Remarks as Prepared for Delivery

Dr. Mark A. Calabria, Director

Federal Housing Finance Agency

2019 Ginnie Mae Summit

Thursday, June 13, 2019

3:30 - 4:00 PM

Marriott Wardman Park - Washington, D.C. 

“Working Together to Build a More Stable, Resilient, and Equitable Housing Finance System”

​​Thank you, Maren, for that kind introduction and for your leadership. Thank all of you for being here today.

I always appreciate the opportunity to speak from the same stage as Secretary Ben Carson, who I know you heard from earlier today.
But I am especially grateful to be here at this 2019 Ginnie Mae Summit because I imagine many of you are also interested in hearing an update on America's other two mortgage giants.

Many of you who do business with Ginnie Mae also work with Fannie Mae and Freddie Mac, and maybe the Federal Home Loan Banks. These institutions are regulated by the Federal Housing Finance Agency. And I am here today to talk about my vision for the future of Fannie and Freddie, and my vision for housing finance reform more broadly.

But first, it is worth spending a moment to take stock of where the mortgage finance industry is today.

One of the most significant developments since the financial crisis is the growth of non-bank, non-depository business models.

In 2013, non-banks made up 30 percent of all the mortgages sold to one of the government guarantee programs. By February of this year, that footprint had doubled to 60 percent.

Last year, non-banks made up roughly 50 percent of all mortgage originations sold to Fannie Mae and Freddie Mac. And non-banks are now Ginnie Mae's main counterparties. They service around 60 percent of the mortgages in Ginnie Mae pools.

Many of you work in the non-banking sector. You know what an important role your institutions have played in the mortgage market.

Non-banks have brought capacity to both originate and service mortgages, providing the liquidity that the market needs. And we fully expect that they will continue to play an important role moving forward.

But from a risk perspective there are some key differences between banks and non-banks that we need to address in a responsible way.

Prudent, sustainable risk management is one of my top priorities.

We have been working with Fannie and Freddie to improve counterparty risk standards. Our goal is to ensure that originators have the financial strength to continue lending through any market weakness or stressed environment.

I want to commend the innovative work that Ginnie Mae is doing on this front. The Progress Update that they released this month contains an overview of their efforts to modernize counterparty risk management practices.

I also want to thank Ginnie Mae for calling for increased collaboration with FHFA.

Ginnie Mae's footprint now stands at more than $2 trillion. An additional $5 trillion in mortgage-backed securities are guaranteed by both Fannie and Freddie. This gives us a shared interest in making sure our housing finance system is strong and stable through the cycle.

And the rapid advances in technology and data analytics give us a great opportunity to collaborate and share best practices to accomplish that goal.

We will continue to work together to adapt to the changes in the mortgage industry we have seen over the past decade.

But the more important and urgent task that we face today is to bring change to our mortgage finance system where there has been too little. This is what I would like to talk about today.

Since the financial crisis, the fundamental structure of our housing finance system has not changed. In fact, the federal government's command of our nation's housing industry has only grown larger over the past decade.

Fannie and Freddie's books of business are in better shape today than they were in 2007 and 2008. But they have grown in size since the crisis, and they remain “too big to fail."

With a leverage ratio of nearly a thousand to one, their balance-sheet capital cushion is razor thin.

This makes Fannie and Freddie vulnerable to fluctuations in housing prices, interest rates, and other macroeconomic conditions. And it leaves American taxpayers increasingly exposed to bearing the risks of these mortgage giants through another bailout.

The basic structure of the system is also inefficient and unstable. The duopoly of Fannie and Freddie undercuts competition and makes the entire system more fragile and vulnerable.

You do not need to be an economist to see the problems here.

The housing finance system we have today is largely the same system we had in 2008… A system that produced a 26 percent drop in home prices, a more than 80 percent spike in foreclosures, and the evaporation of trillions of dollars in household wealth.

Behind all the numbers are the stories of Americans struggling to pick up the pieces after the crash.

I heard some of these stories while working on the Senate Banking Committee, where I took many calls from families in financial distress.

These stories show the consequences of our collective failure to make our mortgage finance system more resilient when we had the chance.

I know the status quo can be very comfortable for many people.

But for the rest of the country – and for the broader economy – the status quo is fundamentally unstable, unfair, and unacceptable.

Under the status quo, homeowners remain vulnerable to another shock to the system. And taxpayers remain on the hook. Therefore, as I have said before, the status quo is over.

Mortgage finance reform has been called “the great unfinished business" of the financial crisis. The time has come to finally finish it. And that is exactly what I am focused on.

There are two major avenues for reform – administrative action and congressional action.

To truly fix what is broken in our housing finance system, we need both.

It is not the case that either Congress acts or else I will.

There are some things that only Congress can do. One of them is to create an explicit guarantee.

If Congress does create an explicit guarantee, it should be limited, clearly defined, and paid for.

At the same time, I will pursue administrative actions wherever appropriate and necessary. This will involve regulatory actions at FHFA. And it will involve working with Treasury, HUD, and my fellow regulators.

My responsibilities are to protect American taxpayers, protect borrowers, and protect homeownership as the cornerstone of the American Dream.

I will take whatever actions I can to fulfill these responsibilities. And I will continue working closely with Congress to make the system more resilient and stable through the cycle.

In fact, just yesterday FHFA sent its 2018 annual report to Congress​, and I attached a letter asking for several much-needed legislative reforms.

