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New Head of FHFA Could Mean GSE Reform in 2019

Published by Michael J. Novogradac on Friday, March 1, 2019

Journal cover March 2019   Download PDF

Change may come to the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae in 2019. The question is whether that change will constitute “reform” or something notably less.

The pending appointment of Mark Calabria as the head of the Federal Housing Finance Agency (FHFA) adds momentum to the GSE reform push, making both administrative and legislative changes more likely for the GSEs after years of talk. The issue is important for affordable housing, which benefits from not only the GSE’s mortgage business, but from affordable housing goals, duty-to-serve rules, low-income housing tax credit (LIHTC) equity investment and funding for the Housing Trust Fund (HTF) and Capital Magnet Fund (CMF).

Fannie and Freddie went into government conservatorship as the housing bubble burst in 2008. Since then, the FHFA has overseen the GSEs, as competing ideas circulated on what type of reform is needed and how it would be implemented.

A flurry of activity at the beginning of 2019–the end of Mel Watt’s term as the head of FHFA; the appointment of Joseph Otting, the Comptroller of the Currency, as acting head; and the nomination of Calabria to a five-year term–could prompt changes.

GSEs and Affordable Multifamily Housing

Fannie Mae and Freddie Mac were chartered in 1968 and 1970 (Fannie’s predecessor entity was created in 1938, but turned into a publicly traded private enterprise in 1968), creating a liquid secondary market for mortgages, which freed up funds for financial institutions to make additional mortgages.
From the outset, Congress required Fannie and Freddie to promote mortgage credit, “throughout the nation, including central cities, rural areas and underserved areas.”

The GSEs were considered a success as Fannie and Freddie helped to generate an increase in homeownership in the decades after their chartering, but as the housing bubble burst in 2007-2008, the GSEs were left holding mortgage guarantees that led to the risk of insolvency.

That’s when conservatorship began and the risk to affordable multifamily housing increased.

Fannie and Freddie do most of their business financing single-family homes, but the GSEs also have a significant role in affordable multifamily housing. In particular, they have annual affordable-mortgage-purchase goals (a responsibility established in 1992) which apply to multifamily as well as single family housing, and an assessment to fund HTF and CMF. The GSEs also have a duty-to-serve requirement that covers the underserved markets of affordable housing preservation, rural housing and manufactured housing. The CMF, HTF and duty-to-serve requirements were established in 2008.

The CMF and HTF funding is instructive: in 2018, the GSEs contributed about $400 million combined to the CMF and HTF. (At press time, Otting hadn’t announced whether he would block the transfer of 2018 funds to Treasury and HUD, as well as continue or suspend the contributions in 2019).

The GSEs also were allowed by FHFA in 2017 under former director Mel Watt to invest LIHTC equity for the first time since they were placed in conservatorship. Fannie and Freddie were permitted annually to invest up to $300 million each on their own, and up to $200 million each with approval by FHFA. The additional $1 billion in LIHTC equity helped soften the blow resulting from tax reform, which reduced LIHTC equity investment.

Room for Disagreement

The GSEs’ role has long been a dividing point for lawmakers. There are members of each party who don’t like the idea, albeit for different reasons–a Republican desire to encourage private capital in the mortgage business, a Democrat desire to avoid a return to the former GSE model.

Efforts at legislative reform often fall short for that reason. While there is a shared desire to change the GSEs, there is little common ground.

For instance, the Obama administration wanted to get rid of Fannie and Freddie and make them regroup under a new regime with multiple guarantors and private capital ahead of any government insurance. Like other efforts at reform, it fell short.

For those in multifamily affordable housing finance, especially the constituency in small community banks and non-bank providers of mortgage debt, Fannie and Freddie are crucial.

Starting, Stopping, Starting in 2019

GSE reform talk has been ongoing for years, but things stepped up quickly at the start of 2019.

In mid-January, after Watt’s five-year term ended, Otting discussed plans to take Fannie and Freddie out of conservatorship without legislation and said a plan was coming in a few weeks. The White House quickly walked back that claim and pledged to work with Congress on plans to end conservatorship, among other housing finance reforms.

