The FHFA Report on Credit Risk Transfer: Another Controversial Document from the Agency
The Federal Housing Finance Agency (FHFA), the regulator and conservator of the two government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae, earlier in May released a report titled Performance of Fannie Mae’s and Freddie Mac’s Single-Family Credit Risk Transfer (the “CRT report”).
As I have noted on many occasions, everything about the GSEs is highly politicized. Consequently, many and perhaps even most articles or speeches about them are biased, sometimes a little and sometimes a lot, in favor of the economic interest or ideological viewpoint of the author or speaker. For example, the mortgage industry always advocates for policies and actions good for its bottom line, and against anything that will raise its costs. Free-market advocates believe everything the GSEs do is ineffective or harmful, and so anything to shrink or eliminate them is a good idea. Such advocacy positions are, not surprisingly, accompanied by high-minded language about being “data-driven” or motivated solely by what is good for the country – claims I found few in Washington took seriously.
In my seven years at the heart of the housing finance system as CEO of Freddie Mac, I unfortunately found that such biased, advocacy-driven analyses dominated policy discussions in Washington – not only because of their sheer numbers but also because they are heavily promoted. It is against this background that I find the FHFA’s credit risk transfer report meaningful in terms of housing finance policy, but in two distinct ways.
First, the CRT report is a classic Washington-style advocacy document, as described above. 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. (One knowledgeable reader of the report told me, “It seems to say not a single good thing about CRT.”) And, of course, it uses the obligatory high-minded language – in this case, claiming that it is simply a research report examining facts.
The 30-page report, after reviewing how various CRT transactions work and some of their historical background, proceeds to go through a laundry list of nearly every criticism of CRT that has been or could be made, regardless of how minor or self-interested the source. I find the related commentary slanted in all cases to cast doubt on the program. Meanwhile, it ignores virtually all the benefits of CRT, not mentioning those widely discussed over the years by policymakers, such as reducing systemic risk and taxpayer exposure to the GSEs. For readers who do not know much about CRT (it is admittedly an obscure field), the report will naturally lead them to conclude that the program must be highly troubled; it will thus fulfill the purpose of an advocacy piece, which is to convince the less knowledgeable. However, for those in housing finance who are experienced enough in CRT to understand its functioning and its benefits, the report erodes confidence in the FHFA’s credibility, for its bias represents a drastic departure from the even-handedness expected of an independent regulator.
But it is the second characteristic of the CRT report that is perhaps more important. This is the fourth in a string of major FHFA documents that have been driven by a zealous free-market advocacy viewpoint that the GSEs should be shrunk if not eliminated altogether. This viewpoint puts these reports outside the mainstream of views held in the housing finance industry and broader policy community. As a result, I have found that these communities’ confidence in the FHFA as a proper and impartial regulator has taken multiple hits. The CRT report completes the picture, leaving little doubt that the FHFA now operates with a level of advocacy and lack of even-handedness that put it outside the bounds of normal regulator behavior.
In fact, key figures in the industry – not publicly, but certainly privately – have begun to view the FHFA itself as a source of instability in the housing finance system as it has developed a reputation for taking actions that require the industry to make abrupt and significant changes to their operations and business models, with consequent disruption for borrowers as well. That’s a bad reputation for a regulator to have.
In my new paper, “The FHFA Report on Credit Risk Transfer: Another Controversial Document Further Erodes Confidence in the Agency,” I review the three earlier documents, show how they are both controversial and questionable, and how they have reduced confidence in the objectivity (and sometimes the technical skill and forthrightness) of the FHFA. I then analyze the CRT report to illustrate that it is an unadulterated advocacy document, with strong bias.
So, what are the housing finance industry and others involved in the field to do in this extraordinary situation where the regulator has, in their view, so abandoned even-handedness? I hear, directly and indirectly, that many are throwing up their hands and wondering if engagement with the FHFA to correct the situation is worth the effort. Given that the term of Director Mark Calabria, whose strong free-market advocacy viewpoint dominates the agency, lasts through 2024, there is real concern (and even fear) about how things will transpire during the remaining three years. However, a case now before the Supreme Court (Collins v. Mnuchin) will decide, among other items, whether the FHFA director’s independence is constitutional; that independence is rooted in language that an incumbent can be fired by the president only “for cause” (which is not defined). The expectation in the industry is that such independence will be ruled unconstitutional, and President Biden could fire Director Calabria at will, like any other executive branch official – and likely would do so quickly. The hope is that this ruling, which is scheduled to come out within weeks, will lead to the appointment of an FHFA director who would be more mainstream and reverse the recent damage done to the FHFA’s credibility by restoring its reputation as an even-handed regulator.