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Prepared Remarks of Dr. Mark A. Calabria at SFA Residential Mortgage Finance Symposium

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


1:15 PM – 1:45 PM 


Thank you, Reed, for that kind introduction. And thanks to Michael Bright and the leadership of SFA for inviting me to speak here today.

The mission of SFA is to ensure that securitization finances “responsible lending and remains committed to the safety, soundness, and growing needs of the entire economy.”

I share that mission, too. And it is why I believe our mortgage finance system is in urgent need of reform.

Fannie Mae and Freddie Mac – the two largest entities that I regulate – just entered their eleventh year of conservatorship.
This is much longer than any financial institution conservatorship has ever lasted. It gives Washington a far-reaching influence over the nation’s housing finance system, and it leaves taxpayers at risk.

If you add up all federal programs, taxpayers are exposed to nearly 63 percent of all single-family mortgage debt outstanding, or $6.9 trillion.

Today’s mortgage finance system poses significant risk not only to taxpayers, but also to borrowers, renters, homeowners, and our entire financial system. Yet, since 2008, mortgage finance reform has received much discussion but very little action.

When my tenure at FHFA began six months ago, I said the status quo is no longer an option and change is on the way. Since then, real change has begun, and we are building momentum for lasting reform.

And one week ago, FHFA marked another critical milestone in our progress when we released a new Strategic Plan and Scorecard for Fannie Mae and Freddie Mac.

I came here today to discuss what is in the new Strategic Plan and Scorecard. These two documents will be critical in guiding Fannie and Freddie through this important time of change and reform.

But first, let me clarify why we need reform now.

I recognize that business is pretty good for most people in mortgage finance today – especially now that we are in a refi market. And it does not hurt that the economy has been booming the past few years and house prices have been rising at a steady clip.

Some see these positive economic trends as evidence that reform should wait for a crisis. I disagree. To quote President John F. Kennedy, “The time to repair the roof is when the sun is shining.”

Now is the time to reform our mortgage finance system because our economy and housing market are strong.

Also, I imagine many of you would prefer a little bit less “boom and bust” in the real estate and mortgage markets.

A more stable and predictable market would be better for everyone’s business. It may also be more boring. But boring looks pretty good from the wrong side of a cycle of boom and bust.

As a safety and soundness regulator, my job is to hope for the best but prepare for the worst. That is why we must act now to repair the roof before it starts raining.

A root cause of the 2008 financial crisis was imprudent mortgage credit risk backed by insufficient capital. This fundamental problem remains unresolved today.

A case in point is Fannie and Freddie, which are undercapitalized for their size, risk, and systemic importance.

Together, they 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. When I first walked in the door at FHFA, the combined leverage ratio at Fannie and Freddie was nearly a thousand to one.

In September, Treasury Secretary Mnuchin and I signed a letter agreement modifying the terms of the Preferred Stock Purchase Agreements. Now, Fannie and Freddie can retain capital of up to $45 billion combined.

After retaining just one quarter’s net worth, I am proud to say that in my first 6 months at FHFA, we have nearly tripled the capital at Fannie and Freddie. This is a significant step forward. But it is just the beginning.

Their combined leverage ratio still stands at just over three hundred to one. To put this in perspective, our nation’s largest banks have an average leverage ratio of around ten to one.

In addition to low capital levels at the Enterprises, we have seen mortgage credit risk rising across the market for several years.

Regardless of loan quality, when the tide turns, there will be defaults, and Fannie and Freddie do not have the capital today to withstand a downturn.

Fannie and Freddie are not the only ones responsible for today’s broken status quo. For more than 11 years, they have been operating under government control through the conservatorships. This means their performance is also a function of government policies.

That is why there is momentum building across the government to fix those policies.

A critical step forward came in September when the Departments of Treasury and Housing and Urban Development released reform plans.

These plans represent a fundamental shift from past policies. They aim to prepare Fannie and Freddie to withstand a downturn and to operate safely and soundly outside of conservatorship.

I share this goal. The new Strategic Plan and Scorecard are critical to achieving it.

The Strategic Plan outlines FHFA’s priorities that will guide Fannie and Freddie’s operations. And the Scorecard is FHFA’s primary tool to hold Fannie and Freddie accountable for achieving those priorities.

The three objectives of the new Strategic Plan and Scorecard are to ensure that Fannie and Freddie…

Number 1 – Focus on their mission of fostering competitive, liquid, efficient, and resilient national housing finance markets.

Number 2 – Operate in a safe and sound manner appropriate for entities in conservatorship.

And Number 3 – Prepare for their eventual exits from the conservatorships.

Let me emphasize that third point: FHFA is moving forward to develop and implement a roadmap to end the conservatorships of Fannie Mae and Freddie Mac.

This is not simply a policy preference. It is a statutory duty.

The Housing and Economic Recovery Act of 2008 directs the FHFA Director to release Fannie and Freddie from conservatorship through one of three mechanisms: “reorganizing, rehabilitating, or winding up [their] affairs.” 