These reforms are intended to better align my current authorities with those of other regulators within the existing framework.

For instance, I asked Congress to authorize FHFA to issue more GSE charters. This would allow more competitors to enter the industry. Other federal regulators have the same authority – and FHFA should too.

History proves that competition is the best way to serve consumers.

Competition lowers prices, improves quality, and drives innovation. Competition would also increase the stability of our housing system and ensure no institution is “too big to fail."

We have already seen some proposals that could support issuing new charters – including a framework put forward by Chairman Crapo.

I will continue to consult with Congress on legislative reforms. And I am hopeful we will be able to find broad bi-partisan agreement on some key issues, as we have in the past.

I believe there is consensus in Congress that the system is broken. And there is broad interest in fixing it.

I know that Congress can come together to pass meaningful housing finance reforms. The last major reform was the Housing and Economic Recovery Act of 2008. It passed the Senate with more than 80 votes. And I was proud to be a part of that effort.

We have done this before, and we can do it again.

While I will continue to work with Congress, I will also take action where I can.

Reform should not have to wait for the next crisis. Reform is about preparing ourselves to withstand the next crisis.

To paraphrase President John F. Kennedy, the time to repair the roof is not in the middle of a downpour but when the sun is shining.

Right now, the sun is shining on our economy and housing market. But we know booms are eventually followed by busts.

For too long, our housing finance system has fueled these cycles. It has pushed the peaks higher and dragged the valleys lower than they might otherwise be.

When the market is hot, this can feel great. But we know this feeling is fleeting.

When the market turns south, this kind of pro-cyclical housing finance system can turn a decline in prices into a global financial crisis.

What we need instead is a counter-cyclical housing finance system. That means it must be reliable, stable, and liquid over the long-term – across the business cycle and the housing cycle.

This is not the housing finance system that we have today.

But it is the housing finance system that the American people deserve. And we can build it, if we work together.

In March, the President directed the Treasury and HUD Secretaries to develop a housing reform plan. And I have been consulting with Secretary Steven Mnuchin on this plan.

Our objective is to give taxpayers confidence that America's mortgage giants will never need another bailout. We will also give investors confidence that America's secondary mortgage market is strong and resilient.

Part of our strategy is to end the Fannie and Freddie conservatorships.

We will move toward a new, reformed structure of our mortgage finance system that protects the American taxpayer, meets the housing needs of American families, and supports financial stability at home and abroad.

The conservatorships have lasted far longer than anyone expected. In 2008, as they were being debated and developed, I remember thinking that any conservatorship was unlikely to last more than 6 months. 

It has now been more than a decade. This is at odds with what is contemplated in the statute. The law requires me to do what I can within my powers to fix Fannie and Freddie.

The foundation of Fannie and Freddie's path out of conservatorship is capital. This is a central tenet of finance – capital is the foundation of safety and soundness.

My primary concern is that Fannie and Freddie maintain capital levels commensurate with their risk profiles.

Over time I think they should operate under essentially the same capital rules as other large financial institutions.

An important step will be to address the Net Worth Sweep. But it would likely take a very long time to build sufficient capital through retained earnings alone.

Therefore, we will be exploring other avenues to raise capital, such as a public offering of some kind.

We are still very much in the early stages of this process. There is much work and analysis to do in this arena to fully explore all the options.

We will continue to engage with Treasury to develop a responsible plan to end the conservatorships – with a clear road map and mile markers – and to adjust the Treasury share agreements accordingly.

And by sometime next year, my hope and expectation is that we will be on the path where Fannie and Freddie can start to build capital.

But building private capital to stand between mortgage credit risk and American taxpayers is just one of our strategic objectives.

In addition, we need prudent and sustainable lending standards, sound risk management, and world-class regulation that applies the same set of rules to all market participants.

Toward that end, FHFA will also be pursuing regulatory reforms that prepare the Agency to transition into the post-conservatorship world.

As I see it, a prerequisite for ending the conservatorship is to ensure that Fannie and Freddie are first-in-class in corporate governance and risk management.

Any rule, regulation, program, or activity begun under FHFA's previous leadership that serves these objectives, we will continue and expand.

And we will continue working on rule makings that establish sound, prudent standards for both the amount and the quality of capital.

We will also reexamine all Agency policies that dilute or undercut our strategic objectives and vision.

We are actively reviewing all recent expansions into new markets and activities to put an end to the era of charter creep. Anything that falls outside the GSEs' core business model and mission will be curtailed or ended altogether.

We are also looking at every rule and regulation to ensure that we are creating a level playing field across the industry.

One of my statutory responsibilities is to create a competitive mortgage market. To do that, everyone must operate under the same rules.

That means Fannie and Freddie should be successful because they have the best management, execution, and business practices – not because they have the rules stacked in their favor.

To be fair to everyone in the emerging marketplace, no one will get any special favors.

This kind of comprehensive reform agenda will strengthen Fannie and Freddie for the future.

When implemented, it will allow them to build a sound capital base, backstopped by world-class supervision and regulation. And it should bring added confidence to all market participants. 

I recognize that we have our work cut out for us. The agenda I have just laid out is ambitious.

But I am optimistic – and I hope you are too. With your support, I know we can finally complete “the great unfinished business" of the financial crisis.

Before I close, let me thank Maren Kasper one more time for hosting this great event.

This Summit is just one reason why I am confident we will succeed in building a stronger, more secure housing market for all Americans.

Thank you.