Biden could derail Fannie Mae, Freddie Mac reform, fire Calabria if he wins 2020
Federal Housing Finance Administration is led by Trump appointee Mark Calabria
Will a Joe Biden presidency derail housing reform and the “recap and release” of mortgage giants Fannie Mae and Freddie Mac?
The answer is a resounding "yes," according to housing analysts who have ties to Biden’s economic advisers and their thinking on what might happen to the housing giants, if as current polls suggest, the former vice president unseats Donald Trump and becomes president in November.
Of course, these people say, the fate of Fannie and Freddie aren't front-line issues for Biden and his campaign, which has yet to select a running mate and continues to strategize how to respond to major news events such as the COVID-19 pandemic, racial equality and policing.
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But, these people add, affordable housing is a significant issue to Biden and he would like to expand Fannie and Freddie’s mandate and likely keep them under government control. To do so, Biden's financial advisers are signaling he will halt and undo much of the work of the Trump housing team, headed by Treasury Secretary Steve Mnuchin and Federal Housing Finance Administration (FHFA) chief Mark Calabria.
For starters, these people say, if the former vice president wins the presidential election in November, he will try to remove Calabria from his job, and then put a halt to his "recap and release" plan that includes ending efforts to take the mortgage outfits out of government control, or conservatorship, and scrap a massive public offering that would allow the so-called government-sponsored enterprises or GSEs to operate as private companies.
Under a Biden administration, Fannie and Freddie would likely remain wards of the government and would be used to expand homeownership among lower-income people — a move that would allow more Americans to receive mortgages but could be disastrous for holders of Fannie and Freddie stock since the GSEs’ profits would likely be returned to the government as opposed to being retained by the companies.
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Calabria is said to be well aware of the risks both himself and his overhaul of Fannie and Freddie face under a Biden presidency, and is said to be weighing contingency options in the advent of Trump losing in November.
In the past, Calabria has argued that it doesn't matter who is president, since under the law he can only be fired for "cause" as the head of an independent agency, the FHFA. With his term ending in 2024, that would leave him more than enough time to leave his mark on the GSEs.
But Calabria is paying close attention to recent court cases on the matter that have made his job security much more tenuous, FOX Business has learned.
The Supreme Court is getting set to decide whether such independent directors should be immune from presidential appointment, and ironically, it's the Trump administration that is siding with the plaintiff's argument that the president should have the power to remove such officials without showing cause.
Most legal authorities expect the court to rule in favor of giving the president the full power of firing such officials, which means if Biden is the president, Calabria would be out, as would his Fannie and Freddie reforms.
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"It's unclear what Mark will do if Biden wins," said one housing advocate close to the Biden campaign. "If Biden wins it’s difficult to end conservatorship and raise capital on a timetable where the drop-dead date is late January when Biden would be officially sworn in."
A spokesman for Calabria had no comment; a press official for the Biden campaign had no immediate comment.
Despite recent polls, the 2020 election is far from over. The pandemic-stricken economy is improving and voters may reject moves by Democrats to defund the police amid the racial unrest and reelect Trump. That would allow Calabria to carry on with his plan to release the GSEs from government control and issue new stock to get them recapitalized.
But if polls continue moving against Trump, Calabria’s plan will face significant headwinds.
Among the obstacles Calabria faces, particularly if the courts give the president power of removal, is that he probably doesn't have enough time to meet legal mandates for Fannie’s and Freddie's capital levels before the next presidential term begins. Without meeting that capital threshold, it’s unclear how he can end conservatorship and launch a public offering.
Those capital levels — estimated in the tens of billions of dollars — are unlikely to be reached until next year, meaning that a public offer won't likely take place until after January 2021, housing experts say.
While some investors speculate Calabria could ram through his plan to recap and release the GSEs in late 2020 or early 2021, other investors tell FOX Business he faces too many headwinds to convince investors to buy the new stock.
Fannie Mae and Freddie Mac are publicly traded corporations that were placed under government conservatorship during the 2008 financial crisis. The government control came after a massive taxpayer bailout that saved both outfits from insolvency.
Since that time, they have been wards of the state even as their shares traded in the over-the-counter market at penny-stock levels.
The agencies are considered vital to the US mortgage market because they buy home loans from banks and package them into securities, allowing the banks to keep lending to potential homeowners.
Government officials believed the 2008 bailout was necessary to save the agencies and protect housing during the banking collapse and the Great Recession that followed. At the moment, Fannie and Freddie control nearly $5 trillion of the nation’s mortgage business.
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But the Trump administration has made it a goal to relinquish Fannie and Freddie from government control and allow them to operate once again as fully private companies as long as it would not put the taxpayer at risk for another collapse.
Calabria, in pushing his reforms, is looking to reduce the size of Fannie’s and Freddie's loan portfolios to prevent another brush with insolvency, and have Congress approve a government guarantee on its debt so it can borrow cheaply.
While shares of both companies have remained at penny-stock levels, they often trade higher on any news that the government is making progress in recapping and releasing them from its control.
Fannie and Freddie are in the process of hiring financial advisers for a much-anticipated public offering that Calabria has said could total $200 billion — making it one of the biggest in history.
Those advisers will be laying out in the coming weeks some details on plans to sell stock, even if the deal could be scuttled by a new administration.