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That was fast: Calabria out; Thompson in for Federal Housing Finance Agency

Supreme Court rules leadership structure of Federal Housing Finance Agency (FHFA) unconstitutional. Director Calabria steps down; Sandra Thompson in as director.

Just a day after the Supreme Court ruled, in Collins v. Yellens, that the leadership structure of the Federal Housing Finance Agency (FHFA) was unconstitutional, Director Mark Calabria, a Trump appointee, resigned. A short while later Sandra Thompson. Since 2013 Thompson​ has served as Deputy Director of the Division of Housing Mission and Goals (DHMG).

As the Deputy Director, Thompson oversaw FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending and all mission activities for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. She has served in this position since March of 2013.

In a statement from Thompson, she says, “As a longtime regulator, I am committed to making sure our nation’s housing finance systems and our regulated entities operate in a safe and sound manner. We can accomplish this, and at the same time have a laser focus on mission and community investment. There is a widespread lack of affordable housing and access to credit, especially in communities of color. It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.” 

Upon resignation, Calabria warned that the mission of FHFA has much work to do. “When the housing markets experience a significant downturn, Fannie Mae and Freddie Mac will fail at their current capital levels. I wish my successor all the best in fixing the remaining flaws of the housing finance system in order to preserve homeownership opportunities for all Americans,” he said.

According to an article on HousingWire.com, “The Biden administration has not seen eye-to-eye with Calabria on the role the GSEs play in the mortgage market. Calabria has sought to build up the entities’ capital reserves and reduce their footprint in the market.”

Fannie and Freddie guarantee about half of the $11 trillion U.S. mortgage market. Upon the Supreme Court ruling, Fannie Mae and Freddie Mac shares dropped 45%. They’ve since rebounded.

Changes to the regulator of Fannie Mae and Freddie Mac are inevitable in light of a June 23 ruling by the U.S. Supreme Court that the single-director structure of the Federal Housing Finance Agency (FHFA) violates the Constitution’s separation of powers clause.

The decision made it possible for President Biden to remove Mark Calabria, a Trump appointee who had served as chief economist for former Vice President Mike Pence, from the position.  Biden wasted no time in doing so, appointing FHFA Deputy Director Sandra Thompson as acting director until a permanent director is confirmed. 

Background

The FHFA was created in 2008 in the wake of the mortgage crisis to regulate Fannie Mae and Freddie Mac, known as the Government Sponsored Enterprises (GSEs). It is headed by a single Director who serves a five-year term and is removable by the President only “for cause” (inefficiency, neglect of duty, or malfeasance in office).

The FHFA’s first action was to place Fannie Mae and Freddie Mac into conservatorship because of the losses they had suffered during the crisis.  It negotiated an agreement with the Treasury Department, under which Treasury committed to providing each company with up to $100 billion in capital.  In exchange it received, among other things, senior preferred shares and quarterly fixed-rate dividends. In the years that followed, the agencies agreed to a number of amendments, one of which replaced the fixed-rate dividend formula with a variable one that required the companies to make quarterly payments consisting of their entire net worth minus a small specified capital reserve.

The Supreme Court Decision

The case before the Supreme Court was brought by Fannie Mae shareholders who argued that the FHFA exceeded its authority when it swept the GSE’s profits into the Treasury Department.  They also claimed that the FHFA’s single-Director structure violates the Constitution’s separation of powers clause. 

In a majority opinion written by Justice Samuel A. Alito Jr., the court agreed that the FHFA’s structure is unconstitutional.  It relied on its 2020 decision in Seila Law v. Consumer Financial Protection Bureau (CFPB), in which it held that the CFPB’s single-director structure violated the separation of powers clause by limiting the President’s power to remove a single top officer of an agency except “for cause”. 

“A straightforward application of Seila Law’s reasoning dictates the result here,” Alito said.  “The distinctions…between the FHFA and the CFPB are insufficient to justify a different result.”

The Court, however, rejected the shareholders’ claim that the FHFA exceeded its authority in contracting to sweep their profits into the Treasury Department.  It remanded the case back to the Fifth Circuit Court of Appeals for further proceedings to “determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”

The Impact

The departure of Calabria is expected to trigger a reversed direction in plans to overhaul Fannie Mae and Freddie Mac. 

The Trump Administration’s game plan for Fannie and Freddie, often referred to as “recap and release”, first involved building the GSEs’ capital by allowing them to retain more of the profits that currently are being swept into Treasury.  Once they were recapitalized, they could exit government conservatorship and compete as private companies with the private-label securitization market.

One week before Biden took office, Calabria and the Treasury Department announced an agreement to substantially increase Fannie Mae’s and Freddie Mac’s capital limits. They also agreed that the FHFA may release the GSEs from conservatorship once the litigation is resolved and the GSEs have built equity to 3% of their current assets. 

Sandra Thompson is expected to work with Treasury to roll back the Trump Administration’s “recap and release” program, and to fulfill Biden’s campaign pledges to make housing more affordable by using Fannie and Freddie as tools to increase the availability of lower-interest mortgages.  Since higher capital requirements would make their mortgage pool smaller, the GSEs’ profits would likely be returned to the government as opposed to being retained by the companies.  Fannie and Freddie likely would remain under government control with an expanded affordable housing mandate.

In a June 23 statement, Thompson said, “There is a widespread lack of affordable housing and access to credit, especially in communities of color. It is FHFA’s duty through our regulated entities to ensure that all Americans have equal access to safe, decent, and affordable housing.”

“When the housing markets experience a significant downturn, Fannie Mae and Freddie Mac will fail at their current capital levels,” Calabria said in his parting statement. “I wish my successor all the best in fixing the remaining flaws of the housing finance system in order to preserve homeownership opportunities for all Americans.”

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