Mark Calabria on *Shelter From the Storm: How a COVID Mortgage Meltdown Was Averted*

Through a combination of mortgage and renter relief programs, the FHFA aided millions of individuals and families during the worst of the COVID crisis.

Mark Calabria was the Director of the Federal Housing Finance Agency and prior to that, he was formerly a chief economist for Vice President Mike Pence. Mark is also a previous guest of Macro Musings, and he rejoins the podcast to talk about his new book titled, Shelter From the Storm: How a COVID Mortgage Meltdown Was Averted. Specifically, David and Mark discuss Mark’s time as the director of the Federal Housing Finance Agency, the relief programs his agency ushered through during the peak of the COVID crisis, the history and handling of Fannie and Freddie, and a lot more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Mark, welcome back to the show.

Mark Calabria: David, it's great to be back.

Beckworth: It's great to have you on. And I was looking back at your first appearance, which was way back in 2016.

Calabria: I think it's one of the earlier.

Beckworth: It was. You helped kick this podcast off before you went on to do greater things like govern the country in an important agency. And that was six and a half years ago, if I'm counting correctly.

Calabria: That's right.

Beckworth: And I went back and looked at the transcript and we talked about your career path. And what was striking to me about your career path is that it was almost perfectly planned for you to take on the role as the Director of the Federal Housing Finance Agency. So just a few things I pulled from that, you spent time at Harvard's Joint Center for Housing Studies, you worked for Senator Phil Gramm, and you worked on mortgage market issues under him. You spent time at HUD on mortgage regulation, then you were with Senator Richard Shelby, and with Senator Richard Shelby during the Great Recession. So you were both exposed to the housing market in depth as well as to a crisis period. So you had both of those experiences under your belt. You're perfectly suited for the moment.

Calabria: Thank you for saying that. I think lost in the bio is I actually was the primary staff drafter of the legislation that created the Federal Housing Finance Agency. I guess I'd put it this way, if I knew that I was going to run it someday, I would've set the salary a lot higher. Almost perfect foresight then.

Beckworth: Almost prophetic, right? You helped create the very agency that you end up moving into. So just to invoke a biblical passage for such a time as this, in the book of Esther, you were definitely well groomed and you couldn't think of a better career path to be where you were by the time you got there.

Calabria: I think that's fair. I had the privilege and luck at the White House, I probably could have talked to president, vice president into appointing me to a number of jobs. And in fact I was under conversation for one of the Fed slots and ultimately looked at it and said, this is what I've been working on my entire career. There really probably is few people who know the agency better. And I had really spent a lot of time in creating the agency of FHFA and so had a real strong attachment to it. And of course not to take anything away from being a Fed governor, but I also wanted to run something to be frank about it. The Fed's a different animal if you're chair, vice-chair versus just a normal governor. Not that such things are normal, but you get my point.

Beckworth: Yes, for sure. Now, tell us a little bit about your time with Vice President Pence. What did you do with him?

Mark’s Time Working for Vice President Pence

Calabria: I mostly worked on taxes, trade. Let me preface with that. The reason the book is really about my time at FHFA, or at least one of the reasons, is after having read, first, Casey Mulligan's book, You're Hired. And then later, Kevin Hassett's book, The Drift. They're really 90% consistent with the experience I had working on economic policy, so a shocking thing for me to say. I didn't really feel like I had a lot original to add to what those two gentlemen had already written about their experience. There were some differences. Casey was much more involved in healthcare than I was, but I worked in the 2017 Tax Act, which for me was fun. I did have a role and I hope my New York friends don't hold it against me. I had a role in limiting the state and local tax deduction. I had a role in reducing the mortgage interest deduction.

Calabria: And again, I'm somebody who lives in a high local state tax jurisdiction too, so that hits me. So I do understand it, but it's good policy. And so I also worked on trade issues. I worked on the NAFTA, the USMCA, as well as Japan issues. And of course it was always interesting going to Japan and dealing with the Japanese because their history of macro and monetary is so unique in some ways. So really just a great experience, worked very closely with CEA. I would characterize the job as, 80% of it was I formed the role of NEC for the vice president and maybe 20% of it was CEA. We weren't making our own forecasts. I was involved early on… you may recall that Hassett wasn't confirmed until September of 2017. I had a lot of involvement early on with OMB and Treasury in the forecasts and the baseline things. But once Kevin and once CEA started getting rounded up, most of that was able to shift off. So again, my role was very much representing the vice president in the policy process and keeping him informed in the debates so that he would be prepared to answer questions the president may have. It was a lot of fun. I think the world of Mike Pence, again really enjoyed working with him and enjoyed the people I was working with. In Kevin Hassett, I'm a huge fan, Tomas Philipson, great people, Tyler Goodspeed. Great group of people there.

Beckworth: Well, it was interesting reading your book because you note in your book that, not only this time at the White House where you made lots of connections and friendships and networks, but back in the Senate with Senator Richard Shelby, you mentioned you helped vet, for example, Ben Bernanke, both to the CEA and to the Fed, right?

Calabria: Exactly. And so I think one of the things that probably helped me get confirmed was I went through the committee I used to work on, but as you know, the Federal Reserve nominations come through the banking committee, as do the CEA nominations for that matter. One of the funnier stories to me was I remember emailing Ken Rosen the night before his CEA hearing, this is obviously in the Bush years and said, these are the questions you're going to get asked. And then lo and behold, those were largely questions he got asked. I don't know if he realizes this today because half of those questions I wrote, but the other half I did give him a pretty good indication of what Sarbanes on the other side was asked because I simply had sat through many hearings and I knew what the other side of the aisle was going to ask as well.

