Remarks As Prepared for Delivery
Dr. Mark A. Calabria, Director
Federal Housing Finance Agency

CREDIT UNION NATIONAL ASSOCIATION (CUNA)

GOVERNMENT AFFAIRS CONFERENCE

MONDAY, FEBRUARY 24, 2020 - WASHINGTON, D.C. 

"STRENGTHENING OUR HOUSING FINANCE SYSTEM TO SUPPORT AMERICA'S COMMUNITY LENDERS"

Thank you, Antonio, for that introduction. Thank you to the more than 5,000 CUNA members for inviting me to speak here today. And let me also thank Jim Nussle for his leadership over the years – as a member of Congress, Director of OMB, and of course as President and CEO of the Credit Union National Association.

I am here to talk about the work we are doing at FHFA to strengthen our mortgage finance system. And let me emphasize at the outset that, at every stage of this effort, we are taking into account the unique and important role of credit unions.

Credit unions are unique both in what you do and how you do it. Your borrowers are your members. And you are committed to meeting their needs. You are an essential part of the communities you serve. And your success is tied to theirs.

Our housing finance system has a major impact on our nation's economy and the lives of most Americans. A home is the largest asset most people will ever own, and mortgages are the largest asset class, second only to treasuries.

The backbone of our housing finance system has always been the small, community lender. And that includes the thousands of credit unions that today serve 115 million members nationwide.

During the Great Depression, America's community lenders were hit hard. Fannie Mae and the Federal Home Loan Banks were created to be a source of liquidity to support them. And a few decades later, Freddie Mac was formed for the same purpose.

My job is to make sure that Fannie, Freddie, and the Federal Home Loan Banks fulfill this core mission. There are two critical elements of that mission that FHFA is especially focused on.

Number 1: The entities FHFA regulates have to be a source of liquidity in times of stress.

The economy is strong today. But my job is to hope for the best and prepare for the worst.

The question I ask myself every day is: Are Fannie and Freddie ready for a stressed housing market? Are they strong enough to support the market, in order for you to continue supporting your members?

Right now, the answer is no. In their current financial condition, Fannie and Freddie would fail in a downturn.

The lack of capital at Fannie and Freddie jeopardizes their important mission. It puts taxpayers at risk of absorbing their losses, as we saw with the bailouts after the last crisis. And it threatens every sector of our housing system, including credit unions.

This point is key: If Fannie and Freddie fail again, liquidity in the mortgage market will be impacted. This would hurt America's credit unions and the communities you serve.

That is why we are focused on strengthening Fannie and Freddie. And I will tell you more about the steps we are taking in just a moment.

The second critical element of the mission of Fannie, Freddie, and the Federal Home Loan Banks is that they have to provide fair and equal market access to small lenders.

One of the troubling trends leading up to the 2008 crisis was that the biggest players in the market received special treatment, like g-fee discounts, because of their size and volume.

This fueled reckless lending behavior. It drove consolidation in the industry that ultimately hurt consumers and borrowers. And it was unfair to community lenders.

I have nothing against the big players. But their size means they do not need to worry about market access. The point of Fannie, Freddie, and the Federal Home Loan Banks is to provide that access to the smaller lenders, like credit unions.

That is why, last year, FHFA put an end to volume-based discounts, variances, and exceptions at Fannie and Freddie. Small lenders must have access to the secondary market at terms equitable with larger players.

This is a critical step to ensuring Fannie and Freddie are supporting the level playing field that is necessary to bring competition and innovation to the marketplace.

Again, at FHFA we are focused on strengthening these two elements of the mission of Fannie, Freddie, and the Federal Home Loan Banks. Our goals are to ensure that they, number 1, are a source of liquidity in a downturn and, number 2, support equitable market access for small lenders, like credit unions.

To achieve these goals, we must: First, build capital at Fannie and Freddie; Second, reduce their risk profiles; And third, strengthen FHFA's regulatory capabilities.

We are making steady progress on all three fronts.

It all starts with capital – the foundation of financial safety and soundness.

Fannie and Freddie own or guarantee a combined $5.5 trillion in single and multifamily mortgages. That is nearly half of America's residential mortgage market.

But when I walked in the door at FHFA, they were limited to just $6 billion in allowable capital reserves. This put their combined leverage ratio at nearly a thousand to one.

The danger this poses to taxpayers and our entire housing system cannot be overstated.

Imagine if any of your credit unions operated at a thousand to one leverage. That would probably keep you up at night too.

That is why, last September, Treasury and FHFA agreed to allow Fannie and Freddie to retain capital of up to $45 billion combined.

As a result, their combined leverage ratio has greatly improved. Since I came into office, we have nearly quadrupled capital at the Enterprises.

But it still stands at nearly two hundred and forty to one – roughly 20 times the average leverage of the institutions represented here today.

This is far less capital than Fannie and Freddie need to survive even a modest downturn. But we are moving in the right direction. And we will continue building on this foundation this year.

FHFA's capital rule will be a critical mile marker in our effort. It must be in place before Fannie and Freddie can go to the market to raise capital. I expect we will have re-proposed the capital rule very soon. Our goal is to publish the final rule by the end of 2020.

Based on this timeline, 2021 is the most likely target for an external capital raise by the Enterprises. However, let me emphasize that this effort will continue to be process dependent, not calendar dependent.

At the same time that we are building capital at Fannie and Freddie, we are also reducing their risk profiles.

When reducing risk, my standard is: Are the loans bought by Fannie and Freddie sustainable? Are they being made just to get people into homes? Or are they being made so that borrowers can stay in their homes?

