Fannie-Freddie Watchdog Pick Urges Overhaul to Avoid Losses

(Bloomberg) -- President Donald Trump’s pick to lead Fannie Mae and Freddie Mac’s regulator pledged to work with Congress on overhauling the companies, while downplaying controversial positions he’s previously laid out on everything from the 30-year-mortgage to affordable housing initiatives.

Mark Calabria, the libertarian economist who Trump has nominated to lead the Federal Housing Finance Agency, told senators Thursday that they should play a leading role in pursuing changes for the mortgage giants, which have been under U.S. control since 2008. He outlined what he thinks should be the goals of any reform effort, emphasizing the need to dial back Fannie and Freddie’s dominance by fostering competition for the companies.

“We need an open, competitive market,” Calabria said at his confirmation hearing before the Senate Banking Committee. “There is certainly a part of me that has a suspicion of monopolies and duopolies.”

Fixing Fannie and Freddie, which underpin the mortgage market by buying loans from lenders, is the main unresolved issue from the 2008 financial crisis. The Trump administration has repeatedly said that coming up with a solution is a priority but it has made little headway two years into the president’s term. Securing Calabria’s Senate confirmation is considered crucial to any revamp.

Taxpayer Losses

While the housing market has been stable in the decade since Fannie and Freddie were taken over, Calabria warned that maintaining the status quo could lead to “significant” taxpayer losses in another crisis. The U.S. took over the companies during the 2008 meltdown, eventually injecting them with $187.5 billion in bailout money.

In response to repeated questions from Democrats about his commitment to maintaining the government’s role in housing, Calabria gave assurances that he sees FHFA as an “absolutely necessary” agency and that he has no interest in disrupting the $10 trillion mortgage market. He said he expects that the 30-year fixed-rate mortgage, the bedrock of the U.S. market, will survive his tenure after lawmakers questioned whether he might try to undermine it.

Calabria added that he supports a “modest capital buffer” above the $3 billion that both Fannie and Freddie are now permitted to hold to protect against losses, but said he doesn’t think the FHFA director can unilaterally increase the cushions. He declined to specify what an appropriate level would be. To make changes, FHFA would have to reach an agreement with the Treasury Department.

Hedge funds and other investors have been calling for Fannie and Freddie to be permitted to hold more capital, which they see as a step toward the companies being released from U.S. control. At Thursday’s hearing, Calabria did not endorse recapitalizing the companies and then ending their conservatorships.

Democrats have been worried that Calabria might try to lower the size of mortgages that Fannie and Freddie are permitted to purchase from lenders. He seemed to temper some of those concerns Thursday by saying he wasn’t sure the FHFA has authority to determine loan limits, saying that’s Congress’ responsibility.

Failed Efforts

A series of lawmaker efforts to revamp Fannie and Freddie have failed. Amid the stalemate, officials including acting FHFA Director Joseph Otting, who also serves as comptroller of the currency, have indicated that the administration might act alone. Calabria sought to walk that back Thursday.

Calabria, who has been working for Vice President Mike Pence, told lawmakers that he hasn’t seen anything resembling a White House plan for housing-finance reform, noting that he withdrew from internal discussions on the topic once it became clear that he’d be the FHFA nominee. A White House spokeswoman said late last month that the administration would soon release a framework that outlines an approach for developing a proposal.

Calabria also discussed the Fannie and Freddie’s affordable-housing goals, which have been a sticking point in previous overhaul efforts. Democrats have insisted that the companies play a role in ensuring lower-income borrowers have access to mortgages. While Calabria has previously criticized such objectives, he committed to preserving them Thursday -- within the confines of the law.

Fannie and Freddie, both of which turn profits over to Treasury under terms of their bailout agreements, reported fourth-quarter and full-year financial results earlier Thursday. Fannie will pay $3.2 billion to Treasury, while Freddie will pay $1.5 billion. Shares of Fannie were down 3.77 percent at 12:59 pm, while shares of Freddie fell 3.16 percent.

Companies’ Profits

Calabria, who is expected to be confirmed due to Republicans’ Senate majority, didn’t make any specific comments Thursday about wanting to revise the companies’ payments to Treasury.

When he was a scholar at the Cato Institute before joining the Trump administration, Calabria called for putting Fannie and Freddie into a form of bankruptcy that would have allowed them to continue operating while being reorganized with the help of a court-appointed trustee. He didn’t touch on this topic at Thursday’s hearing.

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