dhollier@imfpubs.com

One of the underreported challenges of housing-finance reform is understanding how it will affect the broader capital markets. Federal Housing Finance Agency Director Mark Calabria acknowledged as much in a recent interview with Inside The GSEs, highlighting some of the unintended consequences of previous rules.

“I look back pre-crisis,” Calabria said, “where you would have a large bank take its mortgage and sell it to one of the GSEs, then buy back that same mortgage as a mortgage-backed security. Why would a bank do that? Because they would greatly lower their capital standards.”

His point was that the capital rules for Fannie and Freddie don’t take place in a vacuum – they influence financial decisions up and down the capital chain. Calabria said that’s partly why he’s moving so methodically on putting out the final rule (and why, in fact, he may ultimately have to re-propose the rule).

“We’re trying to be holistic about this,” Calabria said, “which obviously means it takes time.”

But the capital issue might be too big for the FHFA to address on its own, or even in concert with Treasury. Some industry observers have suggested that the Federal Reserve also has a role to play in GSE reform. For full details, see Inside the GSEs, now available online.