New York | Several weeks ago, we commented on how Federal Housing Finance Agency (FHFA) Director Mark Calabria never really had any intention to release Fannie Mae and Freddie Mac from government control (“The Myth of GSE Release”). Instead, Calabria’s true agenda seems to be to cripple the GSEs and the independent mortgage banks (IMBs) that operate in the $6 trillion conventional market. In Washington, watch what they do, not what they say.
We quoted former Freddie Mac CEO Don Layton, writing for the Harvard Joint Center on Housing, who notes that the tenure of Mark Calabria “seems to me to reflect far too much antipathy to the GSEs and the politics of anti-GSE advocates who have long wanted to dramatically shrink (if not eliminate) the role the two companies play in mortgage markets." Again, we totally agree. But Calabria's antipathy for the GSEs also extends to private mortgage firms.
Last week we saw the latest bizarre development from Director Calabria and the FHFA. Fannie Mae and Freddie Mac announced that, at the direction of FHFA, the two GSEs imposed new minimum liquidity requirements for IMB seller/servicers in the conventional market. Effective March 31, 2021, unused and available portions of committed lines of credit from commercial banks no longer will be considered as a component of IMBs’ liquid assets.
The Fannie Mae announcement is found here and the Freddie Mac announcement can be found here. Keep in mind that these changes were made without warning or notice to the GSEs or the IMBs. It’s not even clear that the staff of FHFA or the GSEs had prior notice of the decisions. Bottom line, the change by FHFA will reduce IMB liquidity and lending volumes nationally.
Our guess as to the motivation behind this action is that FHFA is trying, in Calabria’s simplistic fashion, to be dogmatically consistent with all market participants. Unused bank credit lines don’t fit the “high-quality liquid assets” definition in banking supervision and are disallowed for the GSEs themselves, and therefore will not to be used for GSE counterparty risk as well. FHFA states:
“Given that the Enterprises do not have access to the Federal Reserve Discount Window or a stable customer deposit base, FHFA proposes to define high quality liquid assets as: (i) Cash held in a Federal Reserve account; (ii) U.S. Treasury securities; (iii) Short-term secured loans through U.S. Treasury repurchase agreements that clear through the FICC or are offered by the Federal Reserve Bank of New York; and (iv) A limited amount of unsecured overnight deposits with eligible U.S. banks.”
Consider some context for Calabria’s latest policy surprise for the mortgage industry, this a week before Christmas. FHFA first considered this change as part of the proposed updates to the GSEs’ net worth, capital, and liquidity requirements for IMBs released in January 2020. The industry and WGA LLC provided detailed comments in response to this proposal. We discussed why this adoption of liquidity rules applicable to banks are inappropriate and would likely reduce the liquidity of both the GSEs and the IMBs in the conventional market. Calabria is essentially trying to cause, rather than prevent, systemic risk.
In June 2020, FHFA announced that it would not implement the proposed changes and instead would release a new proposal for public comment at a later date to incorporate lessons learned from the pandemic. FHFA has not yet issued this re-proposal, a move that is arguably in violation of the Administrative Procedures Act. Yet last week, in a fit of Trumpian rage, Director Calabria issued this latest attack on the GSEs and the conventional mortgage market for reasons only he understands.
Given that the mortgage industry is still expecting a formal re-proposal of these net worth, capital, and liquidity requirements for IMB seller/servicers to the GSEs, it is fair to say that mortgage lenders are a little disappointed by Calabria’s latest decision. The fact that the change to the treatment of unused and available portions of committed lines of credit was made without the opportunity for further public analysis and comment illustrates the reckless behavior that has come to characterize the tenure of Director Calabria at FHFA.
There has been a lot of speculation as to whether President-elect Joe Biden will be able to remove Director Calabria from his post upon taking office. The question currently before the US Supreme Court is whether a President may remove the FHFA head without cause. In fact, we believe that President Biden will have more than ample reason to remove Director Calabria for cause, specifically that his intemperate and ill-considered actions violate HERA and, more broadly, are harming the financial soundness of the GSEs and their counterparties in the conventional market.
