”
As Calabria explained, Fannie and Freddie together own or guarantee $5.6 trillion in single and multifamily mortgages – nearly half the market.
“And until very recently they were limited to just $6 billion in allowable capital reserves,” he said. “When I first walked in the door at FHFA, the combined leverage ratio at Fannie and Freddie was nearly a 1,000 to one.”
The FHFA’s goal, he said, is to ensure the companies can weather another economic downturn after they are returned to the private sector.
“That is why, last month, the Departments of Treasury and Housing and Urban Development released plans to reform [current] policies,” Calabria said. “These plans represent a fundamental shift from past policies. The Administration’s plan aims to enable Fannie and Freddie to build sufficient capital to withstand a downturn and operate safely and soundly outside of conservatorship.”
Calabria said FHFA’s current Strategic Plan and the GSEs Scorecards “address areas of overlap” between the roles of Fannie and Freddie and the FHA.
“Thoughtfully addressing these overlaps makes sense for both the [GSEs] and FHA because they were created to perform different roles in our housing finance system,” he said. [The] FHA exists to support borrowers that would be served poorly – or not at all – by private capital.
“Of course, the [GSEs] will continue to support access to credit through low down payment lending,” he added. “Also, they have a Duty to Serve and Affordable Housing Goals to meet – and FHFA expects them to continue meeting those goals. Borrowers and lenders will continue to have choice in the market.
“But Fannie and Freddie have a different model than the fully taxpayer-backed FHA,” Calabria said. “Fannie and Freddie’s risk must be supported by private capital. Their activities are expected to earn ‘a reasonable economic return.’ They must be able to withstand an economic downturn and their loans must be sustainable through the cycle.”
Calabria further added that “reducing irresponsible and needless competition between the [GSEs] and FHA also strengthens and stabilizes the FHA fund.”
“We will also ensure that the secondary market continues to provide liquidity and access to credit,” Calabria said.
In a statement, Robert D. Broeksmit, CMB, president and CEO of the MBA, said “now is the time to address the long-term future of Fannie Mae and Freddie Mac, and we’re pleased to hear that meaningful progress is being made to prepare for a responsible end to their conservatorships.”
“We look forward to continuing our work with FHFA to establish a housing finance system that protects taxpayers, allows equal access to lenders of all sizes and business models, and ensures a liquid and stable mortgage market for single-family and multifamily loans,” Broeksmit added. “Preserving the GSEs’ core mission of providing affordable and sustainable mortgage credit to markets at all times will remain MBA’s focus as FHFA implements this plan.”