Federal Housing Finance Agency Director Mark Calabria on Monday warned Congress that Fannie Mae and Freddie Mac play a disproportionately large role in the housing market and are badly undercapitalized – creating significant risk to the nation’s economy.
In a letter to the banking and housing chairs introducing FHFA’s annual report, Calabria urged Congress to give the agency greater authority to charter competitors to Fannie and Freddie and limit their relative power in the housing market.
“A root cause of the 2008 financial crisis was imprudent mortgage credit risk backed by insufficient capital,” Calabria wrote to Congress. “This fundamental problem remains unresolved today. The Enterprises are inarguably undercapitalized for their size, risk, and systemic importance.
Calabria said Fannie and Freddie owned or guaranteed approximately $5.7 trillion in single-family and multifamily mortgages at the end of 2019, which accounts for nearly half of all mortgage debt outstanding in the United States. Fannie and Freddie’s combined leverage ratio was approximately 300 to 1, compared to a 12-to-1 leverage ratio for the largest U.S. financial institutions.
Calabria warned that Fannie and Freddie “do not have the capital necessary to withstand a serious downturn in the housing market.”
“The lack of safety and soundness at the Enterprises jeopardizes their important mission and countercyclical role, which is to support sustainable homeownership and affordable housing, especially during times of market stress,” he said. “It also puts taxpayers at risk of absorbing their losses, as we saw after the housing and financial crisis of 2008, and it threatens every sector of the nation’s housing and mortgage finance systems.”
Calabria called on Congress to “advance legislation to enhance the safety and soundness of the regulated entities and move our country toward a stronger and more resilient housing finance system.” Specifically, FHFA is seeking:
Chartering Authority: “FHFA reiterates its recommendation that Congress provide FHFA with chartering authority, similar to that of other federal financial regulators such as the Office of the Comptroller of the Currency. Such authority would enable FHFA to charter competitors to the Enterprises. In the lead up to the financial crisis, the duopoly market structure, together with the Enterprises’ congressional charters, size, and systemic importance, created a perception that the Enterprises were `too big to fail.’”
Service Provider Examination: “FHFA recommends that Congress authorize FHFA to examine the records, operations, and facilities of each material service provider to a regulated entity
for the limited purpose of identifying practices that could pose a safety and soundness risk to the regulated entity. Examination authority is distinct from regulatory authority, and FHFA is not requesting the authority to supervise or regulate these other market participants.”
Regulatory Capital: “FHFA’s proposed regulatory capital framework for the Enterprises, as set forth in the recent notice of proposed rulemaking, would mitigate the risk posed by the current statutory definitions of capital by prescribing supplemental capital requirements based on definitions of regulatory capital used by the federal banking regulators. FHFA’s proposed regulatory capital framework for the Enterprises, as set forth in the recent notice of proposed rulemaking, would mitigate the risk posed by the current statutory definitions of capital by prescribing supplemental capital requirements based on definitions of regulatory capital used by the federal banking regulators.”
Fostering Competitive National Housing Finance Markets: “FHFA agrees that a driver of the Enterprises’ growth has been a regulatory framework that has become biased in favor of Enterprise-supported mortgage lending. FHFA’s proposed regulatory capital framework is an important step toward reducing the gap between the credit risk capital requirements of banking organizations and those that apply to the Enterprises with respect to similar mortgage exposures. FHFA will continue to support the efforts of the Consumer Financial Protection Bureau and other federal financial regulators to ensure that the special regulatory advantages afforded the Enterprises do not create opportunities for regulatory arbitrage or otherwise confer undue competitive advantages on the Enterprises. A congressional grant of chartering authority would significantly reduce any competitive advantage arising out of the perception that the Enterprises are “too big to fail.” To further level the playing field with private-sector sources of capital, Congress should also consider other legislative reforms to remove unnecessary statutory exemptions and other special treatments afforded the Enterprises.”
See the full report with language on FHFA’s legislation recommendations here.