Biden should appoint Sandra Thompson to lead the FHFA permanently

The departure of Director Mark Calabria as head of the Federal Housing Finance Agency, arguably the most powerful position in the housing finance complex, marks an end to a time of confusion and contradictions for the industry.

Calabria, on the one hand, limited and reduced the footprint of Fannie Mae and Freddie Mac. At the same time, Calabria pretended to have a real possibility for ending the government’s conservatorship over the GSEs.

The ruling from the Supreme Court regarding the constitutionality of the FHFA’s leadership structure allowed President Joe Biden to immediately remove Calabria. The court’s decision took many in the industry by surprise.

“The court took an approach on the statutory issue which was unexpected from a legal point of view,” writes bank analyst Dick Bove.

“It argued that the FHFA’s first requirement was to think of the risks that the public faced. The second: keep the secondary mortgage market operating at its normal pace.”

Bove continues: “The third was to worry about the condition of the two secondary market companies Fannie Mae and Freddie Mac. However, the court believed that the health of these companies could and should be impaired if either of the two concepts above were at risk,” he concludes.

With the appointment of industry veteran Sandra Thompson as acting FHFA director, the industry can relax somewhat after four tumultuous and at times anxious years under Calabria.

“Sandra is a highly skilled and widely respected regulator who understands the secondary market, the GSEs, and conservatorship,” former FHFA Director Ed DeMarco told NMN. “She will do a terrific job as acting director.”

“Sandra’s tenure at FHFA makes her a wise choice to fill the acting role,” Faith Schwartz, president, Housing Finance Strategies, told NMN. “With her background at the FDIC and FHFA, she is very knowledgeable about the issues of liquidity, affordable housing and risk management of the enterprises.”

The mortgage industry longs for a period of stability after four years of upheaval from FHFA. On several occasions, various industry leaders and trade groups were forced to publicly rebuke Calabria for his unilateral actions to diminish the role of the GSEs in supporting the mortgage market.

Calabria, who is considered a conservative, inexplicably encouraged the Financial Stability Oversight Council and the Conference of State Bank Supervisors to impose bank-like capital rules on independent mortgage banks. He also ended the widely successful credit risk transfer transactions by the GSEs, which reduced taxpayer risk from these housing agencies

The FHFA under Calabria even published erroneous research on CRTs that criticized this private sector mechanism for de-risking the GSEs. Former Freddie Mac CEO Don Layton put FHFA research on CRTs published during Calabria’s arbitrary tenure into political context in a comment for the Harvard Joint Center for Housing Studies:

“It starts with the predetermined conclusion that ‘CRT doesn’t work,’ a position articulated by the director of the FHFA, Mark Calabria, from his first days in office. It then cherry-picks data and slants arguments to support that predetermined conclusion, ignoring or dismissing any argument to the contrary.”

Calabria’s limitation on cash window loan sales to the GSEs and caps on loans for investor properties were another sore point with the industry. These loans have since found a welcome reception in the private label market for the non-agency loans, but look for the Biden Administration to eventually roll back these changes.

The hope of the mortgage industry, of course, is that President Biden will avoid selecting another academic economist to run the FHFA. Calabria’s tendency to avoid taking advice from the professional staff of the GSE and the FHFA is another major industry concern.

With her strong regulatory background from two decades at the FDIC, Sandra Thompson would make an excellent candidate as FHFA director. She provides Biden a great opportunity to recognize a leading female executive in the mortgage industry. No doubt a great deal of energy and time will be spent speculating on the next FHFA nominee.

Meanwhile the industry is in the midst of a pivot from a year of great profitability in 2020 to a year where expense management is roaring back into vogue as the process of mitigating loan delinquency is intensifying.

Following the CDC’s decision to extend the eviction moratorium for one final month through July 31, 2021, the Biden administration announced a series of actions to help state and local governments prevent evictions. The administration is also taking action to stabilize homeowners and support a return to a more stable housing market, including by extending the foreclosure moratorium for federally backed mortgages by a final month, until July 31st.

Once the housing assistance funds appropriated by Congress begin to flow, the Biden administration is expected to allow the foreclosure moratoria to expire, but this still does not mean that significant foreclosures will begin.

Many loans now in forbearance will be put through a tortured waterfall of modifications and partial claims that will add greatly to the cost of servicing. The overriding concern of the Biden White House is to avoid “disparate impact” on minorities. Here’s how the process will go:

First, the servicer will ask the delinquent borrower if they can repay the $15-20k in arrears accumulated during COVID forbearance. The answer mostly will be no.

Then the servicer will ask the borrower if they can resume the previous level of payments if the arrearage is put at the back of the loan. About half will say yes, the other half will require a partial claim or modification or both.

The servicer will then mod the delinquent borrower into a loan in the high 2s to low 3 percent coupon. Some of these loans will perform, but many will eventually default. But few if any loans currently in forbearance will be eligible for foreclosure until early 2022 at the soonest.

As the year progresses, narrowing credit spreads and vicious competition for loans in the secondary market will place increased pressure on IMB expenses and liquidity. As officials in the Biden administration search for progressive victories and photo opportunities, the industry will clean up the mess.

The new FHFA director need be prepared to deal with the failure of a large IMB if the credit markets become more volatile than they were in March of 2020. The bidding war between Rocket, United Wholesale and other large public and private aggregators could lead to many smaller IMBs shutting their doors. This adds urgency to rolling back some of the Calabria-era changes in the operations of the GSEs.

In addition to worrying about changes at the FHFA, revisions to servicing waterfalls, and progressive political operatives seeking trophy scalps, IMBs must navigate a market that increasingly believes that we are on the verge of a change in Fed interest rate policy. Look for higher mortgage rates and volatility. Just another day in the life of mortgage finance.