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Barry Zigas and Dave Stevens: 2019 Outlook Cloudy, But Not Without Hope

On the latest podcast for Mortgage Media, Dave Stevens talks with Barry Zigas, who hopes for a better Qualified Mortgage process and a stronger FHA — and doesn’t think the FHFA’s new leader will change things as dramatically as past rhetoric may suggest.

There may be a new sheriff in town at the Federal Housing Finance Agency (FHFA) — one who’s been openly skeptical about Fannie Mae and Freddie Mac’s role and has called for the end of their conservatorship — but don’t expect much in the way of drastic or radical changes in 2019.

That’s Barry Zigas’ take on the advent of Mark Calabria — Vice President Mike Pence’s chief economist and a former senior aide on the Senate Banking Committee — to the leadership of the FHFA. Zigas, director of housing policy at the Consumer Federation of America and a leading light in consumer advocacy in the housing sector, believes Calabria will be constrained from changing much, by both statutory requirements and by political and economic reality: “Housing represents too important a part of the economy.” And don’t expect much in the line of legislative action, either, barring a crisis that kicks Congress into action.

“That economy is too dependent on there being a steady supply of capital from around the world to support American home ownership and rental housing, and heading into a presidential election cycle, in particular, woe to the policy executive who messes with the housing system and causes it to go into a tailspin and aggravate home owners and lenders across the country, so I don’t think Mark is going to be a radical change agent,” Zigas said, though acknowledging that Calabria likely will shake up the status quo in smaller, but still substantial, ways.

Zigas is among 13 top thought leaders in mortgage finance, housing policy and related issues who shared with Mortgage Media senior advisor Dave Stevens their perspectives on what 2019 likely will hold for the industry. Zigas formerly was president of the National Low Income Housing Coalition from 1984 to 1993 and senior vice president at Fannie Mae from 1995 to 2006.

In looking to 2019, Zigas addressed expectations for Calabria’s leadership at FHFA; what he hopes could emerge from the Consumer Financial Protection Bureau’s “lookback” of the Qualified Mortgage provision; and the outlook for the Federal Housing Administration (FHA), already hampered by depleted resources even before the current government shutdown. To Zigas, “there is almost nothing more critical in the system today” than to ensure FHA’s integrity and effectiveness.


Zigas gives the retiring Mel Watt credit for “very significant changes in the way the government’s relationship with Fannie Mae and Freddie Mac is organized,” with work beginning on the Common Securitization Platform in the single security and with the Duty to Serve requirements regarding underserved markets finally being implemented.

“Those are big steps forward for the companies, and they also set the table for discussions at the Congress and elsewhere in the administration, by putting in motion certain things that are going to be very, very hard to stop or change,” he noted, “and they represent a broad consensus in the mortgage industry, and the advocacy community, policy community, about what needs to be done as Fannie Mae and Freddie Mac remain in conservatorship following their entry into that in 2008. So I think Mel deserves a lot of credit for the leadership he showed.”

Watt’s departure and President Trump’s naming Calabria to FHFA leadership (with Joe Otting serving in an acting status until Calabria is confirmed) — as well as the tenor of the Trump administration in general — have sparked uncertainty and “a lot of chatter” as to its intentions regarding such government-sponsored enterprises (GSEs) as Fannie Mae and Freddie Mac. A libertarian-leaning economist who had a platform at the Cato Institute, Calabria has a history of being skeptical of the GSEs — considering securitization a “false god,” opining that the FMs didn’t serve a useful purpose, and that all consumer needs and mortgage finance could be handled through the deposit system or private label securitizations. And, while Zigas doubts Calabria can realistically make overly radical changes, that’s not to say the change in tenor won’t result in some policy changes that tilt more toward private interests.

“I do think Mark comes with a point of view that is going to influence policy for some time,” he said. “I think he will endeavor to shrink the GSE footprint in an attempt to ‘crowd in private capital.’ He can do that through limits on the loan limits, through increases in the guarantee fees, through changes in the products they’re allowed to offer — all of which could mean Fannie Mae and Freddie Mac play a smaller role in the housing economy as things go forward.” There are areas in which there isn’t even board agreement or consensus, such as whether the current guarantee fees the GSEs charge really reflect the risk they’re taking on, so Calabria “has a lot of freedom of action frankly in that regard.”

Regarding such key issues as access and affordability, though, Zigas says Calabria’s “hands are relatively tied,” since the big elements in the FHFA regulatory structure are set by statute — they can be tweaked but not abolished: the housing goals, the Duty to Serve requirement, and the 4.2 basis point fee imposed in 2008 to fund the HUD Housing Trust Fund and the Treasury Department’s Capital Magnet Fund. The director could suspend that fee, but only by showing that maintaining it would endanger the soundness of the institutions.