Calabria: So he did send me an email, shocked at how accurate my predictions were, but having been through it and having developed those relationships. So one of the things I decided very early working for Pence was that since personnel's policy, I would throw myself into the vetting process. And I worked very closely, predominantly with Andrew Olmem who was on NEC at the time, and John Roscoe, later my chief of staff, but the person for the independent agencies at president's personnel and did a lot of vetting. Fed nominees, I worked on most of the Fed nominees, the CFPB, OCC, a number of other independent agencies as well as the HUD nominees. And again, vice President Pence is very fond of saying that he was the first house member to publicly oppose TARP. I took him at his word. I can't say I've ever checked that, but he's not the guy who make that up.

Calabria: And we really took this with, how do we make sure we get Fed and other financial regulators whose first inclination was not to rescue first, ask questions later. And some of the book I do talk about perhaps some of my disappointment. As I put it in the book, I've come to conclude that the Fed changes the governors more than the governors change the Fed. But at least having that, and I was very fortunate to be part of the process that arrived at Jay Powell as the chair and I talk about some of the other front-runners and other-

Beckworth: That was interesting reading that. And I've read in the book by Nick Timiraos, his version of the story, and I want to run this by you, but he tells the story, all the same people, John Taylor, Kevin Warsh, Janet Yellen, of course Jay Powell comes in at the very end as a surprise. But in his telling, one of the reasons that President Trump did not pick Janet Yellen is because of her height.

Calabria: I can tell you it had nothing to do with that. I can tell you I had nothing to do with that. I think that, so where I would fill in some gaps with what Nick has written, which I've read and I think is largely the case, certainly the biggest advocacy for John Taylor was me and the vice president, although the vice president felt equally strong about Kevin Warsh. He and Kevin really connected. So Jay was not really even in the running. As I say in the book, the three finalists really were Warsh, Taylor and Yellen. And there really was a very strong constituency, particularly at Treasury, for Yellen. And she was very seriously considered. She certainly came to the Oval Office, made her case, made her pitch, and I think was very seriously considered.

Calabria: I think some of us, to be frank… and the reason I think many of us were concerned was we fundamentally thought she would see the tax reform we were doing via a Keynesian demand lens. So whether you agree with it or not, what we believed we were doing in 2017, particularly on the corporate side, was increasing the incentives for investment, which we felt would increase productivity and hence be deflationary or not inflationary. So many of us were concerned that we thought she didn't understand what we were trying to achieve or whether she just disagreed with it. But there was again, a contingency that really pushed for her. And so many of us made the case it had to be a different way.

Calabria: Of course the president made his decision at the end of the day, but obviously advisors play a pretty big role. I suspect that in some sense having both Warsh and Taylor in the process divided support. And it really wasn't until, I think, we had convinced the president to move away from Yellen, that Treasury pivoted to Powell as a compromise. Again, it pushes back against this common theme of Republicans in Wall Street and that the Wall Street folks we heard from pretty regularly in Treasury, absolutely did not want Warsh or Taylor. And they felt like these guys are not going to flood the system with liquidity when we need it. They're not going to rescue us. They're going to be tough on us, and then they're going to be hawkish.

Calabria: So there was really just so much Treasury opposition. So the reason we ended up with Powell, and I really like Jay, and I'll say for the record he never lobbied for the job, never. I got to be in the Oval Office interview with Powell. We later did another interview with Powell with the vice president and I. And at no point did he ever say anything derogatory about Yellen. He has been her biggest advocate. So he was always above board with this. But it really was Treasury shifting to Powell as their compromise when they felt like they couldn't get Yellen through.

Beckworth: So Treasury had a lot of influence in-

Calabria: And that's not unusual. Of course as you know the Treasury secretary dines pretty regularly with the Fed chair. Mnuchin had a very good relationship with Yellen that was not necessarily shared by the rest of us. But in the institutions, there's a constant revolving door between Treasury and the Fed. Treasury institutionally identifies a lot with the Fed.

Beckworth: Okay. Fair enough.

Calabria: It's a very pro… and again, I'm not trying to say it's a nefarious thing, it's just it is-

Beckworth: It is what it is.

Calabria: ... it's the air that they breathe and the assumptions that they share. I know that he was hearing from the staff, Mnuchin, and he was hearing from many of his contacts on Wall Street, and they were very, very comfortable with Yellen. And again, he had a good relationship and that's what he conveyed. But again, had nothing to do with height. I'll remind people, John Taylor isn't all that tall. He is tall in spirit, but he's not all that tall in height.

Beckworth: Well, I wanted to talk this briefly on John Taylor, and we'll get to your book here I promise.

Calabria: As long as people read it.

Beckworth: I worked for John Taylor at Treasury and he was really gracious to me. I came from a state university. I wasn't from an Ivy League PhD program, but he hired me. He's the person who hired me at Treasury and I really enjoyed working for him. Now I was several layers down, but I got to interact with him some. I always thought he did a decent job. Of course I didn't see everything from where I was at Treasury, there's a bigger political picture. And reading your book, it really shed some light on why he did not get the nod to be Fed chair the first time when Bernanke got it, and then also this time.

Calabria: I'm a huge John Taylor fan, but the vice president supported him, but again, as I mentioned, the vice president liked Warsh as well. And I really felt that, like your experience, John has always been just such a decent open person to me throughout my career. You and I didn't come from Cambridge world. I've had people in that world, not necessarily, if you don't go to the right school and publish in the right journals… John has never, ever treated me-

Beckworth: Exactly.

Calabria: ... in anything other than as a colleague. And he's just a tremendously gracious man. And of course, I think objectively, whatever your politics, John Taylor's got to be top five in terms of knowing and understanding monetary policy. So there's no question about his qualifications. Eminently decent guy, has been at Treasury, has been in government, and it's important for me, and again, the vice president, his inclination is not always to rush in. And I mention in the book, and I forget the name of his, he wrote a book about his time as Under Secretary International, which is well worth reading. He really was a go slow and be thoughtful on Argentina during his time at Treasury. And so he already had a history of being reluctant to throw public resources at problems.

