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What Does Biden Replacing FHFA Director Mean for Homebuyers?

Just hours after the Supreme Court gave the green light, President Joe Biden removed Federal Housing Finance Agency (FHFA) Director Mark Calabria and appointed Sandra Thompson as acting director.

The shakeup comes after the nation’s highest court ruled that the structure of the FHFA was unconstitutional because the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac were not sufficiently accountable to the federal government.

Calabria, who was appointed by the Trump administration, is known for his unfavorable views of Fannie Mae and Freddie Mac and his efforts to return them to private control during his tenure.

Calabria said he would step down in a statement released shortly after the decision came through.

Before the day was done, the Biden administration appointed Thompson as acting director to replace Calabria. Thompson is a veteran housing and banking regulator with decades of experience at FHFA and the Federal Deposit Insurance Corporation (FDIC).

What does a new FHFA director mean for homebuyers?

It’s not unusual for new administrations to remove and replace department heads. But how does a changing of the guard at the FHFA trickle down to affect homebuyers?

It largely revolves around Freddie Mac and Fannie Mae and their role in the housing market. These GSEs are overseen by the FHFA. Their purpose is to buy mortgages from banks and private lenders and assume the risk of borrowers defaulting on their loans. With this burden off their shoulders, lenders are more comfortable making loans less expensive and more widely available.

This is especially true for non-government backed conventional loans, which make up around 85% of all mortgages.

This quote from HousingWire sums it up nicely:

“The government guarantee attracts trillions of dollars of investment from all over the world, from parties that would simply not invest without it. This, in turn, creates stable, deep liquidity, which reduces mortgage rates, particularly for long-term fixed rate lending.”

Jessica Manna, President of Digital Strategy and Innovation at Fairway Independent Mortgage Corporation said GSEs play a role in the company’s ability to increase access to credit.

“Freddie Mac and Fannie Mae provide assurance that allows mortgage lenders like Fairway to make home loans more affordable and accessible,” Manna said. “While we appreciate Calabria’s efforts as director, we look forward to working with the incoming leadership to expand access to credit and make homeownership more equitable and attainable.”

Home.com is owned by Fairway Independent Mortgage Corporation.

The battle over Fannie and Freddie

In 2019, as FHFA director, Calabria criticized Fannie and Freddie as a “duopoly” that undermined competition and said that increased competition would lead to market stability — the very thing the FHFA was created to achieve and maintain.

Fannie Mae and Freddie Mac have been under an FHFA government conservatorship since 2008, when the housing crisis cratered the U.S. economy and necessitated a $191 billion taxpayer-funded bailout of the GSEs.

Trump appointee Calabria, along with former Treasury Secretary Steve Mnuchin, moved for the GSEs to once again be managed under private ownership rather than by the government.

Critics of this position feared that private control of the GSEs could lead to another massive bailout without government oversight and regulation. The GSEs back about 50% of the housing market, and as Bloomberg described it, “the housing market is more dependent on them than ever.”

The Supreme Court’s ruling that the FHFA’s structure was unconstitutional because the President could only remove the director “for cause” gave President Biden the authority to oust Calabria and appoint someone supportive of the new administration’s policies.

Home affordability has been a key focus of the Biden White House. Earlier this year, the administration released proposals for a $15,000 down payment tax credit for first-time homebuyers and up to $25,000 in down payment assistance for first-time, first-generation homebuyers.

With Calabria out of the FHFA director’s seat, it’s unlikely that the GSEs will be phased out of the government conservatorship anytime soon, according to HousingWire.

Flashback to 2008

Perhaps the best way to explain the importance of GSEs is to look at the years leading up to the 2008 housing crisis.

In the mid-2000’s, the role of GSEs was reduced to make way for private label securities (PLS). This led to the housing market collapse and taxpayer-funded bailouts, after which GSEs regained their dominant role.

Screenshot from the Urban Institute.

Critics of Calabria — including trade associations and housing advocacy groups — feared he was leading the FHFA and down a similar path.

The Urban Institute sounded the alarm in 2019 in The Trump Administration’s Perplexing Plans for Fannie and Freddie:

“The system would once again be dependent on a privately owned and controlled duopoly that policymakers cannot possibly let fail. It would thus once again give these two institutions on which the nation’s housing market and economy depend every reason to take excessive risk in pursuit of the greatest possible return, knowing that if they fail, the taxpayer will bail them out.”

Also at issue was how Fannie Mae and Freddie Mac profits are distributed. When the GSEs were restructured into the government conservatorship in 2008, private investors were promised compensation commensurate with their original investments in the companies, HousingWire explains.

But the Treasury and FHFA modified the terms four years later and required Fannie and Freddie to pay dividends based on their respective values to the Treasury to repay the bailout funds. The move curtailed investor profits, and the issue has been argued in court for the past several years, eventually reaching the Supreme Court in 2020.

In addition to allowing the director’s removal, the Supreme Court ruling also keeps in place FHFA policies made while its structure was unconstitutional, including bailout repayments to the Treasury.

What to expect from the new FHFA director

By allowing the removal of Calabria, the Supreme Court decision is a major setback for the efforts to release Freddie Mac and Fannie Mae from government conservatorship. The GSEs play a large role in the Biden administration’s proposals to increase homeownership. With Thompson in place as FHFA director, it’s likely the agency will reverse the course set by Calabria.

Further Reading