Now that we have clarity around the structure of the Federal Housing Finance Agency (FHFA), and as the president considers installing a new permanent director, an opportunity arises for the next evolution in housing finance policy. But success for either Acting Director Sandra Thompson — who, by all accounts, will bring a steady hand — and whomever comes next, will rely on steady leadership and a willingness to learn from dynamics of the past.
Over the last decade plus, the FHFA has had some clear successes, some clear failures, and plenty in between. Whoever runs FHFA over the remainder of the Biden administration, there are no shortage of lessons to be learned. As the former president of Ginnie Mae, I would like to offer a few thoughts to the new director for his or her consideration.
First, remember that the job — at its core — is about regulating. The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, along with the Federal Home Loan Banks, are critical pieces of our housing finance system. Every day, decisions are made at these entities that impact the availability and cost of mortgage credit for millions of American households. Their algorithms not only determine what loans are eligible for purchase but what loans — by default — meet qualified mortgage requirements (a dynamic that has outlived multiple attempts to put it to bed).
It is true that neither Secretaries Hank Paulson nor Tim Geithner — both critical players in the early days of GSE conservatorship — expected conservatorship to last this long. But it is equally true that the law that created this conservatorship is filled with tensions calling on the FHFA to always maintain a functioning housing system and liquid market for Agency securities.
More importantly, it should now be clear to all how many difficult policy choices are involved in housing finance reform. Make no mistake, these choices are not and should not be left to one person.
To put it succinctly, you should focus primarily on coming in every day and regulating the enterprises. It is really that simple, even though we tend to overthink it. The companies will ask the FHFA director for a million things. Say “yes” to some, and “no” to others. Analyze the enterprises and their counterparties with data and dispassion.
Ask questions about how they price risk, how they assess and examine their seller-servicers, and how they can safely innovate to fulfill their mission. Bring as much transparency as possible, especially to the conservatorship. If the GSEs bring you interesting ideas — for example, ways to shed some risk via risk transfer bonds — listen and give direction. These are the actions of good regulators.
But there is a difference between sound regulation and sweeping reform that looks more like tilting at windmills. An obsession with the latter will cost you the ability to do the former well.
I want to be clear: this does not mean accept the status quo. There are plenty of exceptionally important policies in need of deep examination at the agency. For example, it is time to look at bringing back credit risk transfer (CRT) in a cost-effective way that maximizes risk reduction at the enterprises. The way the GSEs manage their cash windows is sorely in need of further examination, as it seems likely that they may sacrifice quality control when volumes spike.
Balancing loan level price adjustments (LLPAs) for safety and soundness versus the GSEs’ missions is a perennial challenge. And it is time for reliance on the qualified mortgage (QM) “patch” to end. All these issues need to be addressed, and all of them will have meaningful impact on lives and communities. Focus on these real and tangible challenges as opposed to more grandiose dreams of administrative “reform.”
Second, never take mortgage-backed securities (MBS) or agency debt investors for granted. And, importantly, do not forget that a meaningful portion of our mortgage system is financed overseas. While we tend to think of our housing finance infrastructure as solely a domestic challenge, the world is watching and also providing capital that supports the availability of attractive mortgages to U.S. households.
When I ran Ginnie Mae, I quickly learned that a large portion of the job involves explaining to U.S. and foreign investors, and their respective regulators, how changes to the program will impact their investment. Investors from Japan to Singapore to Brussels to Kuwait finance these securities, and their money keeps the system working. It is hard enough to discuss prepayment speed dynamics in English with sophisticated asset managers in New York. Wait until you try doing it across this many languages.
If you inadvertently create confusion or ambiguity, you will have a tough time ensuring liquidity in agency product (especially as the Federal Reserve exits MBS purchases, which will likely also happen on your watch). So, make sure that policy changes impacting these investments are well-thought-out and easy to explain. And get on a flight and go see the investors. They appreciate it, and the market relies on them trusting you.
Third, build alliances on Capitol Hill. And be proactive about it. I promise there are plenty of U.S. Senators who will find your number when their constituents raise concerns. The best defense is a good offense. Get ahead of that dynamic by building your own relationships and rapport. It will make it much easier to call balls and strikes when the phone calls inevitability reach your desk.
But there’s more than just self-preservation at stake here. If you want your approach to regulation and all the decisions you make to stand the test of time at FHFA, you must sell them to the elected officials who lead on housing policy. And you need to sell your approach across the political spectrum. That means building support that will last. There may even be operational things in your charter that need to be amended now and then. Make friends with the people who can help.
Finally, visit communities that rely on your work, from time to time. People have often asked me why housing finance reform is so hard. I have decided the answer is some form of the following: this issue requires discussion and compromise on everything from derivative trading to implementation of housing goals. It is going to be tough to stay grounded with so many diverse needs and challenges coming your way as FHFA director. Lots of D.C. insiders will want your ear.
My advice is to go to communities that rely on the GSEs already, as well as ones that do not yet but need the help. Think-tank white papers written in Washington, DC are great. (I have to say this, I have written several.) But seeing people in the communities you serve is better.
I share these thoughts as someone who has traded agency MBS, watched the system evolve since 2008, and managed a similar, albeit smaller, agency. You will have plenty of good and bad advice from others, too. For now, remember that the market and the people it serves are counting on you. And we all sincerely wish you the very best.
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