Calabria: And again, people on Wall Street were aware of that. One of the first meetings I had when I joined the banking committee in 2001 was a bunch of hedge funds guys coming in and saying why the committee needed to urge the IMF to support Argentina. Of course it wasn't like they just were caring about Argentina. So again, the opposition to John really was coming from the financial sector where they felt like, again, he would not turn the spigot on when they needed it and would be a bit hawkish. Now, as you know, because you have your own rule, if you will, there is this perception that having rules-based monetary policy is just synonymous with having tighter policy. Of course it isn't. There are instances where the rule-based… and I point this out, there's certainly plenty of times in history you can go back with the Taylor rule and it says that policy should have been looser at certain points.

Calabria: But there just became this perception, but John didn’t understand. We talked a lot with each of the nominees about what we were doing on the tax side, what we were doing on the regulatory side. And Warsh and Taylor got it. They understood what we were trying to achieve, and that was part of it. And we felt like, obviously we respect the independence of the Fed, but you also don't want monetary working across purposes with fiscal. And that was our concern. Our concern was that Yellen would see what we were doing on the tax side, believe it to be inflationary and prematurely tighten before it was needed. So oddly enough our concern was we thought Yellen would be more hawkish in certain circumstances.

Beckworth: Very interesting. Well, let's move into your book, again, the title is, Shelter From the Storm: How a COVID Mortgage Meltdown Was Averted. Under the leadership of you, Mark, at the Federal Housing Finance Agency or FHFA. And to motivate this, I want to first talk about the US housing market, at least the financing side of it, because that's where you work, that's what you oversaw. I'm going to draw from a report that I often look to when I want to learn about the housing market finance, and that's the Urban Institute's *Monthly Housing Finance at a Glance* report. I encourage listeners to check it out if you ever want to just take a look, really cool graphs. But if you take a look at it, you can get a sense of how important housing finance is. As of March of this year, the total housing market value according to report was 46.3 trillion. 13.4 trillion in debt and 33 trillion in equity. I was really surprised to see that much equity, and I guess it has to do with housing prices.

Calabria: And you also have a large, surprisingly a large number of people who own homes outright.

Beckworth: Outright. And then of that 13.4 trillion in debt, according to them, 8.8 trillion is funded through agency mortgage backed security. So a lion's share of that debt is all GSE.

The State of US Housing Market Finance

Calabria: It's hard to overestimate the importance of the mortgage and mortgage backed securities market. Obviously on the mortgage side for individuals, it's almost certainly your largest debt for most people. And mortgage-backed securities, they play huge role in the repo market. They play, as we know, the Fed, is a very big purchaser, plays a huge role in monetary policy. It is treated sometimes like treasuries and sometimes not. But mortgage-backed securities is incredibly large and important and often generally liquid market that underlies much of our financial system. And of course, as we saw with Silicon Valley Bank, it's not unusual for commercial depositories to hold a lot of mortgage back securities as well, so hugely interconnected.

Calabria: And in fact, I would argue it's hard to think about financial companies that are more interconnected with the rest of the financial system than Fannie and Freddie, because not only do they originate and buy and have customer relationships with most of the financial system, but their debt is held throughout the financial system and including by money market mutual funds and others. It's just a tremendous amount of interconnectedness and huge market. But that said, it's worth noting, I think we're middle of the pack in terms of OECD countries in terms of homeownership. So there's certainly some very open questions… in my mind, probably not really very open to say all of this subsidization of the mortgage market does not appear to have increased homeownership. I think that's a fair takeaway from the evidence, nor does it actually seem to have greatly decreased the costs.

Calabria: For instance, if you really think about the era of securitization beginning around 1980… so Fannie and Freddie were sideshows until the savings and loan crisis, and they really ended up taking over the role of savings and loans in a big way. So pre 1980, their share of the mortgage market was always single digits. And so if you really think, so 80 is a fair point to say, okay, post securitization world, pre securitization world. And again, for a very long time, Fannie did not even securitize, it bought mortgages and held it on its balance sheet for a very long time for most of its existence. And if anything, the cost, 30 years over 10 year Treasury spread is higher than it was pre-conservatorship, higher than it was pre 80. So to me, it's not even clear that they have actually lowered the cost of mortgage credit in the United States. The only thing we can say with the high degree of certainly is they've helped increase the leverage of both households and the financial system.

Beckworth: It's accomplished something.

Calabria: There you go.

Beckworth: Okay. So just to be clear, and I think most of our listeners know, but Fannie and Freddie, they take mortgages and turn them into mortgage-backed securities. So they create a new financial product off of existing ones, make it more liquid, increase the availability. My house might be funded by someone over in China or Europe or across the country as opposed to some local bank in, wonderful-

Calabria: By the Federal Reserve indirectly.

Beckworth: It's made housing a global market for mortgages. Walk us through the history, though, really briefly of what happened in 2008, how they collapsed, the conservatorship and where we got to when you took over. Because I was really surprised to read that when you walked in, I believe it was April 2019, that Fannie and Freddie, as you note in your book, were leveraged 1,000 to one. Let me repeat that, 1,000 to one. 6 billion in equity to 6 trillion in debt. So how do we go from a decade under conservatorship to that kind of position?

The History and Handling of Fannie and Freddie

Calabria: It is pretty shocking. And almost nobody… you can't be, 1,000 to one, a strong wind to blow you over. That is not financially stable. That is essentially insolvent given the errors in accounting most days of the week. Anyhow, so there were a number of factors that led to the 2008 crisis, one of which, not solely, but one of which were Fannie and Freddie that added to that boom and bust that we saw in the 2000s. And because of that and because of the leverage they had, they first started seeing losses on their securities, oddly enough in some sense, like Silicon Valley Bank. So Fannie and Freddie bought pre 2008, a large number of private label mortgage-backed securities. And in fact market participants would structure deals so that, here's a package of private label mortgages, all of which are under the loan limit.

