WASHINGTON — Rumors circulating this week about a potential nominee to head the Federal Housing Finance Agency could offer key insight into how the Biden administration envisions the future of the mortgage giants Fannie Mae and Freddie Mac.
Speculation is mounting that Mike Calhoun, the president of the Center for Responsible Lending, is under consideration to head the FHFA. Though the White House has made no announcements about who will lead the agency, experts say nominating Calhoun would be an endorsement of spinning Fannie and Freddie into regulated utilities.
Calhoun — who has been president of CRL since 2006 — would likely steer both the FHFA and the two mortgage giants in a much different direction than former FHFA Director Mark Calabria, a Trump appointee
While at CRL, Calhoun has advocated for spinning the government-sponsored enterprises — held in federal conservatorships since 2008 — into regulated public utilities, similar to water or electric companies.
“The GSEs … had critical flaws leading up to the [financial] crisis. Since then, fundamental reforms have been made to them, and these changes have addressed systemic risks,” Calhoun said in testimony in 2019 to the Senate Banking Committee. “Going forward that work needs to be continued and expanded through regulation like that of the utility industry, to ensure that the housing finance system fully carries out its public mission but does not expand beyond that role.”
He also distanced himself from more extreme reforms to substitute a completely new housing finance regime for the current model.
“Proposals to replace the housing finance system with a dramatically new model would unnecessarily undercut the system’s public mission and place our overall housing market in grave danger of harmful and costly disruption,” he said.
The utility model has been championed by small lenders and Democrats alike.
“It appears possible that Calhoun could support GSE privatization if it created utilities that could play a far more meaningful role in supporting affordable housing,” Bose George, an analyst with Keefe, Bruyette & Woods, said in a research note.
Although Biden has not publicly stated where he stands on GSE reform, if he were to nominate Calhoun, it would indicate that the White House is likely interested in pursuing the utility model option, said Tim Rood, the head of industry relations at SitusAMC.
Rood said an embrace of the utility model for reforming Fannie and Freddie would be another sign that policymakers are interested in preserving the two companies in some form, although with a different structure.
“The thinking around radical housing reform [and] reforming Fannie and Freddie has really just been worn out, and even the folks who were adamant about winding them down and releasing them” have coalesced around the utility model “and seem generally supportive of it,” he said.
If nominated and confirmed, Calhoun would almost certainly deviate from Calabria’s focus on building capital at Fannie and Freddie in preparation to release the companies from conservatorship into the private sector.
Instead, he would be more likely take positions consistent with those of acting FHFA Director Sandra Thompson,
Just Tuesday, the Treasury Department and the FHFA
On Wednesday, the FHFA also proposed changes to the rule finalized by Calabria requiring Fannie and Freddie to boost their capital levels consistent with what they would need as private companies once they exit conservatorship. In a speech, Thompson noted that the rule drafted by Calabria did not incorporate the capital treatment of risk transfers.
"We may be looking at a few refinements" to the capital rule, Thompson said in a speech to the National Association of Federally-Insured Credit Unions. "And when I say that, I want to be really clear because it doesn't make a lot of sense for the capital rules to change every time there's a new director. It doesn't provide consistency or stability."
Although Thompson is well liked among both lenders and community groups, it’s unclear where she stands on the issue of conservatorship and the long-term future of Fannie and Freddie.
Calhoun would assume the role “with a clearly articulated agenda on ways that FHFA can increase the GSEs’ role in affordable housing” as well as a vision for the future of Fannie and Freddie, said George.
In February, Calhoun also co-wrote a paper for the Brookings Institution in which he suggested that the government’s ownership stake in the GSEs be exchanged for affordable housing commitments and a “restorative justice program” that would provide down payment and other assistance in an effort to close the racial homeownership gap.
If Calhoun were to be nominated, “there would be a fair amount of focus on his comments around the utility model and his comments regarding whether the government should sell or alter its ownership position in order to facilitate more investment in affordable housing,” said Isaac Boltansky, director of policy research at Compass Point Research and Trading.
“My sense is, that will be part of the conversation along with a whole lot of other ideas, because the affordable housing issue is a national crisis, and there isn't a single panacea for it,” he added.
Before joining CRL, Calhoun worked at the group’s affiliate Self-Help, the largest community development lender in the U.S. He was also the author of a 1999 North Carolina law that cracked down on predatory mortgage lenders, which other state legislatures also later adopted.
Calhoun came out against the post-conservatorship capital framework that the FHFA finalized under Calabria in November, expressing concern that the rule would undermine the GSEs’ credit risk transfer program and translate into an increase in guarantee fees, ultimately raising the cost of borrowing.
“There are two main ingredients that will go into the GSEs. One is the amount of capital that's required and this raises that by 40%, so that is going to have a massive impact on pricing,” Calhoun said
Although Calhoun may have bold ideas for Fannie and Freddie, analysts are cautioning that the reality of the FHFA director job often tempers many agendas, and Calhoun is likely no exception. After all, spinning the GSEs into utilities could require legislation or cooperation from other government agencies.
“We caution against overreacting,” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a research note. “Calhoun would continue the GSE focus on affordable housing, but we question if some of his more aggressive restructuring ideas could advance.”
Calhoun is well known in the mortgage industry as being progressive, but also pragmatic, Boltansky said.
“A lot of the day job prevents some of the bigger-picture thinking that is often outlined in these white papers,” he said.
And that could be enough to get Republicans on board with his nomination, said Rood.
“He clearly sees the opportunity to use the GSEs as instruments of public policy, to expand homeownership to right some wrongs in terms of racial discrepancies,” Rood said. “I think that's certainly consistent with the progressive message without being too provocative for the Republicans.”
Kate Berry contributed to this article.
