By Nathalie Voit
On Friday, Oct. 29, Mark Calabria, former director of the Federal Housing Finance Agency (FHFA), and Todd Zywicki, task force chair of the Consumer Financial Protection Bureau (CFPB), met at Mississippi State University to discuss consumer credit and the mortgage market. Consumers’ Research’s Senior Research Fellow Tom Miller moderated the event.
In his opening statement, Miller began the event by introducing the speakers and defining consumer credit. Consumer credit, according to Miller, is “any debt not secured by real estate, such as credit cards, student loans, automobile loans, personal loans, and the like.” Along with mortgages, these comprise the legal sources of credit held by consumers, Miller explained. He then asked the speakers to describe the history and function of the federal agencies they served.
According to Calabria, both the FHFA and the CFPB were created after the last recession. The FHFA, created in 2008, and the CFPB, created in 2010 as part of the Dodd-Frank Act, “were both a reaction to problems in the mortgage market,” Calabria explained. The primary difference between the two agencies is that the FHFA is a “prudential regulator,” tasked with overseeing and supervising the secondary mortgage market, while the CFPB is consumer-facing or concerned with consumer-related matters.
The FHFA was set up to ensure the housing finance market operates safely and soundly. Its tasks include ensuring major mortgage loaners like Freddie Mac and Fannie Mae have enough liquidity or capital at their disposal to support the nation’s mortgage markets and financial institutions. Given how central mortgage policy was to the 2008 financial crisis and other major economic crises in U.S. history, the role of the FHFA cannot be overstated, Calabria said.
“When the mortgage market goes sideways, you can really do a lot of damage to your economy,” he said.
The combined footprint of the regulated entities is about $7 trillion, over 25 times the assets of Walmart. Meanwhile, the outstanding debt of Fannie and Freddie is greater than the capitalization of Nasdaq, Calabria said. Given the entities’ “systematic importance,” designing a strong set of regulations is of primary concern to the FHFA.
On the other hand, the CFPB is concerned with establishing consumer protection laws at the federal level. According to Zywicki, there was a strong perception of the need for a national consumer financial regulator during the aftermath of the Great Recession. Before 2010, consumer protection issues were the subject of various agencies.
“To try to do anything on consumer financial protection was like holding a United Nations meeting,” Zywicki explained.
With the creation of the CFPB in 2010, consumer financial regulation became much easier to implement.
The discussion then shifted to how both speakers approached their job during the pandemic.
Calabria, who served as the most recent FHFA director until his removal by President Joe Biden in June 2021, said his agency looked at COVID-19 “first and foremost as a public health crisis.” When the pandemic hit, the FHFA was concerned with the ability of people to socially distance themselves by staying at home. Therefore, people at risk of losing their homes to foreclosures became a public health problem for the agency. Under the guidance of Calabria, the FHFA pressed pause on mortgage payments. The agency set up forbearance programs to help thousands of struggling homeowners avoid foreclosure.
Zywicki, CFPB taskforce chair, revealed how the agency had to rapidly adapt in 2020 to deal with the changing pace of financial markets. The rapid evolution of various technologies like contactless payments systems posed a problem for regulators interested in protecting consumers without stifling innovation.
Zywicki also revealed how the shutdown of courthouses during the pandemic prompted the rise of new technologies like remote notarization within just a few months. Similarly, home appraisals that traditionally involved agents physically inspecting a property now required automated valuation methods that are generally less precise. The rapid adoption of remote tools by the public writ large was particularly challenging for the CFPB and other rule-bound federal institutions that by nature are not very flexible, Zywicki explained.
Miller then asked Calabria about the current price appreciation affecting the real estate market.
In Calabria’s view, the housing market is fundamentally about supply and demand. The pandemic brought new consumer preferences like the desire for home offices and more space, particularly from millennials, shot homeowner demand through the roof. In conjunction with record savings rates, some regions in the country experienced major housing booms. But markets can turn quickly, Calabria revealed
“I think in the next 12 to 18 months you will see continued demand and rates go up that will dampen the demand response and moderate prices. This is a 12-to-24-month story,” he said.
The conversation then pivoted to the recommendations outlined in the CFPB’s task force report. Although the task force report identified five regulatory tools of concern to the agency: enforcement, regulations, supervision, consumer regulation, and research, Zywicki regarded research as the most important.
“Research tells you where you’re going and how you should be going,” he said. Research also reveals how consumers are making financial decisions. Through the use of research, the CFPB was able to identify the financial inclusion challenges of rural populations. The task force was also able to pinpoint exactly where and how current financial regulations fail lower-income individuals.
Zywicki noted how well-meaning provisions of the credit card act have been counterproductive for low-income households. For instance, the act makes it more difficult for college students to obtain credit cards unless they have a co-signer. Because students from upper-middle-class families have parents who can co-sign and therefore help them develop a credit report, the law benefits higher-income families to the exclusion of the less well-off.
“If you’re credit invisible when you’re young, you’re more likely to be credit invisible when you’re older,” he noted.
That is why “inclusion is best promoted through competition in consumer choice,” like the availability of alternative financial providers to offer credit products, more industrial loan companies, broader use of alternative data for people who lack credit reports, or broader chartering of credit unions to serve lower-income communities, Zywicki said. Calabria agreed.
The speakers then talked about what makes a good leader and provided recommendations for how the new director of the CFPB, Rohit Chopra, should operate. The event concluded with a question-and-answer session moderated by Miller.
A full video of the hearing can be found here.