If you sent somebody to deliberately sabotage the US housing market, you could not find a better perpetrator than Director Calabria. Calabria’s obsessive fixation with imposing bank like restrictions on nonbank finance companies is unnecessary and actually increases systemic risk. For example, IMBs are increasingly being forced to demonstrate "cash on hand," a retrograde step that takes the industry backwards 50 years.
Yet even as the mortgage industry is reeling from this latest surprise attack from Director Calabria, the industry is also engaged in an increasingly acrimonious dialog with the Conference of State Bank Supervisors (CSBS) regarding its proposal for a broader prudential framework for IMB servicers.
When you consider that Senate Republicans including Pat Toomey (R-PA) supported Calabria’s nomination to lead FHFA, it is more than ironic to see Calabria leading the charge against private mortgage companies. The supposedly conservative FHFA Director is serving as a facilitator for the progressive CSBS to hijack national housing regulation.
But here’s the question: Does Mark Calabria understand this little nuance? More important, does the incoming Biden Administration realize that Washington is about to lose control over housing policy to the states led by New York? We wonder if Senate Republicans understand what they have done to the US housing market by embracing Mark Calabria.
Inspired by Director Calabria’s erroneous statements to the Financial Stability Oversight Council (FSOC) regarding the systemic “risk” from mortgage servicers, the CSBS proposes to impose bank like restrictions nationally on IMBs, a radical and unwarranted change that promises to further reduce the cash liquidity in the conventional mortgage market.
In the request for comment by the CSBS, they state with respect to loan servicers that IMBs have “an obligation to both parties of the transaction, making servicers simultaneously responsible for efficiently servicing the market and protecting consumers.” The CSBS does not cite a statutory reference for this statement.
Indeed, looking at current law and regulation, there does not seem to be any backing for the assertion of an operational responsibility for IMBs by the CSBS. While loan servicers have a contractual duty to note holders and other parties and a duty of care to consumers via the National Mortgage Settlement and the Dodd-Frank legislation, the CSBS legal construction regarding safety and soundness is tenuous at best and deserves a challenge.
With the exception of the State of New York, most other member states represented by the CSBS do not have any legal authority to impose bank-like safety and soundness rules on IMBs. The CSBS may think that having such power would be preferable, but such legal powers do not yet exist. Does the CSBS propose to export New York law on a national basis? The answer to that question seems to be yes.
It appears that the CSBS is essentially attempting to impose a national standard upon IMBs via an illegal regulatory action that encroaches upon the power of the federal government, and without specific legal authority from each CSBS member state to support and enforce such rules.
Will the Mortgage Bankers Association take the example of Met Life with the FSOC and litigate over this aggressive power grab by the CSBS? After all, the CSBS is basically a trade association that lacks the legal authority to act as a national regulator.
Will the White House join the MBA in challenging the CSBS? This is a fundamental question that the incoming Administration of Joe Biden must quickly decide. The Executive Branch should immediately quash the Calabria-inspired attempt by the states via the CSBS to subvert the supremacy of HUD and the FHFA when it comes to national housing finance policy.
On his first day in office, President Joe Biden should fire FHFA Director Mark Calabria for cause based upon his tenure to date. That change alone will kill a lot of the momentum behind the FSOC and CSBS. After Director Calabria returns to the private sector, we think the MBA and individual IMBs should band together and sue the CSBS for a lack of legal authority to impose new regulations on the housing market. The IMBs and trades should hire the lawyers that represented MetLife in the FSOC litigation and go to war.
Sue the CSBS until they are forced to go back to the member states for contribution to fund the expense. Just remember, more than two-third of the members states in the CSBS are controlled by Republicans. After a few years in court, when the CSBS and the states they purport to represent get tired of paying for lawyers, then perhaps a reasonable compromise will be possible.