Calabria: They would structure deals for Fannie and Freddie that were rich in housing goals that Fannie and Freddie could buy. And so they were very big participants. And in fact, at the height of the pre 2008, about 40% of private label mortgage-backed securities were bought by Fannie and Freddie. So they were the single biggest purchasers in that market, because those assets were largely held as available for sale when the crisis hit, started, actually, August 2007, really before you got to even September 2008, those assets started losing value. And some of that's interest rate change, some of it is definitely credit losses. And so Fannie and Freddie quickly became near insolvent, first and foremost because of the losses on private label mortgage-backed securities they held.

Calabria: Eventually over time they started to suffer losses, credit losses, in their own book as the housing market started to decline and the losses started showing up. And so the decision was made in September of 2008 to take them into conservatorship, which, it's an administrative bankruptcy. And having worked on the statute, it's very much modeled on what the FDIC does. Now, my view is that they probably at the time should have been taken into a receivership, which would've essentially cleaned the balance sheets, resolved them, put them back out. But the decision was first made by Treasury Secretary Paulson, later by Treasury Secretary Geithner, essentially placed them in amber, if you will, try to freeze them.

Calabria: I forget, it's not the On the Brink, but it's Paulson's second book that he writes on China, where he's very explicit about part of the reason to rescue Fannie and Freddie was the concern that China's large holdings of mortgage-backed securities, and he felt it was necessary to give China a surety. There were also concerns at that time, there's some evidence that Russia went to China and tried to orchestrate a coordinated dumping of mortgage backed securities to try to disrupt the US housing market. There are some interesting questions there. But fundamentally, the reason to rescue Fannie and Freddie debt holders seemed to be primarily a foreign policy decision at the time. And so they got stuck. Over time, they lost money and were covered by that for a considerable amount of time.

Calabria: On his way out the door in 2012, then Treasure Secretary Geithner created a profit sweep where the deal was that in exchange for all of their profits, Treasury would essentially try to offer a backstop to some degree of Fannie and Freddie debt. Obviously if you're sweeping all their profits, they're not building up equity. And so as mentioned, when I inherited them, quite frankly, little in my view had been done. There had been a lot of activity, but very little to actually fix the companies. The agency wasn't where it needed to be. It may surprise people that a Cato guy over two years increased the staffing at a federal regulator by 20%. But I did, because-

Beckworth: State capacity libertarian.

Calabria: Well, you have to have a very clear mind that the role of the regulator is to control the moral hazard created by the implied guarantee, and you need to have a regulatory structure to do that. So to me, essentially leaving Fannie and Freddie under-regulated or poorly regulated would ultimately cost us more money. So again, it was to control a very real risk because they'd failed all once already. And of course Fannie failed in the early 80s, so this is not the first time, so at least a third. So all that said, when I walked in the door, as you mentioned, they were leveraged about 1,000 to one. We started building capital in September, we reached an agreement with Treasury where the profit sweep would end. So there was no profit sweep during my tenure.

Calabria: And it ended up being quite fortunate. My view coming in was immediately telling the staff, listen, we've had a decade of a housing market recovery. It was a week one, granted, but I'm not one of these people who believe the business cycle or the housing cycle's dead. Quite frankly I was puzzled by the people who are like, “business cycles don't die of old age.” Well, they die of something. If your assumption as a regulator is going to be that everything's always going to be fine, then you shouldn't be a regulator. Your assumption as a regulator should be hope for the best plan for the worst. And so I came in 2019 telling the staff, this housing cycle's gone too long, there'll be a correction at some point. So we immediately started building capital. And to put it in context, the COVID losses that Fannie and Freddie suffered were about six to 7 billion.

Calabria: And as you mentioned, they had about 6 billion in capital when I walked in the door. So if we had not started building capital in 2019, Fannie and Freddie would've failed during COVID from their losses, but they didn't because we started building capital and started building their financial strength. And why it wasn't popular, we also paid for the assistance programs we provided. So in comparison to the 2008 programs, we helped twice as many people. We did it six times as quickly. And whereas the housing assistance, part of TARP for instance, cost about 25 billion and there was another 10 or so billion elsewhere, we managed to do that at near zero cost because we paid for it in the mortgage market, and also hence not adding to inflationary pressures that later showed up in the economy. So again, trying to get these companies built in a very strong way.

Calabria: And it's also important to keep in mind, there was a very simple, straightforward narrative behind the 2018 Housing Economic Recovery Act that created FHFA. And that was, we needed a stronger bank-like regulatory structure for Fannie and Freddie. Now, there's always a debate whether, are these insurance companies, this or that. That's all beside the point. Because Congress made a decision that it was a bank-like regulator. And I'm at the Cato Institute, so unsurprisingly I call myself an Article One constitutionalist, which means fundamentally, Congress makes the big decisions. And I do think you have to tell yourself when you enter a regulatory role, your job is not to second guess Congress. So of course I wrote a lot of stuff over the years critical of Fannie and Freddie. But the second I was sworn in and took the job, the decision was, it's not my job to decide whether there should be a Fannie and Freddie, it's my job to carry out the law that Congress has created.

Beckworth: Very nice. There's a lot to unpack there, Mark. I want to first just recognize your success in avoiding a second, I guess third, in the case of Fannie, collapse in Fannie and Freddie in the GSE. So you actually built up equity prior. You had about, not even a year, to build up equity before the pandemic.

Calabria: About six months.

Beckworth: Six months. So you built up that equity cushion, so absorbed some of the losses. So kudos to you for doing that.

Calabria: Well, also, I should note, we cut the tail risk at Fannie and Freddie in half. And what by that, there are three primary risk factors that drive mortgage defaults: loan to value, borrower credit and debt to income. And so the number of loans that had all three risk factors, we cut in half over the course of the year leading up to COVID. I'll also say, during that time, I believe [we had the] largest annualized increase in black homeownership. There's a narrative out there that you can only achieve increases, particularly minority homeownership, by weakening underwriting standards, and we showed the opposite. And so I do think that one of the reasons that households performed better, one, not the only, but a reason the households performed better in COVID, was because we spent a year getting households in better mortgages.

