After Leadership Change, What’s Next for Fannie and Freddie?

Yardi Matrix Research Director Paul Fiorilla assesses what new priorities at the Federal Housing Finance Agency could mean for multifamily lending.

Now that the Biden administration has ousted former Federal Housing Finance Agency (FHFA) Director Mark Calabria as overseer of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) appear poised to take a more active role in multifamily lending.

Former FHFA director Mark Calabria, dismissed by President Biden on June 23. Photo courtesy of FHFA

Calabria, who was appointed to head the agency in 2019 by former President Donald Trump, made no secret of his desire to shrink Fannie Mae and Freddie Mac’s footprint in the multifamily lending market and return them to private status. With Calabria out, talk of privatization is dead, but it remains unclear exactly how the Biden administration will operate the GSEs.

Given the priority that Biden has placed on creating affordable housing and combating climate change, and his inclination to use the levers of government to shape policy, it seems a good bet that Fannie and Freddie will do more rather than less.

“The smart bet on the GSEs is that multifamily will be able to do more volume, but with a continued mission-driven focus. It won’t be a blank check,” said David McCarthy, senior director of government and policy relations at the CRE Finance Council, a Washington, D.C.-based trade group.

Some possibilities include ramping up loan production, increasing access to the correspondent program for smaller lenders, and expanding the use of loans with affordable and green components. “We’re likely to see an increased focus on affordable and green lending, a review of the multifamily caps and a renegotiation of the conservatorship agreement between the Treasury Department and the FHFA,” said Mike Flood, a senior vice president of commercial/multifamily policy at the Mortgage Bankers Association.

Calabria’s Eventful Reign

Calabria was removed on June 23 after the U.S. Supreme Court ruled that a president can fire agency heads without cause. Sandra Thompson, previously FHFA’s deputy director of housing mission and goals, was appointed acting director. The court’s decision was significant because Calabria had set ambitious goals to release Fannie and Freddie from conservatorship, which they have been under since a 2008 federal bailout. Calabria ended the cash sweep that sent the GSEs’ profits to the federal treasury, the first step toward financial stability and ending conservatorship.

Image courtesy of Fannie Mae

Calabria talked about raising private capital for the GSEs in 2022 or 2023 but ran out of time to accomplish his plan. Raising the hundreds of billions of dollars necessary to make the GSEs’ balance sheets ready for a public offering was a multi-year process that was short-circuited. What’s more, removing the conservatorship requires an act of Congress, and there is little political consensus or will to “fix” agencies when housing markets are stable.

Calabria tried to reduce the GSEs’ market share and provide more opportunities for private lenders. Earlier this year, he reduced their annual lending allocations to $70 billion, down from $80 billion in 2020; required that at least half of originations are on properties that meet a threshold of affordability; and set stricter standards for “green” loans that are intended as incentives for improved energy efficiency.

Calabria also implemented a capital framework last year that increased the regulatory capital the GSEs are required to hold for loans. The step makes them safer from losses but also increases their cost of capital. All told, Calabria put the GSEs on footing closer to private lenders, set limits on their volume and made them slightly less competitive, with the goal of privatizing them.

Sandra Thompson, FHFA’s acting director. Photo courtesy of FHFA

Even without the achievement of that target, Calabria’s tenure was notable because he started the process of restoring Fannie and Freddie’s depleted capital reserves so they would be secure in the event of a future downturn. He also sought to clarify the dance around the federal government’s implicit guarantee from the federal government that enables the GSEs to issue low-rate bonds and write low-coupon loans. However, a change in the status would require legislation that either made the guarantee explicit or ended it altogether, and legislative changes continue to be a non-starter.

New Priorities 

Privatization will not be on the table in the Biden administration. Instead, the questions will center on how the GSEs can support the president’s activist housing policy. Biden and Vice President Kamala Harris campaigned on a multi-tier plan to increase the stock of affordable housing and provide incentives for municipalities to remove barriers to construction. Some of the possibilities that would enable the GSEs to be tools for Biden’s agenda include:

  • Increase production caps. Calabria set hard limits on Fannie and Freddie’s loan volume at $70 billion apiece, but that can be increased by the next FHFA director.
  • Increase allocations for green loans and allow them outside the caps. Before 2021, loans with an environmental component did not count against the cap, in effect giving the GSEs wide latitude to originate such loans. Given Biden’s emphasis on climate change, the next FHFA administrator could increase green loan production by removing the limits.
  • Increase production of loans with an affordable component. Calabria required that half of Fannie’s and Freddie’s loan production have an affordable component, on properties that were affordable to residents at 80 percent of area median income (AMI). The next FHFA director could expand originations on affordable properties in many ways, including increasing the GSEs’ participation in loans with low-income housing tax credits (LIHTC).
  • Another strategy to increase affordable housing loans would be to change the formula for qualifying in high-income areas. Lawmakers and industry participants have long noted that the 80 percent AMI requirement made it difficult for properties to qualify in high-rent areas such as New York City and San Francisco. Increasing the threshold to 100 percent or 120 percent of AMI in high-cost metros would help the GSEs serve properties with middle-class tenants in currently underserved areas.
  • Increase the number of correspondents that originate for Fannie and Freddie in order to expand participation by smaller lenders. The two agencies purchase and securitize loans that are originated with prescribed terms by correspondent lenders. The list of GSE partners is skewed toward banks that do business with institutional property owners. Bringing in smaller lenders to the programs would increase participation among less well-heeled property owners.

More Active Role 

Freddie Mac headquarters. Image courtesy of Freddie Mac

The consensus in the industry is that the Biden administration will wield its authority to try to increase affordable housing stock. “I think you will also start to see a focus on developing products that are geared toward tenant bases in the 60 percent to 120 percent AMI group,” said Evan Blau, chair of the agency lending and affordable housing practice at law firm Cassin & Cassin. “Generally, this segment suffers from shrinking housing stock and increasing rents while being unable to qualify for the benefits of traditional affordable housing programs. This is likely to be the next large area of focus and further serves Fannie Mae and Freddie Mac’s mission.”

Whatever changes are ahead, the impact likely won’t be immediate. The GSE allocations in the current agreement with FHFA are in effect until the end of the year, and an acting director is not likely to make major changes. There is also no industry pressure to make quick changes, as ample liquidity and low-cost debt is available from all types of lenders, including CMBS, life companies, banks and private equity.

It’s not known whether Thompson—who is one of FHFA’s longest-tenured employees, with 31 years of service—is in line for the permanent job of director, which requires Senate  confirmation. Since 2013 she has served as deputy director of the Division of Housing Mission and Goals (DHMG), responsible for overseeing FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending and all mission activities for Fannie, Freddie and the Federal Home Loan banks.

Most major policy changes are likely to wait for a permanent director. “We don’t think Sandra will charge hard in any direction as the acting director,” said one industry analyst.

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