Three Decisions the Biden Administration Will Need to Make If the Supreme Court Eliminates FHFA’s Independence
The Federal Housing Finance Agency (FHFA), the regulator of the two government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae (as well as the eleven Federal Home Loan Banks), has also been the conservator of the GSEs since September 2008. As their conservator, FHFA has complete authority over their operations. That is, it has all the authority that would normally be held, for each GSE, by its shareholders, its board of directors, and its management. Given that the GSEs currently own about half of all the single-family mortgages in America, this gives FHFA the material ability to directly impact the housing finance system of the entire country.
The FHFA was established in mid-2008, after its main predecessor lost the confidence of Congress. In establishing it, Congress created a single position, the director, to run the agency. The director, nominated by the president and confirmed by the Senate, has a fixed term of five years and can only be dismissed by the president for cause. This delivers significant independence from political interference, and is the long-recognized best practice for all federal financial regulatory agencies.
Since the expectation in 2008 was that any conservatorship would be relatively short-lived, it doesn’t appear that policymakers at the time fully thought through the wisdom of having FHFA play such a pivotal role in housing finance for so many years while being run by a single person who enjoys “independence.” This formula gives that one individual unprecedented and almost unaccountable power over the GSEs and, through them, over the country’s housing finance system. Indeed, it has been referred to as being like a “mini-President” for housing finance, but without any accountability to voters.
Interestingly, there is a lawsuit now before the US Supreme Court (Collins v. Mnuchin) that addresses, among other things, the independence of the FHFA director. The case asks whether it is constitutionally acceptable for FHFA to be run by a single individual as director with cause-based independence. The case has already been argued, and a decision is expected near the end of the court’s current term, just a few months away. A similar case last year, concerning the same issue about the Consumer Finance Protection Bureau (CFPB), was decided by the court that it was indeed unconstitutional for a single director, rather than a commission (such as the Securities and Exchange Commission) or board (such as found at the Federal Reserve), to have the protection of independence in that manner. As a result, the court ruled that the president could fire the incumbent at will, just as he can any other appointed official in the executive branch of the government (e.g. cabinet secretaries). While the situations at FHFA and CFPB are not exactly the same, the expectation in the housing finance community is that the Supreme Court will reach the same conclusion for FHFA. In that eventuality, President Biden would then be able to fire–at will, without being required to specify any cause–the Republican-appointed director, Mark Calabria, whose term would otherwise extend to 2024.
The ability of the president to fire at will the head of FHFA, while sounding limited in scope, in practical terms means that the FHFA in its entirety, including all its activities, has fully lost its independence, potentially coming under the direct control of the White House as much as any cabinet department. It behooves the administration, then, to think through what to do with this new-found authority, especially given FHFA’s power to significantly impact housing finance while it is conservator of the GSEs.
My analysis is that the Biden administration, if this comes to pass, has three decisions to make that could have a substantial impact on housing finance. First is a major policy decision: how much of the independence lost via the Supreme Court’s ruling should it to cede back to FHFA? The history of the regulation of housing finance institutions like the GSEs, as I recount in my new paper, makes it clear that this is critical to get right, as a lack of adequately-independent regulation was a key reason for both the S&L Crisis of 1989 and the financial crisis of 2008, the two largest financial crises since World War II until the recent pandemic.
The second and third decisions are personnel choices: whom to appoint as acting director of the FHFA, followed by whom to nominate for Senate confirmation as permanent director. Given that the director (whether acting or permanent) has the legal authority to act as a super-CEO over both Freddie Mac and Fannie Mae while they are in conservatorship, given that this in turn means she or he has tremendous power over housing finance, and given that mortgage markets and the operations of the GSEs are universally understood to be exceedingly complex, the choices should be people with very significant financial regulatory or mortgage industry experience, and ideally both. This will minimize their learning curves and increase the likelihood of fast, accurate decision-making in such a complicated field.