Beckworth: So you did a lot of work leading up to the pandemic, and a key one at least comes out on the book, and one that I think is important to tell is, you built up the equity they had. Still really low, but higher than what it was when you came into it. I want to go back to talk about something you mentioned that 2008, the policy response, was in part, maybe largely, a foreign policy decision. And I was going to ask you this. I remember reading this back then that Hank Paulson got a call from China, and I was like, this can't-

Calabria: It's true.

Beckworth: Bloomberg was important. I was like, this sounds like a conspiracy theory.

Calabria: And then he flew to China.

Beckworth: They actually were worried about their agency holdings, and they called them up. They weren't worried about the treasuries. They trusted those with the agency. That speaks to something that you bring out in your book and that is that, I'm getting a little ahead of myself here, but in February 2020 when the pandemic unfolded, the spreads on the mortgage-backed securities from Fannie and Freddie actually went up. They increased above treasuries quite a bit. And so you paint this picture that even though we tend to view mortgage-backed securities from Fannie and Freddie as similar or safe asset like to treasuries, during moments of uncertainty, they're not.

Calabria: I think the better way to think about the implied guarantee or the safetyness of Fannie and Freddie is less as a light switch, off and on, and more as a dial between one and 100, if you will. Think about it, the probability of assistance. And I do think this is a real problem with Fannie and Freddie. In normal times, the assumption is most closer to 100, maybe let's say in normal times 85, 90% probability that people are like, “well, government will step in.” But when you're really getting in a stressed environment, that drops, and it's obviously reflected in the spreads. And you saw this in 2008, and we saw it in the early months. So you first saw starting December, January of 2020, a shift into treasuries and agency mortgage-backed securities.

Calabria: Then you started to see in February where market participants were pulling back and saying, maybe this isn't as safe as I thought it was going to be. And of course people were looking at the possibility of large job losses, and it's really hard to have large job losses and not have housing market, mortgage market distress. There really were questions being raised during that time by market participants on the stability of Fannie and Freddie. I do think a fundamental problem with the status quo is there's not really the market monitoring when you need it. And then when you don't want it, it becomes severe. So you have the worst of both worlds in my view.

Beckworth: That was very interesting to read that and to think back to 2008 as well. But let me go back just briefly to your role, set things up, as the director of the Federal Housing Finance Authority or the FHFA. And just walk us through what was your responsibilities assigned by Congress?

Mark’s Role in the FHFA and His View of FSOC

Calabria: So, well, first and foremost FHFA is a safety and soundness regulator. So just like the banking regulators would set capital liquidity standards, resolution standards, these are all the things that FHFA does for Fannie and Freddie. And like the financial regulators often have things like CRA obligations, the FHFA has housing missions. So the housing goals that Fannie and Freddie live under are fairly similar and spirit, maybe not necessarily in detail, to CRA and some of the other responsibilities that banking has. So again, it's first and foremost a financial regulator. It's not HUD. It's not FEMA. The role is not to give out grant money or assistance or to lose money. It is to make sure that these entities are regulated in a manner that they're not a risk to themselves in the financial system.

Calabria: And I think over a time that had gotten a little lost, and we really saw this, I could see it when I came into the agency, that much of the supervision staff were essentially disillusioned and didn't feel that someone had their back. And there was often the case where the Fannie and Freddie were able to call the agency and had the staff overruled, so really big morale problems. So part of the conversation in the book is also how we came in and took an agency where they weren't sure they were going to have a future, morale was in the dumps, and how we turned that around and why we needed to turn that around for the COVID response to be successful. I did find that a lot of the ability to get the staff behind me, and again, I provide some quantitative evidence of that as well, is we really just channeled the mission of the agency.

Calabria: We're here to make sure the system is safe and sound. And of course also reminding everybody that most of the mortgage and real estate transaction is people don't take the risk… like a realtor you make a commission when the house is sold. Maybe the appraiser, you come by, you get a fee paid for the appraiser whether the home closes or not. And you have a whole group of people, mortgage brokers. So most people on the process, their payment does not depend on whether the loan ultimately performs or not. I would remind the staff pretty regularly, everybody else in the front of this, they're just getting paid on the transaction. We hold the risk, and therefore you cannot count on anybody else in the transaction, to actually monitor that transaction. You are the residual claimant of the risk in the mortgage market at FHFA, if you will.

Calabria: And I don't know that they'd ever really heard it that way or felt that way about it. I would certainly say one of the things that heavily influenced me, I was on the banking committee as you mentioned, during 2008, and you would get these phone calls from people who their house was about to be auctioned off or foreclosure the next day. And obviously they tried a lot of other avenues and wanted Congress to intervene at the last moment. And also, I worked in Dirksen, one of the Senate office buildings. And so when a number of the cafeteria workers had found my office and brought their mortgage documents, and you're sitting across the table from a dishwasher with four loans, and you're asking, how did this happen? And so to me, it's important to keep in mind these were real people that were put in bad products. And Dodd-Frank aside, we didn't change that really in my mind and not in my experience. And so I really tried to impress upon the staff that you own it. If you don't do your job, bad things happen to the economy and the households. And so you would think maybe the lecturing would depress morale, but no, it improved it. Because again, everybody wants to feel rightly so that their job is important and has value. And this is an agency that when done right, does have a very important role.

Beckworth: One last question about FHFA and your role in it. Were you a part of FSOC, the Financial Stability Oversight Council?

Calabria: Yes. Yes.

Beckworth: So what is your view of FSOC? Because that's been pretty controversial.