Ultimately, as far as Calabria goes, “the real governor on his actions is going to be to what degree it leads to a further slowdown in housing, or housing finance, or begins to pinch consumers at a time when I think the administration is going to be loath to be associated with anything that looks like it is slowing down the economy, or preventing American consumers from becoming home owners.”

And legislative action? Don’t hold your breath, Zigas notes: On the complexities of housing policy, and GSE legislation, Congress historically has worked in crisis mode, “when it’s under the gun and forced to take action.” (As with the S&L collapse in the early 1990s.) And that’s not the case right now: The FMs are “operating full speed ahead,” and issues — obstacles to home ownership or affordable rental credit — while being definite problems “aren’t at a stage where people in Congress, you know, feel compelled to act.”

“Now, if the administration does what I would consider something radical in terms of trying to break out of conservatorship through administrative means, I think that would set in motion a series of events that could probably lead to legislative action,” he said. “Whether there’s really any consensus around what legislative action to take is another question, and the changeover in the House has a significant impact on them.”


What could be the ramifications of the Consumer Financial Protection Bureau’s five-year lookback on the Qualified Mortgage requirements to ensure lenders make a good-faith effort to determine borrowers’ ability to repay?

Zigas hopes — and strongly encourages — that it will result in a process that’s easier, less rigid and more beneficial for both borrowers and lenders.

First, the background: The Dodd-Frank Wall Street Reform and Consumer Protection Act provisions established new rules for mortgage lending. Most importantly in the housing context, they obligate lenders — under threat of penalty — of making sure borrowers can afford the payments on their mortgages at the terms originally offered. The Qualified Mortgage, Zigas noted, is “a specific provision that relaxes the liabilities lenders otherwise would have, but only if they make loans that fit in s certain box. And CFPB tried to craft that box in a way that wouldn’t choke off credit, but that also would not encourage lax lending.”  Without access to the so-called “GSE” patch that allows for other compensating factors, the rule would have come up short, he added.

Appendix Q establishes standards for determining a consumer’s debt-to-income (DTI) ratio, which may not exceed 43 percent. It comes into play, Zigas noted, for loans that can’t go through the GSE or FHA underwriting systems. The trouble is, he notes, Appendix Q standards are overly complicated and labyrinthine.

“The big problem with Appendix Q, in my opinion, and I think that of many other people, is that it was kind of this cobbled together, Frankenstein monster of multiple layers of verification documentation, that made the process very, very cumbersome, in some ways impossible to fully validate and comply with, and therefore is a huge discouragement to developing lending channels outside of the GSEs or other government channels,” Zigas said. He would instead encourage the Bureau to enable acceptance of the guidelines Fannie Mae and Freddie Mac have for manual underwriting, which he says are “well-established, well-understood, and much more easily utilized.”

“I would hope in this lookback, the Bureau will take a serious look at taking a more simpler — not less rigorous, but simpler — approach to manual underwriting, one that the lending community can more easily adhere to, it can be more easily verified and quality controlled, and help make it possible for borrowers,” he said, “particularly non-W-2 borrowers, borrowers who for whatever reason can’t get sent through the automated underwriting systems of the GSEs, but for which there is a credit demand. And I think that it should not be as complicated and hard to do as it has been here before, and this lookback is an opportunity for everyone in the industry to offer an opinion about them.”

Zigas gets how things got to this point: Lenders needed to have a “clear, so-called bright line test” to determine whether a loan qualified under QM — “and I understand the need to have a scalable, easily understood and easily audited means of doing this that doesn’t engage lenders in the potential for a back-and-forth, he-said-she-said, years-later argument over how a loan was originated.” The Bureau chose that DTI ratio number as the default for loans that don’t get approved through other government-sponsored systems — but, Zigas said, “the DTI is a pretty arbitrary measure” and doesn’t allow for lenders to consider other compensating factors even if the lender’s DTI tops 43 percent.

“We have done some work on trying to think about alternatives, including the use of residual income, or cash-flow underwriting of the borrower as a more accurate and certainly a helpful supplemental, if nothing else, means of making that determination, and I’m hoping the lookback will give us an opportunity to air that point of view more fully,” he said. Borrowers and lenders would both benefit from an underwriting approach that looks at factors beyond “one rigid rule,” he said.


Zigas’ outlook for the Federal Housing Administration in the immediate future? “Cloudy.” But not without hope.

