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Fannie and Freddie will likely exit conservatorship by 2024, Calabria says

WASHINGTON — Federal Housing Finance Agency Director Mark Calabria said Fannie Mae and Freddie Mac are expected to be out of government conservatorship by the time his term ends in 2024.

However, he said the U.S. takeover of the government-sponsored enterprises — which began more than a decade ago — will not end until Fannie and Freddie hold sufficient capital.

“I certainly hope and expect they will leave before I leave,” Calabria told reporters Wednesday. “If they’re not ready, they’re not ready. And I’m not going to force them out.”

FHFA Director Mark Calabria
Mark Calabria, U.S. Federal Housing Finance Agency Director, testifies during a House Financial Services Committee hearing on the the Trump Administration's plans to change housing finance in America on Capitol Hill in Washington, D.C., U.S., on October 22, 2019. Photographer: Zach Gibson/Bloomberg

Calabria added that he expects initial public offerings from Fannie and Freddie to start within a few years.

“If all is going well, [in] 2021, 2022 we will see very large public offerings from these companies,” Calabria said at a Conference of State Bank Supervisors conference. “We will be allowing these companies to go out there and raise the capital they need so they can get out.”

That could tee up a conservatorship exit around 2022 or 2023, he said.

Again, Calabria reminded that the GSEs “have a large number of supervisory issues they need to fix” first.

The FHFA will announce soon whether it intends to reoffer the post-conservatorship capital framework that was developed under his predecessor, Mel Watt. Calabria said he expects the proposal to come out in “a couple of weeks” and that it will be a “prerequisite” for the GSEs to escape government control.

Though Fannie and Freddie will not need to meet the capital standard set by the framework before they exit conservatorship, Calabria said, the final rule will give investors a clear idea of what is required.

“The objective is, have the capital rule finished, so that we know what the capital target is, and then they’ll raise the capital to meet that,” Calabria told reporters.

Fannie and Freddie will be building retained earnings for “another year, or year and a half,” he said. “I’d like to make sure the institutions I regulate don’t fail in the next downturn."

Besides the risk-based capital rule, Calabria said his priorities include better analytics, the shift in interest rate benchmarks and appraisal standards.

“We plan to be a much more data-driven regulator than we did in the past,” Calabria said, noting that FHFA is currently lacking a sufficient number of Ph.D. economists. “If we can get data out that market participants and regulators find useful, we’re going to get it out. … My intention is for us to get a lot more of that out there so that market participants can get a lot better informed.”

Calabria also said that the he is also focused on transitioning Fannie and Freddie from the London interbank offered rate to a new benchmark.

"If you ask me what topic I've spent more time on than I thought I would coming in, it's Libor transition,” Calabria said. “Libor is going away. … At some point in the middle of next year, we will instruct Fannie and Freddie to no longer purchase Libor [adjustable-rate mortgages]."

For years, Congress has attempted to overhaul the housing finance system and largely failed. Most lawmakers have said they hope to preserve the 30-year fixed-rate mortgage. Calabria said that he doesn’t see the 30-year fixed-rate mortgage “as a product that’s going away.”

Calabria also weighed in on the appraisal industry, which he said the FHFA will be seeking feedback on soon.

“I think that it’s critical that the steps that Fannie and Freddie will be taking or could take over the next couple of years will completely determine the landscape of the appraisal industry,” Calabria said. “Because of that, I think it’s important that we press pause, that we do a request for information, that we hear from stakeholders such as those in the appraisal industry, or in other industries, and that we are thoughtful about how this transpires without simply saying go.”

Calabria’s comments coincided with House Financial Services Committee consideration of several bills Wednesday related to the debt-collection industry and mortgage underwriting.

Under the Consumer Financial Protection Bureau's Qualified Mortgage rule, which requires lenders to assess a borrower's ability to repay, Fannie- and Freddie-backed loans are automatically deemed QM. But that exemption, known as the QM patch, is expected to expire in January 2021, and the CFPB has said it intends to let the patch expire.

One of the House bills would give lenders a choice between using Appendix Q, a set of unpopular standards cited by the CFPB for complying with the qualified mortgage rule's 43% debt-to-income limit, and guidelines used by Fannie and Freddie for determining debt and income.

Calabria told reporters he has not yet read the text of the House bill, but, “As I said when I appeared before the House, I’d be happy to work with the committee. I believe that QM ultimately needs a legislative fix.”

As the 2020 presidential race heats up, Calabria — who was appointed FHFA director by President Trump — said he plans to complete his full five-year term regardless of the election results.

“My expectation is I will be coming to the office for the next four years, five months," he said. "So I’m not working on updating my resume.”

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