Calabria: We could probably do an hour long on the activities. Let me say, we did actually start an activities based review of Fannie and Freddie. The activities approach did not foreclose us from designating entities as has somehow been asserted. That's not the case. The activities approach worked quite well that the FSOC came up with a set of recommendations back to FHFA, capital resolution, other exercises. We worked very deeply with the Fed and Treasury who did a lot of analysis and a lot of feedback. But I will say, FSOC is very Treasury-Fed driven. So nothing happens on FSOC that the Treasury and the Federal Reserve don't approve of. And in some sense I would say the real purpose behind the FSOC creation from Dodd-Frank, is to give the Treasury Department more say over what the financial regulators do.

Calabria: And again, treasury is an outside voice. They set the agenda. I do think, as I would say, somewhat in jest but more in reality, FSOC is really good at identifying risk that nobody as a member has responsibility for, but it's not very good at identifying risks that the members themselves have. And so, ultimately, I think FSOC would be a better organization if it was outside of Treasury and you had a truly independent voice and a truly independent research function. Because for instance, the Office of Financial Research that supports FSOC largely supports Treasury. They do the work that Treasury says. I'll be quite frank and say I overlapped for about six months with the Biden administration. I participated in two closed FSOC meetings with Chair Yellen. I raised questions about the mortgage-backed securities market. I raised questions about the housing market. I thought things were going to go sideways. And the entire conversation almost every time was about using FSOC, to force the financial services industry to transition at zero. That was 95% of the conversation.

Beckworth: Interesting.

Calabria: So if you raised your hand and said, as I did, I've got worries about this part of the market, it got largely brushed off it. FSOC at the end of the day is structured in a way to allow Treasury to impress its political agenda onto the financial regulators. If you think that's a good thing, then you think FSOC is a good thing. If you think FSOC should be there to objectively identify risks in the financial system, you will be disappointed.

Beckworth: That is a long conversation we can have. Maybe we'll have you back on, Mark, to talk about that more sometime. Let's move into the relief that was provided during the pandemic and the role your agency played as well as other parts of government. So there was mortgage relief, renter relief, there was also big fiscal stimulus. The Fed provided support. But let's focus in on what you authored. These were your ideas. You wanted to be distinct from what happened in 2008. You learned the lessons of 2008. So maybe walk us through how your mortgage relief and renter relief was unique and distinct from 2008.

The Structure of Mortgage and Renters Relief at Mark’s FHFA

Calabria: There were a number of programs, 2008, things like HAMP and HARP, and you can look up the acronyms, what they meant, but a number of mortgage programs that were rolled out in 2008. I think the general consensus is they worked poorly and were expensive and cumbersome and complex. And you may remember there's the famous Geithner quote about foaming the runway, his view of more of these programs were simply to make it easier for the banks to survive. We looked at that and said, that was a disaster. And A, starting from the recognition that even though a number of households were going to get unemployment insurance… I guess just stop and remind ourselves, from February to April, 22 million jobs were lost in the United States. And to put that in context, in the Great Recession, it was nine million over two years. This is 22 million in two months. Unprecedented job loss.

Beckworth: Huge, yeah.

Calabria: And so certainly you're not going to have that level of job loss and not have distress in the housing market. And so even though unemployment insurance traditionally covers about half of jobs, it still takes two, three, four months for your unemployment check to come up. And so if you're somebody who's living paycheck to paycheck and you're not getting your unemployment check for three months and you've got a mortgage, you may be experiencing some distress. We recognize that unlike 2008 where it would take six months of paperwork back and forth, we took a gamble here and said, we're going to let people call their mortgage servicer, the person who collects the payment, and the mortgage servicer will ask, did you suffer a job or income loss because of COVID? And if you say yes, you're in. With the intention of we'll come back in three months, which by that time you should be collecting your unemployment check, assuming you qualify, and you'll be able to get back on your mortgage.

Calabria: So it really was, we'll get you in. We'll be very generous on the front end, because the intention was we'd be stingy on the back end. We’ll call and try to make sure you were ready to get back. And it was not forgiveness, it was forbearance, the expectation and the requirement would be that you'd pay it back. So essentially what we were going to do was give you hopefully three or four months of a free loan to cover your payments and then you'd get tacked as a balloon onto the back of the mortgage. But I do want to emphasize, it really was something where we thought we could be really generous on one margin because we were going to be stingy on the other. And I think that that largely worked. We saw very little evidence of it being abused. There were probably about a fourth of people who continued to make their mortgage payment the entire time they were in forbearance. And we would reward it.

Calabria: So for instance, as long as you were in forbearance, you couldn't refinance. And as you remember, eventually later in the year, rates dropped to historic lows, which created a real incentive. And again, we expected rates to drop. We didn't expect them to quite drop as much as they did. But as you know, the Fed, regardless, demand for investment goes down in recessions and we expected demand for investment to go down, so we expected mortgage rates to trend down. So we expected there to be a significant refinance opportunity. We underestimated that, but we expected that, we got the sign, if not the magnitude. And so we shortened the time. So traditionally if you've entered a forbearance or you've ever been late in your mortgage, it usually takes you 12 months later before you qualify for a refinance. So what we did was to say, okay, if you get out and you pay for three months, you can refinance, no questions asks.

Calabria: And it really created this incentive for people to pay it back. The big takeaway lesson is assistance programs need to be incentive compatible. In this one, they were. We helped people very generously, but we also, again, made sure that the incentives minimized the opportunity for abuse. I think it worked really well in that regard. And you didn't have the paperwork back and forth. We engaged in the honor system. Now, there was some concern that because we were engaged in an honor system, that people would abuse it. And again, if you structure it incorrectly, people will abuse it. But I think we ultimately got it right. We felt that we were at a level where we could stand up and understand how much the severity was going to be. I'll say, as an aside, one of the more shocking things to me when I talk about FHFA… so fair to say, Fannie and Freddie and the Federal Home Loan Banks regulated by FHFA, their number one risks are probably housing market microeconomic. Yet, FHFA, when I walked in the door, did not have a house price or macroeconomic forecast function.