Then Sen. Mike Crapo, R-Idaho, released a three-page outline of a reform plan. Crapo, chairman of the Senate Banking Committee, called for multiple private guarantors overseen by the FHFA, with Fannie and Freddie returned to private ownership with their federal charters revoked and Ginnie Mae guaranteeing timely repayment on mortgage-backed securities.

Crapo’s plan would end Fannie and Freddie’s affordable housing goals and duty-to-serve requirements, replacing them with a Market Access Fund to finance loans, grants and credit enhancements to support affordable homeownership and rental housing. The plan would retain the CMF and HTF, which would be financed–along with the Market Access Fund–through an annual assessment on the total loan volume guaranteed by Fannie, Freddie and the additional guarantors, a larger assessment than the current law assessment of 4.2 basis points on annual new business purchase from Fannie and Freddie.

While Crapo and House Financial Services Chairwoman Maxine Waters, D-Calif., might find common ground on HTF and CMF funding, Crapo’s proposed end of affordable housing goals and duty-to-serve requirements (which includes rural housing, affordable housing preservation and manufactured housing) are likely a non-starter for Waters.

In the wake of Crapo’s proposal, Treasury Secretary Steven Mnuchin said that if housing-reform legislation doesn’t advance in the Congress, Treasury may take the lead in reform, using administrative tools.

White House Options

All the talk made it clear that the Trump White House could play a significant role in potential GSE reform. The nomination of Calabria to lead the FHFA fed that narrative. Once approved by the Senate, Calabria would have tremendous authority over the GSEs, due to FHFA’s conservatorship. 

Many observers considered it likely that Calabria will, at a minimum, cut off contributions from the GSEs to the HTF and CMF. Calabria could also increase guarantee fees, get rid of product lines (such as LIHTC equity), lower the loan limits, get rid of high-cost areas–all to reduce the footprint of the GSEs.

However, at his Feb. 14 hearing before the Senate Banking Committee, Calabria said he would suspend contributions to the HTF and CMF only if the GSEs were failing, which he said was unlikely. He also said he expected to keep the duty-to-serve requirements in place.

Any or all of the aforementioned actions to cut off contributions or reduce the footprint of the GSEs would likely lead to a reaction from Congress, prompting GSE hearings and proposed legislation. Proposals would likely come from both houses of Congress and from both parties, although the proposals will probably have little common ground.

One consideration is whether a White House-led extraction from conservatorship of the GSEs–which is a possibility–could lead Democrats and Republicans in Congress to find common ground and reach a legislative solution that, for instance, includes preserving the CMF and HTF.

The presence of Calabria may increase pressure to come up with a legislative proposal, although the common-ground question is significant.

However . . . 

Calabria’s history as a libertarian and his relationship with Vice President Mike Pence (he was Pence’s chief economist) don’t necessarily outweigh the fact that anything concerning the GSEs would also be a political decision. In addition to the head of the FHFA, there are two significant players in the executive branch with voices in this type of decision: the Treasury Department and the National Economic Council. While the FHFA head currently has legal authority to make decisions concerning the GSEs (due to FHFA’s conservatorship), political issues would be influenced by the other significant players.

Simply put, there are questions about whether the Trump administration would choose to go to battle over the GSEs a year before the 2020 presidential election. It’s possible that other voices would convince Calabria to go slow and Calabria’s statements to the Senate Banking Committee assuaged some fears.


While critics of the GSEs focus on single-family finance issues, Fannie and Freddie play important roles in affordable housing finance. The likely presence of Calabria as the head of the FHFA, thus the loudest voice on GSE administrative reform, could make 2019 a year of at least adjustment and perhaps reform for Fannie and Freddie.

For those in affordable housing, the focus is on the GSEs’ investment in CMF and HTF, retention of their ability to invest in LIHTC equity, and the ability to keep the GSE multifamily affordable housing goals and the duty-to-serve provisions.

There’s consensus on a desire for GSE reform, but how that looks depends on perspective. We know this: with a presidential election looming, legislative and administrative solutions will likely happen this year or wait until 2021.

Multifamily affordable housing advocates will watch GSE decisions–legislative or administrative. The effects will be significant, even though solutions are to a problem that multifamily affordable housing didn’t create. 

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