Ending the conservatorships is one of my top priorities because it is what the statute requires. FHFA is not going to ask Congress for permission to do what Congress has already told us to do.

Of course, I will also continue advocating for – and working with Congress to advance – much-needed legislative reforms.

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, FHFA will move forward to fulfill our responsibilities under the law.

One of my principal statutory duties is to ensure FHFA’s regulated entities foster competitive, liquid, efficient, and resilient national housing finance markets. This is the first objective of the new Strategic Plan and Scorecard.

A critical component of a liquid housing finance market is the continued success of the Uniform Mortgage Backed Security. UMBS is now the primary vehicle for the Enterprises to bring affordable liquidity to the market by connecting global investors to lenders of all sizes to borrowers.

The UMBS is the result of an industry-wide effort. On the FHFA side, Liz Scholz – who you will hear from later today – played a key role in the successful launch in June and its operation since then.

The continued success of the UMBS is a key priority in the Strategic Plan and Scorecard. And to ensure that success, this morning FHFA issued a Request for Input around the Enterprises’ UMBS pooling practices.

This RFI seeks to ensure that UMBS remains a source of stable, affordable liquidity for our nation’s housing finance system.

The requested input will help FHFA determine whether further action or alignment is necessary to ensure reasonably consistent security cash flows and continued fungibility of the Enterprises’ UMBS.

Also, FHFA is seeking input on whether more aligned pooling practices could facilitate the issuance of UMBS by market participants beyond Fannie Mae and Freddie Mac.

To facilitate market engagement, the RFI includes a proposal for Enterprise pooling practices that would channel the majority of Enterprises production into larger, multi-lender pools.

This would ensure more uniform cash flows for TBA investors. And it would continue to allow issuance of specified pools under appropriate circumstances.

The RFI proposal would also align Enterprise policies with the actions to be taken when a specific seller or servicer exhibits prepayment behavior outside acceptable norms that may adversely impact UMBS.  We look forward to input from all interested parties on this important matter.

The new Strategic Plan and Scorecard are also focused on preparing for the transition from LIBOR to alternative reference rates.

I know this is a topic of great interest to all of you – and it is a major priority for FHFA and the entities we regulate. This transition is vitally important given the planned phase-out of LIBOR as early as 2021.

FHFA’s focus is to ensure that the Federal Home Loan Banks and the Enterprises reduce risk exposure and prudently expedite the transition away from LIBOR.

FHFA supervisory guidance has already directed the Federal Home Loan Banks to stop purchasing LIBOR-based investments or entering into LIBOR-indexed transactions with maturities beyond December 31, 2021. And at some point, Fannie and Freddie will transition away from LIBOR-based mortgage loan products. 

FHFA has taken several other steps in the past six months to foster markets that are competitive, liquid, efficient, and resilient.

In September, FHFA released new multi-family loan purchase caps for Fannie and Freddie. They ensure a strong focus on their statutory mission without crowding out private capital.

The new caps provide ample support to the multi-family market with a combined $200 billion in purchase capacity through 2020. And they close loopholes that had enabled the Enterprises to unnecessarily displace private capital.

A key aspect of the new caps is that they increase the levels of Fannie and Freddie’s multi-family business that is mission-driven, affordable housing to at least 37.5 percent.

Also in September, FHFA issued formal policy guidance prohibiting the Enterprises from volume-based variances and exceptions. Within conservatorship, it is my intention that all lenders receive similar treatment.

This is an important element to leveling the playing field for small lenders and fostering fair competition. But there is more work to be done.

A key example is the Qualified Mortgage standard. The responsibility to change QM lies with the Consumer Financial Protection Bureau. But Fannie and Freddie have a role to play, too.

In the Strategic Plan and Scorecard, FHFA directs Fannie and Freddie to support the development of a QM standard that applies equally to all players originating responsible loans. This means there can be no special advantages for anyone.

Another example is Reg AB II. Ultimately, this is the responsibility of my colleagues at the SEC – and I am encouraged to see them taking steps to gather public input on some of the challenges of asset-backed securities disclosures. 

I know just before lunch you heard from my good friend SEC Commissioner Hester Peirce, who is doing a fantastic job. I will continue to partner with Commissioner Peirce and all of SEC on this important issue. Identifying relevant and streamlined data standards will provide transparency to investors in all mortgage-backed securities markets.

I noticed that the next session on today’s schedule asks: “Will Private Capital Fill the Gap?”

Private capital has the potential to fill the gap. But it will not be able to if it is hobbled by regulation.

Both QM and QRM create a tremendous amount of uncertainty that is holding back the mortgage market today. Fixing QM and QRM is critical to resolving that uncertainty. This will level the playing field, bring competition into the market, and enable private securitization to play a larger role.

This should be obvious, but it is worth emphasizing: No policy change will matter unless Fannie and Freddie are financially viable and strong enough to withstand a downturn in the economy.

That is why it is critical for FHFA to ensure Fannie and Freddie operate in a safe and sound manner. This is the second objective of the new Strategic Plan and Scorecard.

