The next two years of federal housing policy could be positive under Mark Calabria

The Trump administration has been a nightmare for housing advocates. Housing and Urban Development Secretary Carson has stopped enforcing fair housing laws, with assists from Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting. Those two have been working to scale back fair lending enforcement and the Community Reinvestment Act.

Consumer Financial Protection Bureau Acting Director Mulvaney has gutted consumer protection in the mortgage market. I am more hopeful though when it comes to housing finance reform. The administration has nominated Mark Calabria to be the next director of the Federal Housing Finance Agency; the FHFA is Fannie Mae and Freddie Mac’s regulator.

{mosads}There have been three types of leaders on Trump’s team that have been working on housing issues. First are those who seek to explicitly undermine the work of the agency they lead, like Mulvaney. Leaders like Mulvaney are generally proponents of a radical conservative ideology that has been way out of step with American political norms until the Tea Party movement swept through Congress. Second are those who pay some lip service to the agency’s mission, but work to undermine it, like Carson. And third are those who are clearly industry favorites, like Mnuchin and Otting. They primarily seek to address concerns of the industry they regulate at the expense of their agency’s broader public mission.

Calabria represents a fourth type of leader, one who is more likely to implement a more traditional Republican agenda for the housing sector. For the last couple of years, he has been serving as Vice President Pence’s chief economist.

While I do not agree with Calabria about many things, he is very thoughtful and knowledgeable about the federal housing finance system. His thoughtfulness and knowledge are obviously good qualities to have in any government official, but they particularly stand out in the context of the Trump administration’s housing team and more broadly in an administration that has more than its fair share of scoundrels and incompetents.

He has a principled libertarian bent; and Calabria’s nomination is not sure to go through, but there is good reason to believe that it will. He is a former Republican Senate staffer and the Senate Republicans have a healthy majority in 2019.

It is particularly timely to think about a new phase in GSE reform because the term of FHFA Director Watt, President Obama’s appointee, expired earlier this year. This means that the Trump administration will be in charge of the FHFA for the first time in 2019.

The FHFA has broad authority to implement GSE reform unilaterally and can do even more in coordination with Treasury. So, it is worth thinking through what can happen with housing finance reform now that change is in the wind. Commentators are trying to parse out whether Calabria is a free market ideologue along the lines of former Rep. Jeb Hensarling (R-Texas) or a more traditional Republican.

Calabria’s writings could reasonably lead you to believe that he will be of the former sort, seeking to release Fannie and Freddie from conservatorship in some manner and return them to private ownership. I do not see him doing this, because that plan would have to keep a government backstop in place for their obligations in one way or another. I certainly don’t see Calabria returning to the “good ole days” of privatizing profits and socializing losses that characterized Fannie and Freddie’s existence before they entered conservatorship.

I believe that he will be more of pragmatist, notwithstanding the content of some of his think tank writings. Calabria has written quite a bit, so we have a good sense of his views on a broad range of housing finance issues.

At various times, he has argued that:

1. The footprint of Fannie and Freddie in the mortgage market should be shrunk.

2. The credit risk exposure of private entities like private mortgage insurers should increase while the risk exposure to the federal government, as a guarantor of Fannie and Freddie, should decrease.

3. The 30-year mortgage should not be subsidized.

4. Fannie and Freddie-eligible borrowers should meet meaningful minimum down payment and credit score benchmarks.

5. Fannie and Freddie’s affordable housing goals should be ended.

There is a pretty clear theme: Calabria believes that there should be a significant reduction in the government’s role in the mortgage market.

First, he wants to transfer risk from the government and ultimately taxpayers, to the private sector. This is a relatively technical subject, but it fits well within a theme of “no more taxpayer bailouts” if voters were to focus on it. Second, he wants to reduce the implicit subsidies that middle and upper-income homeowners receive in the current system, because of their access to Fannie and Freddie-insured mortgages. Third, he wants to reduce the subsidies that low and moderate-income homeowners receive in the current system through policies such as the “duty to serve” low and moderate-income households in the mortgage market. These types of policies also have support that crosses party lines. Moreover, these policies are driven to some extent by adopted FHFA rules that would limit Calabria’s ability to make rapid and dramatic changes to Fannie and Freddie’s actions in this area.

These three strands are all consistent with his libertarian bent. But the work of the FHFA is primarily concerned with the first of these three strands: the distribution of risk between the government and the private sector.

The FHFA can also increase the guarantee fee that Fannie and Freddie charge to insure mortgages. This can make private-label mortgages more competitive with Fannie and Freddie mortgages. And while the FHA cannot unilaterally lower the Fannie/Freddie loan limit, it can limit the increase in the loan limits that can be insured by the two companies. This can increase the scope of the private jumbo mortgage market and limited the growth of the government-guaranteed market.

In making such changes, Calabria will likely balance his push to distribute risk away from the government with a concern for a healthy housing market. In particular, if changes are made to loan limits and guarantee fees too rashly, it could have a negative impact on the housing market in the months leading up to President Trump’s likely reelection efforts.

I believe that Calabria is right in his conclusion that the there is too much government intervention in the housing market. The federal government now backs over 60 percent of all residential mortgages. While some believe that this is a positive development because of the excesses and predatory behaviors of private actors in the years leading up to the financial crisis, I believe that a properly regulated private sector can manage those risks and that the federal government should work to limit its role as an evaluator of credit risk and a holder of that risk.

While Calabria will likely push a free market agenda for the mortgage market, there will be countervailing forces that will be pushing for some ongoing government intervention in the housing market.

I think that under Republican control, the FHFA will reduce the footprint of Fannie and Freddie in the mortgage market. This will likely modestly increase the interest rates charged on mortgages but will reduce the likelihood of taxpayer bailouts.

This is also likely to mean fewer low-down payment loan options being offered by Fannie Mae and Freddie Mac which will put downward pressure on the homeownership rate. The Trump administration might continue to pull back on its regulation of the mortgage market and continue to reduce the role of the Consumer Financial Protection Bureau in regulating how mortgages are originated and serviced. 

The Trump administration is clearly working to put fair housing, fair lending, community reinvestment and consumer protection in deep freeze for the foreseeable future. So, from the perspective of an affordable housing advocate, there is a lot to oppose in the Trump agenda. But a move to redistribute credit risk in the mortgage market from the government to the private sector is not one of them, so long as housing proponents are able to protect programs that promote affordable housing and sustainable homeownership.

David Reiss is a professor at Brooklyn Law School, the director of the community development clinic and the research director of the Center for Urban Business Entrepreneurship.