Beckworth: That's interesting.

Calabria: That was my reaction. They relied on whatever Fannie and Freddie told them. It was as if the OCC just asked Citi to tell what's going to happen in the economy. And so we hired Lynn Fisher who was at that time at AEI and had been at Chapel Hill, and so just tasked her with set me up a research division. We had to set up a research division largely from scratch. There were a lot of good economists spread throughout the program offices, but there was no centralized research function at FHFA. The timing was great. We started that in January 2020, and so by the time COVID hit, we had a pretty good forecast function on what we thought the mortgage market would do based on previous recessions. And so we had a pretty good sense of how much do we think forbearances will go? How many people will have stress? And in retrospect it ended up being quite accurate. But again, if we had not done that and not made that change, I think we would've been flying in the dark.

Beckworth: So this was your program, your baby, you created it. And I've had people tell me how much they liked it. I had a very prominent economist from the University of Chicago, Peter Ganong, on the show, and he told me of the many relief packages during pandemic, he really liked this forbearance program that you authored, you designed. And he liked the part that it was an opt-in option… Well, two things, he liked that it was simple, unlike the HARP and HAMP programs you mentioned, very simple, but also you opt in. And he contrasted that with the student loan [program]. Everyone who got a student loan was, in that program, you had to opt out of it. It was not incentive compatible whether you needed it or not. Whereas in this case, he said about 8% of people said they needed it, and it worked out great. I'm just curious, Mark, does it feel great to have this success behind… we talked about your equity building as well, but now you're having studies done on your idea, you're having papers written, that's got to feel pretty cool.

Calabria: It is flattery, and I'm glad that it came out the right way. I'm tempted to say that I guess that suggests we should have economists design more programs, but I don't want to go that far, because it's not like economists don't have their own failures. But it does tell you the understanding of having somebody who can think like an economist and think about incentives and think about the design of these things. And of course the coincidental, that I had studied pretty closely the previous programs and didn't think they worked well. But it also was, so some of the student little debt relief was certainly about helping people in COVID, but other of it was just very blunt, give it away. And also, this isn't simply… you can't rest all this at Biden because even Trump had, let's make the relief payments $2000 or whatever, and you had these biddings.

Calabria: And A, I really felt like you needed to triage so that your assistance went to those most in need and that this wasn't a political opportunity to redistribute wealth, but you were trying to solve a problem, and not necessarily, foremost, a political problem, but a problem of financial distress. And that's how you need to structure it. And you certainly need to have simplicity. I'm trying to remember, what is the Larry Summers thing about a timely, temporary, targeted… that's what we tried to do. And I think we did that in that regard, and I do think it worked. One of the reasons to write the book was I did start to see commentary, pretty favorable. It's often easy for an economist, you feel like government does something, so that's some exogenous shock, but there's not often looking back behind the curtain of why did this happen this way?

Calabria: So for instance, one of the things that I thought was important in program design, and I like to call this the Casey Mulligan effect. Casey at University of Chicago wrote a number of papers coming out of 2008, arguing that among other things, the mortgage assistance programs of HAMP and HARP had very large marginal disincentives to work. And again, I really looked at 2008 as, there was a lot of problems in the labor market. And again, whether you look at Beveridge curves or other things, there were lights flashing off to me, something's going on in the labor market. And Casey's work I think really helped me understand at least one narrative of that. And so we wanted to make sure that the programs, they weren't means tested, partly because when COVID hit, whatever income data we had would be stale.

Calabria: It's useless in terms of telling us… But [just] as importantly we didn't want to create large work disincentives. And in fact, I'd go as far to say, I think one of the reasons for the very strong job recovery in the last three quarters of 2020 is because going back to work didn't mean you lost mortgage assistance. It was time based rather than income based. And I think that that had a much better set of incentives. Now again, I'm of the school who thought as an economist that high marginal tax rates matter. I know some disagree with that. I think the evidence supports that conclusion, and I think the structure of this program and success of this program supports that conclusion. But you really had, I think, ultimately, a successful program because I really thought about it, and again, I do want to give credit as I do in the book at the staff at FHFA, when I came in 2019, I said to them, listen, servicing supportive assistance to distress borrowers was a disaster last time. We need to spend a lot of time thinking about that.

Calabria: We didn't just make this up on the fly. We spent a of time pre COVID thinking about it, and these were probably some parameters we would've used if it was a different shock such as a recession. Now, I talk in the book about what are some of the factors I think that come out of this that we should use next time and some that we shouldn't. Again, this isn't necessary the exact model, but I think there were a lot of lessons learned, and that's why I wrote the book, because the reality is we'll have another housing downturn at some point. And I hope that we learned from some of the responses in 2020 so that we can have this in an effective cost-efficient manner.

Beckworth: Another part of the relief package from the government was the renter's relief. That was an important part. And you mentioned in the book, I think you have a whole chapter on this, talk about how renters were some of the first people affected, they work in service industry. Walk us through that.

Calabria: So keep in mind, out of the 22 million jobs I mentioned, only about 40% of those had a mortgage. And if you really think about it, the real shutdown, both from lockdowns as well as voluntary pullbacks and economic activity, were things like restaurants and bars, and those are professions that are predominantly renters. We had a lot of experience going into COVID, not only because of 2008, but how to deal with Sandy, Katrina, Maria, hurricanes and disasters on the single family side, but we'd never set up anything on the multifamily side. It really was one of these instances of building the plane while you're flying it. So we looked at this and said, this is predominantly a renter recession. Of course most recessions are predominantly renter too, but for some reason it's not really thought about that way in the past. I guess because homeowners are more likely to vote. But that's a whole different issue.