Complicating matters for any sort of prognostication about FHA in 2019 is, of course, the government shutdown going into the year and still underway at this writing, which affects FHA and its parent Department of Housing and Urban Development.

Obviously, Zigas noted, “If there aren’t people showing up at the building to do the work, it’s very hard to imagine how the work gets done.” Further, “The industry has begun to highlight some of the roadblocks that the shutdown is throwing up for real estate in particular, especially the inability to process the requests for tax transcripts, the issuance of certain obligations and commitments that involve credit insurance.”

As FHA commissioner Brian Montgomery steps into the role of HUD deputy secretary, Zigas is optimistic that Montgomery understands and appreciates FHA’s important role — with its origins in the New Deal, it’s meant housing and home ownership opportunities for millions over the ensuing decades — as well as the challenges it faces. His wearing two hats (FHA and HUD) may make dealing with those challenges a bit trickier, though.

“I think he also appreciates that FHA still has a fundamental and very essential role to play in the mortgage system. It is, after all, the largest source of home ownership lending for first-time African-American home buyers. It serves an important purpose in providing credit to low-wealth and moderately good-credit-score borrowers that the GSEs, for whatever reason, more or less abandoned,” Zigas said. “So it’s really, really important to get FHA right, and I think the market has shown that at the moment they don’t have it 100 percent right, because many of the best and most reputable, better capitalized lenders have either severely constrained their footprint with FHA, or they’ve exited the program altogether out of fear for some of the consequences of their outdated technology, their inadequate guidance on credit risk failure and liability — and I think Brian understands how important that is.”

Zigas admits to pessimism in the short term — especially with the wrench thrown in the works by the shutdown — but optimistic in the long term. But there’s work to be done.

“Congress bears a heavy responsibility for years of neglect, of starving the organization for funding and not being responsive to the needs that a big business operation within the government has — and this has obviously sparked conversation among many of us about whether the current system, where FHA is part of HUD, is really the most viable, sensible and durable structure as we go forward.” That’s a legitimate and necessary conversation to have long-term, Zigas says — but more immediately, “HUD needs to get its house in order and fix its infrastructure liabilities, its infrastructure deficits, and provide more certainty in the lending community and the consumer community about when lenders will be held liable for mistakes that are made in the manufacturing process.”

Zigas also hopes to see larger banks move back into FHA lending — many of which have been reluctant to take part for fear of running afoul of the False Claims Act and needing to pay out huge settlements.

“No offense to independent mortgage banks and the important role they play, but when you have a credit mono-culture upon which federal credit insurance is resting, that doesn’t have the same prudential regulatory oversight that money center banks and depositories have, then you’re putting all your risk eggs in one basket — and that’s a basket that is much more subject to liquidity crises, to straitening circumstances in a recession or a slowdown, and you do want FHA to have a robust infrastructure of customers and counter-parties upon whom they can rely in good times and bad.”

Obviously real wrongdoing by lenders needs to be punished, Zigas said — but “the punishment should fit the crime.” He offered that after years of “complete lack of supervision and regulatory action” the pendulum has swung too far in the other direction as a reaction as seen in some of the FCA prosecutions: “They have over-reacted and have been using the False Claims Act that’s going to exact a pound of flesh from the lending industry.”

There’s been talk of moving more of the burden of the issue onto HUD — so the Justice Department wouldn’t unilaterally move on FLCA prosecutions and the client would be more involved in making these decisions — but HUD is working with a depleted staff and resources, Zigas lamented. “You just cannot expect these agencies — any agency, but this one in particular — to operate at top speed, with the best results, when you have cut their staff by two-thirds. It doesn’t make any sense.” The government shutdown, needless to say, doesn’t help.

“This is a nest of issues, and there is nothing more critical in the system today than to resolve this — and the GSEs and the FHFA sort of hog the spotlight, but the fact of the matter is, this engine called FHA has got to keep running or we’re going to see serious, serious problems in the housing economy.”


Barry Zigas

Barry Zigas has led organizations and workgroups ranging from more than 200 national and regional staff members as a Senior Vice President at Fannie Mae to leadership of the National Low Income Housing Coalition, with 16 staff.  He has effectively articulated and promoted innovative public policy solutions to pressing social concerns. He is director of housing policy at the Consumer Federation of America and an expert in consumer advocacy in the housing sector. Find out more at



Dave Stevens

David H. Stevens, CMB, is former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association 

David Stevens
David H. Stevens, CMB, is a Mortgage Media Advisor, and former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association. 

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