The most important question in housing policy heading into the new year has nothing to do with interest rates, housing supply, or home sales. It’s what kind of director of the Federal Housing Finance Agency (FHFA) Mark Calabria will be.

As the regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the FHFA has an enormous hand in who in this country can get a mortgage and on what terms. And in Mark Calabria, the Trump administration has nominated one of Fannie and Freddie’s greatest skeptics, raising the prospect that they, and the market that depends on them, could undergo dramatic change.

So it’s worth taking a look at Calabria’s skepticism and how it might bear on the road ahead for Fannie and Freddie.

By bundling mortgages into securities that bear no credit risk, Fannie and Freddie attract hundreds of billions of dollars in annual investment, which expands access to long-term, fixed-rate loans. That is the commonly held view, anyway, the reason most often offered for having these institutions in the first place or something very much like them.

But Calabria dismisses it out of hand. He contends that neither securitization nor the 30-year fixed-rate mortgage is worth the trouble, as the former facilitates an originate-to-sell model that creates too much risk in the system and the latter creates unhealthy distortions of the market. Given all of the economic and political cost of sustaining them, he asks, why keep them at all?

His question takes on new meaning as Calabria moves from commentator to policymaker. And indeed, his answer is likely to change with the move, as he will have to contend with the practical reality that these institutions are too economically and politically embedded in our system to be easily wished away. Add to this a softening economy and a presidential election in which the economy will play center stage, and we should expect him to move more incrementally than dramatically, focusing on ways to reduce the centrality of Fannie and Freddie in the system rather than eliminate them altogether.

That isn’t to say that he would reverse ideological course—his views are too deeply and genuinely held to expect that—but that he’d likely proceed more cautiously down that course than his writings suggest.

Against this backdrop, his approach to reducing the market dominance of Fannie and Freddie is likely to take two forms: reducing their footprint and reducing taxpayer risk within that footprint.

How Calabria could reduce Fannie and Freddie’s footprint

In reducing Fannie and Freddie’s footprint, he would have four levers to choose from: loan limits, pricing, loan products, and the credit box. The challenge would be finding a combination that constrains Fannie and Freddie’s footprint without pushing the lost lending either over to the Federal Housing Administration, which would simply move taxpayer risk from one government pocket to another, or out of the market altogether, which would be too economically disruptive.

With that in mind, I would expect him to focus on measures that allow the FHFA to move incrementally so that they can see how markets respond before moving more aggressively. For instance, rather than lowering Fannie and Freddie’s loan limits, the FHFA could increase pricing on loans that fall above a certain limit, giving the jumbo market a chance to move into the larger loan balance space without pushing those the jumbo market doesn’t want out of the purchase market altogether. If demand exceeds expectations, they can move the threshold for higher pricing down; if it falls short, they can toggle it back up.

Calabria may also focus on markets that he is more comfortable disrupting, like investor properties or cash-out refinancing. This would allow him to reduce Fannie and Freddie’s footprint without disrupting the purchase market for primary homes, and if demand exceeds expectations, then it may give the FHFA confidence that they can move into comparable purchase markets without too much disruption.

Whether it’s these steps or others, we should look for attempts to shrink the government’s footprint without contracting the overall mortgage market.

How Calabria could reduce taxpayer risk within their footprint

To reduce taxpayer risk within the government’s footprint, Calabria would likely look for ways to ensure that Fannie and Freddie are off-loading most of their credit risk through the entire economic cycle, not only in good times. Fannie and Freddie are off-loading most of their credit risk today through a combination of loan-level mortgage insurance and pool-level credit risk transfers, but the latter is dominated by investors that are so nimble across asset classes that they will move quickly and en masse as the economics shift, leaving Fannie and Freddie to assume that risk once again. Calabria is thus likely to look for ways to deepen involvement by investors that will remain in the market further into the cycle. This could mean requiring Fannie and Freddie to secure deeper loan-level mortgage insurance or expanding the use of pool-level structures that attract so-called institution-based capital.

He would also likely look to position Fannie and Freddie or their successors with much higher capital standards than they have today. The current FHFA regime has already proposed stronger standards, but a more conservative Calabria regime is likely to consider going a step or two further, with, for example, a buffer for systemically important financial institutions or a so-called countercyclical buffer.

While these standards won’t affect Fannie and Freddie’s capital levels while in conservatorship, as their levels are limited by contract with the Treasury Department, they will set a benchmark for similarly situated institutions in whatever system succeeds the conservatorship. They will thus play a critical role in determining where we ultimately strike the balance between taxpayer protection and the cost of credit. In the meantime, as capital standards flow through to pricing decisions even in conservatorship, moves to increase them will lead to higher pricing, particularly for higher-risk loans, exerting still more downward pressure on Fannie and Freddie’s footprint.

In short, Calabria is likely to proceed down the path he has spent a career mapping out, albeit more cautiously than he might have once recommended, toward a mortgage market in which Fannie and Freddie play a smaller and smaller role.

This, of course, leaves open a great many critical questions.

How will the market respond to a contraction of the government footprint?

Banks will step in to take some of the loans onto portfolio, but what happens to the rest? Will investors and issuers in the private-label securities market work through their long-standing issues to pick up the additional supply?

How will the loss of cross-subsidy affect access to credit?

A significant portion of the $3.8 billion in annual cross-subsidy that Fannie and Freddie generate through their pooling of loans comes from the very loans most likely to be lost to the private market: lower-credit-risk borrowers with large loan balances, investor properties, and the like. How would the loss of these loans affect pricing for higher-credit-risk borrowers?

How will Calabria change the access and affordability regime in place today?

On the one hand, he has expressed a consistent interest over the years in supporting affordable housing. On the other, he has expressed skepticism in the policies in place today to support access and affordability, arguing that they do more to drive up the price of a home than to put homeownership within reach for more families. So which policies does he change and how?

What’s the endgame?

Does he put Fannie and Freddie on a path for reprivatization, run them through receivership, or wait on Congress?

There will be considerable drama in how these questions are answered over the coming years.