Calabria: And so the tension that we had is we knew who the homeowners were because we had bought their mortgage. You don't know that with the renter. The landlord has a mortgage on the property… Quite frankly you don't even know whether the unit's occupied, but we knew we needed to have some assistance. So unlike the CDC moratorium, which was later set up in a way that was involuntary, we set up a program where if the landlord entered in and we would give the landlord forbearance in exchange for the landlord agreeing not to evict anybody for nonpayment. So they could evict people who were a nuisance or destructive to the property, all those things. But we were going to give you assistance if you provided assistance. Now, I think estimates are between what we did at FHFA and HUD that maybe we covered about 40% of the rental market.

Calabria: There are limits. Some of this is a very large part of the rental market. People don't even have mortgages. So for instance, you and I live in relatively urban and organized areas, but half of renters nationally live in properties of under five units. So the big 20, 30, 100 unit buildings that are predominantly what Fannie and Freddie finance, that's not actually where most renters live. I even mentioned in the book, being a landlord and my own experience in it. And so we really needed to reach as many people as we can. I do feel like the renter was… we did what we could, but there were real limitations here. Public policymakers should think about what a rental solution would look next time. I do talk about some of the mechanics, we created a lookup tool.

Calabria: So if you were a renter… for instance, as a renter, you would not normally know whether Fannie and Freddie owned the mortgage on your property because you don't have the mortgage, the landlord does. So we created lookup tools, but even that, there were snags, you might live on Main Avenue and you search Main Street and it doesn't show up, and so all of this had to be created new. And so a lot of time was trying to get this to a point where we could help people figure out whether their landlord was a Fannie and Freddie and they could go to the landlord and have a conversation. But again, completely voluntary, nobody was forced into it. And we ended up… I do think this is one of the reasons why you didn't have some of the eviction tsunamis people were concerned about. Of course there were strong incentives for landlords to work with tenants. It's important to keep in mind that we did avoid that housing collapse, both for homeowners and renters. But the renter one was the one that probably required the most creativity and new work, and again, such an important part of it, but also the one that probably leaves the biggest questions going forward for what it should look like next time.

Beckworth: So you brought up the term eviction tsunami, and there were a lot of reports early on in the pandemic that there were going to be a lot of people kicked out of homes, whether renters or homeowners, and images of 2008 were coming to mind and we didn't have it. We went through this surprisingly well. And part of the answer for that is these programs we just talked about. But another argument or contributor might be that the generous income support… in fact, Mark, you know I'm a big nominal GDP targeting fan. One way to look at it is nominal income, stabilize nominal income, people can make their payments, right?

Calabria: Absolutely.

Beckworth: And there's financial stability. So if you had to put a weight or percent contribution to say, federal government providing generous… and we can debate whether there was too much, and I think 2021 was too much.

Calabria: Absolutely.

Beckworth: But in terms of stabilizing nominal incomes versus specific targeted mortgage relief, renter relief, how would you break that down?

Stabilizing Nominal Incomes vs. Targeted Mortgage Relief

Calabria: So let's first say, I really did approach this with, how do we help stabilize households, really? And so a lot of the 2008 response was, if I wanted to be unkind to say, you're going to help financial institutions and you hope that that trickles down to the borrowers or helping Wall Street, helping it trickles down to Main Street. And so just like your preferred approach, to which I'm fairly sympathetic, you stabilize nominal income, we were trying to stabilize essentially the household as well, and felt that if we made it so that you could stay in the house, then the mortgage lenders and everybody else would be fine. So certainly, and again, the book is on the focus on the things that I could do, but certainly the contributions of unemployment insurance, the relief payments, the assistance to overall economy, certainly made those things more stabilized.

Calabria: Now, if I had to do a breakdown, and I know there's been two or three papers, you've tried to tease this out, because obviously you've got a lot going on at the same time. I would probably say that we avoided a housing crisis, probably 60% attributable to these programs, 40% attributable to a combination of Fed relief and fiscal stimulus. So again, they all contributed together. But I do think that, because one thing to keep in mind, we were actually fairly generous with unemployment in the early years in the Great Recession. It's not like we haven't had that before and we still had much higher delinquencies in the mortgage market. The difficult thing, of course, is we don't get to experiment in macroeconomics. We haven't had an opportunity where we've just provided mortgage relief and been stingy everywhere else. We tend to be generous on a number of margins.

Calabria: And again, this is why I say if you look back at the Great Recession where we were fairly generous, I'm personally not of the school that the problem in 2008 was we didn't spend enough. I think it's more, again, the Casey Mulligan view of we expanded programs in such a way that created very large marginal tax rates, implied loss of benefits. That to me was part of the problem, and we tried to avoid that. Obviously, we spent more this time, I'm with you to say we spent too much, and a lot of it was not well targeted. And that was part of the problem as well, is a lot of people got assistance both in 2008, but even more so in 2021, who did not need it. I wanted to make sure in the programs we were designing, that the assistance was prioritized to the household at the margin rather than the household inframarginal.

Beckworth: Great points. And I've said many times that I hope one takeaway from this whole ordeal is that we don't throw the baby out with the bath water. I'm delighted that we actually restored nominal incomes to its trend path or what was expected. But I'm disappointed that we went above it. We had too much income.

Calabria: You raise it and you touch on it, but in a sense, the point of the book is that the choices are not do nothing and go whole hog crazy. There are actually thoughtful choices in the middle that are well targeted, that get at the problem, and that can be fiscally responsible and actually address the underlying problem. And so that's the theme of the book. It doesn't have to be an either or. There can be, I hate to say, a middle way.

Beckworth: Definitely. Yeah, for sure. Well, with that, our time is up. Our guest today has been Mark Calabria. His book's title is, Shelter From the Storm: How a COVID Mortgage Meltdown Was Averted. Get your copy. Mark, thank you again for coming back on the show.

Calabria: It's so great to be here again.

Photo by Pool via Getty Images

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.