We know that a borrower's likelihood of default is positively correlated with their number of risk factors – like high loan to value, low credit score, high debt to income.

If a borrower has just one of these risks, there are ways to offset it with other compensating factors. But the chance of default is driven up when the same borrower has more than one of these risks layered on top of the other.

Historically, the proportion of layered-risk loans purchased by Fannie and Freddie has been in the single digits. But as we saw in the last crisis, without adequate capital, even this “tail risk" can imperil our housing finance system.

To reduce this risk, FHFA directed Fannie and Freddie to improve the quality of incoming loan acquisitions. As a result, we have cut in half the percentage of loans with multiple risk factors.

These changes have not reduced the availability of mortgage credit.

I recognize that this is intuitive for most of you. But again, this gets back to the ways that credit unions are unique. My goal is for the rest of the market to meet the high standards of mortgage quality that credit unions are known for.

Reducing risk at the Enterprises and preparing them to withstand a downturn is not optional – it is why FHFA exists. And it is essential for Fannie and Freddie to be the strong support for the rest of the market that America's credit unions need.  

When tailoring risk, we are moving thoughtfully, but not slowly. This means small adjustments to the footprint pay significant dividends in strengthening the system without disrupting the markets.

Again, it is not just about building capital and reducing risk at Fannie and Freddie. We are also strengthening FHFA's regulatory capabilities. To responsibly end the conservatorships, Fannie and Freddie must be both well-capitalized and well-regulated.

One of my first statutory duties is to foster a competitive, liquid, efficient, and resilient mortgage market. I take this very seriously, especially because so many aspects of today's market fall short.

Much of FHFA's regulatory agenda is focused on bringing today's mortgage market in line with this statutory standard – and it starts with competition.

As long as our mortgage market is dominated by the duopoly of Fannie and Freddie, borrowers will not get the full benefits of a truly competitive marketplace. But there are areas where we can make some progress. That includes leveling the playing field for small lenders, like credit unions.

I already talked about what FHFA has done to prohibit volume-based discounts. Another key example is the Qualified Mortgage standard.

Changing QM is up to the Consumer Financial Protection Bureau and my good friend, Kathy Kraninger. But FHFA has been a partner in this effort, and we will continue to bring our mortgage expertise to support CFPB's work on QM. 

Fannie and Freddie have a role to play, too. That is why FHFA directed them to support the development of a QM standard that applies equally to everyone and gives special advantages to no one.

Fixing QM will help resolve much of the uncertainty that is holding back the mortgage market today. This will level the playing field, bring competition into the market, and enable private securitization to play a larger role.

There is also work to be done to improve liquidity in the market, not just through Fannie and Freddie, but also through the Federal Home Loan Banks.

I know this is an important issue for many credit unions, as so much of your lending is on the balance sheet.

Fannie and Freddie's assembly-line process of securitization works well for much of the market, but not very well for anything that is different.  

To make sure credit unions have the liquidity you need, FHFA will be looking at ways to support more portfolio lending for small, community institutions.

In addition, I have told the Federal Home Loan Banks to continue focusing on the advance business that is such a critical source of liquidity, especially in times of stress.

We are also conducting a holistic review of Federal Home Loan Bank Membership. As part of that review, earlier today FHFA released a Request for Input to collect insights and feedback from the industry and the public on membership issues.

Our goal is to ensure FHFA's regulation on Bank membership is consistent with statutory requirements and supports safety and soundness, liquidity through business cycle, and the Federal Home Loan Banks' important mission.

FHFA is also focused on using our regulatory powers to make the mortgage market more efficient.

For instance, I have spent a lot of time internally asking what has been done to improve servicing, which was a major weak point in the last crisis.

I think one of the reasons that it took so long for the housing market to recover from the 2008 crisis was that the rules of the game kept changing. 

Now is the time to learn from – and fix – the mistakes of the past. That is why we are looking at what Fannie and Freddie have done, and what other regulators have done, to address servicing.

In case we hit another stressed environment in the mortgage market, I want to make sure that borrowers, lenders, and investors all know the rules of the game and what is expected of them. 

This is especially important for credit unions.  You are integrated in the communities you serve. Your borrowers are your members. You know them, often on a personal level, and you interact with them face-to-face. And you have the soft touch that can make all the difference when your members turn to you for support.

Now, FHFA has made significant progress in strengthening our housing finance system. But it is important to recognize that only Congress can enact the structural reforms to fix today's broken model.

For instance, compared to the duopoly of the Enterprises, a fair and competitive secondary mortgage market would better serve borrowers and renters.

A truly competitive market would also promote long-term stability by ensuring that inefficient firms do not survive and that no institution is “too big to fail."

We have witnessed in one industry after another that the best guarantee for delivering lower prices to consumers is an open, competitive market, not a monopoly or duopoly. That is why I have asked Congress for the authority, similar to other financial regulators, to charter new enterprises.

But in the meantime, we are moving forward at FHFA, as the law requires, to fix the system and strengthen Fannie and Freddie.

Reform should not have to wait for another crisis. As President Kennedy said, “the time to repair the roof is when the sun is shining."

Now is the time for bold reforms because our economy and housing market are strong. And we know this will not always be the case.

But we cannot do this by ourselves. To succeed, we need to hear from all of you who are in the marketplace every single day.

You are on the front lines of our housing finance system. To do our job well, we need to see what you see in the marketplace. We need to know what you think we can do and should to do solve these problems.

Again, thank you for the invitation to speak to you today. I look forward to continuing to work in partnership with you as we build a stronger, more resilient housing finance system in America.

Thank you.

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