The Financial Stability Oversight Council (FSOC) announced Tuesday during its Principals Meeting that it will begin an activities-based review of the secondary mortgage market.
In December, the FSOC implemented an activities-based approach for identifying and addressing potential risks to financial stability.
"I applaud Secretary Mnuchin and the Financial Stability Oversight Council for initiating an activities-based review of the secondary mortgage market," said Dr. Mark A. Calabria, Director of the Federal Housing Finance Agency (FHFA). "As demonstrated by the 2008 financial crisis and again by COVID-19, Fannie Mae and Freddie Mac must be well capitalized in order to support the mortgage market during a stressed environment."
The review will assess both the risk that activities in the secondary mortgage market pose to the stability of the financial system and the efficacy of various risk factors.
Calabria, commenting at the FSOC Principals Meeting, said under the Dodd-Frank Act, under one of the Council’s core purposes is “to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties” of large financial institutions.
“Simply stated, the Council’s job is to end bailouts,” he said.
Calabria added that he is concerned that the actions taken over a decade, such as the TARP, reinforced the expectation of bailouts.
“I also remain concerned that as memories of the 2008 financial crisis fade, so does the resolve for ending bailouts,” he said. “Dodd-Frank ultimately leaves ending bailouts to the discretion of regulators, and I, for one, am committed to using all the tools at my disposal to do just that. I believe the nonbank guidance is an important step toward fulfilling that purpose and ending bailouts.”
The FHFA’s Director added that some of the previous nonbank designations were done in such a manner that raised the possibility that designated entities would be perceived as “too big to fail.”
“In doing so, the Council ran the risk that a designation would distort market expectations and reduce market discipline, contrary to its statutory purposes. I believe the approach the Council adopted yesterday reduces that risk,” he said.