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Dec. 18, 2024
With a new Congress and administration descending on Washington, now is the time for policymakers to act decisively to free the government-sponsored enterprises, or GSEs, from government control to support the nation’s housing sector.
During the previous Trump administration, Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria initiated the process of ending the conservatorship but were not able to complete it. During the Biden administration, Treasury Secretary Janet Yellen and FHFA Director Sandra Thompson maintained the flawed status quo by failing to comply with the statutory obligations outlined in the Housing and Economic Recovery Act (HERA) of 2008.
Under the Biden administration’s watch, the FHFA maintained a posture implying perpetual conservatorship. Further, the FHFA tightened its control over the GSEs by forcing them to act as wards of the government instead of as private companies.
In doing so, the FHFA encouraged and often required them to take on projects and initiatives that reflected a political agenda over market success. In other words, the administration successfully used the GSEs’ earnings as “pay-fors” to cover the cost of the Inflation Reduction Act. This meant that 10 basis points of every mortgage the GSEs purchase goes to the Treasury to offset the cost of the IRA.
Those that support keeping the GSEs in conservatorship also know that once the GSEs reach full capitalization according to the Enterprise Capital Framework, they will resume sweeping excess earnings to the government. In other words, the GSEs would never really escape conservatorship. This outcome is very clearly contrary to what is outlined in HERA, which requires the government to return the GSEs to private ownership and control.
This is just one example of what happens when the government takes over private companies. Yes, Fannie and Freddie are in fact private companies. They are government-chartered, shareholder-owned companies, very much like national banks.
Like many private companies—including some automobile manufacturers, insurance companies, and Wall Street firms—the GSEs received government assistance to help them through the worst of the financial crisis. And like those other entities, the GSEs paid their bailout back in full.
Unlike those other entities, however, the government never relinquished control of the GSEs. They remain in purgatory even though they repaid their federal assistance plus an additional $100 billion. Imagine if that had happened to JPMorgan Chase or General Motors.
The incoming Trump administration has indicated they want to finish the job of releasing the GSEs from a perpetual conservatorship, which is great. But, as usual, there are those that raise exaggerated alarms about how this might negatively impact the mortgage market.
Those seeking to perpetuate the conservatorship suggest that without a full government backstop akin to Ginnie Mae, the GSEs’ release will precipitate higher mortgage rates and wider spreads between GSE mortgage-backed securities (MBS) and Treasury bonds, disrupting the mortgage market.
This is not likely. Spreads have already been widening for the past two years, in large part due to the Federal Reserve ending its purchases of GSE MBS. Moreover, any initial concerns regarding spreads and interest rates are likely to be temporary as the market adjusts. Allowing the GSEs to use their portfolios to help rein in and manage spreads is another tool to address this concern.
Others have warned that a post-conservatorship world would mean that the GSEs will have to compete directly with the largest banks and Wall Street issuers, including mortgage behemoths like Rocket Mortgage. But there’s nothing wrong with that. And it wouldn’t be anything new—the GSEs have competed against the largest lenders for decades.
Now that we have a new administration with different priorities and plans for the GSEs, what needs to happen? To begin, Treasury and the FHFA need to agree to end the conservatorship. Then the new Treasury secretary will need to work with the new FHFA director to amend the federal Preferred Stock Purchase Agreements and resolve the government’s ownership.
The bailout should be deemed paid in full, the net worth sweep eliminated, and the GSEs put on a path to access the capital markets, become fully recapitalized, and finally exit conservatorship. The market will naturally figure out how to price the GSEs’ debt and MBS.
Remember: outside the Fed, commercial banks hold the remaining majority of GSE MBS. It remains a very liquid market that trades extremely well. It has also never had or needed an explicit, fully backed government guarantee.
Like any other large financial institution, each GSE will have to compete and trade on the strength of their respective balance sheets. Sounds like good old-fashioned capitalism to me.
Once they’re free from 16 years of government control, the biggest challenge may turn out to be the growing pains of the GSEs re-learning how to act like for-profit companies. But this will be an essential step once the federal government decides to follow the law, end this conservatorship, and support the health of the nation’s mortgage market.
Ron Haynie is senior vice president of housing finance policy for the Independent Community Bankers of America.