Meeting FHFA’s safety and soundness standards means aligning Enterprise risk profiles with their capital levels. This is paramount while Fannie and Freddie remain in conservatorship. And it is a prerequisite for ending the conservatorships.

The essential criteria of safety and soundness is: Are Fannie and Freddie resilient enough to withstand a downturn on the scale of what we saw in 2007 and 2008?

We know they cannot meet that standard right now. But I believe they are capable of and committed to getting there. In fact, today I think we see the strongest board and management teams in the history of these companies. I will measure progress by looking at whether they are moving in the right direction and as quickly as possible without jeopardizing their mission.

Implementing the Strategic Plan and Scorecard will not be calendar driven.   

It will be driven by meeting the key mile markers needed to move from today’s unsustainable status quo to a reformed and resilient housing finance system.

Fannie and Freddie cannot change their risk profiles overnight. But the Strategic Plan and Scorecard direct them to begin the process of calibrating their risk to their capital levels.

Here again, real change has already begun.

In response to the rising risk I mentioned earlier, Fannie and Freddie have taken measured steps to address loans with layered risk.

When tailoring risk, we will proceed thoughtfully. But this does not mean moving slowly. Small adjustments to the footprint can pay significant dividends in trimming the tails of risk.

Within the conservatorship, Credit Risk Transfer has been an important mechanism of reducing credit exposure at Fannie and Freddie.

I know you have already heard from FHFA’s Naa Awaa Tagoe on the latest with CRT. Naa Awaa has played an integral role in driving the successes of CRT, and we are fortunate that she is on the team at FHFA.

In the six years since the program began, CRT activities have included securities issuance, insurance and reinsurance structures, senior-subordination securitizations and a variety of lender risk-sharing transactions.

Fannie and Freddie have conducted just over $3 trillion of CRT activity on reference pools with mortgage loan balances at the inception of the transactions.

This has transferred a substantial amount of credit risk to private capital and helped reduce taxpayer exposure.

The new Strategic Plan and Scorecard recognizes a continued role of CRT in managing risk at the Enterprises. That is why FHFA is directing the Enterprises to conduct a comprehensive CRT review in 2020 to develop lessons learned and strengthen the program for the future.    

One of the new ways that FHFA will tailor risk at the Enterprises is to address overlaps with the Federal Housing Administration.

Reducing these overlaps is one of the recommendations in the Administration’s housing finance reform plans.

It is also essential to preparing for a responsible end the conservatorships. This is the third objective of the new Strategic Plan and Scorecard.

Thoughtfully addressing these overlaps makes sense for both the Enterprises and FHA because they were created to perform different roles in our housing finance system.

Improving the credit quality of FHA lending will also improve the quality of Ginnie Mae securities.

Change has already begun. FHFA is in the early stages of consulting with HUD and FHA. Our approach is to focus each program on fulfilling its distinct mission, while ensuring the secondary market continues to provide liquidity and access to credit.

In order to responsibly exit conservatorship, Fannie and Freddie must not stretch to serve borrowers who are better served by FHA. This is critical to not repeating the mistakes of the 2008 crisis.

Aligning risk to capital must be coupled with building capital to match risk. This is a precondition for exiting conservatorship.

Here again, change has already begun – and it is building momentum for lasting reform.    

As I mentioned, in September, Secretary Mnuchin and I modified the PSPAs, allowing Fannie and Freddie to nearly triple their capital.

FHFA is also working on a capital rule that balances the imperative of protecting taxpayers, the mission of supporting liquidity, and the economic incentives of raising private capital. 

We will soon be announcing whether or not the capital rule will be re-proposed and under what terms. We are moving thoughtfully and methodically because this may be the most important rule of my tenure.

But FHFA having a capital rule is not the same as the Enterprises actually having capital. The real work of reform can begin only after we finalize the rule.

Also, I will continue to work with Secretary Mnuchin on further revisions to the PSPAs necessary to end the conservatorships.

The objectives of the new Strategic Plan and Scorecard – and the changes we have made the past 6 months – lay the foundation for Fannie and Freddie to ultimately raise private capital.

But again, the path out of conservatorship will not be driven by the calendar. It will be driven by Fannie and Freddie meeting the mile markers set out for them.

I am the first to recognize the size and scope of the agenda that I just outlined. We certainly have our work cut out for us.

The only way to accomplish an agenda like this is to work together. Organizations like SFA have an important role to play.

I invite you to be partners in today’s effort to ensure that we have the strongest and most resilient mortgage finance system in the world.

Let me close with some words of wisdom from President Lyndon Baines Johnson.

In his first Thanksgiving address from the White House, he told the American people: “Yesterday is not ours to recover, but tomorrow is ours to win or lose. I am resolved to win the tomorrows before us.”

I hope you share that resolve – because when we put in the hard work to enact the changes that we believe in, we will “win the tomorrows before us” and build momentum for lasting reform.

Thank you.




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