Should Fannie and Freddie Leave Conservatorship?

Recently much has been written about the fate of the Federal Housing Finance Agency (FHFA) and its role as conservator over Fannie Mae and Freddie Mac. Since 2009 the FHFA has been both Fannie and Freddie’s regulator and has overseen the direction of both organizations. During that time, the FHFA has ensured that the primary function of both Fannie and Freddie is not profit maximation, but instead facilitation of the secondary mortgage market. The FHFA has set portfolio retention limits, set volume caps for lenders and determined guarantee fees, among other things. Under the oversight of the FHFA, both government-sponsored entities (GSE’s) repaid their debts and once again became profitable. Additionally, both organizations have lowered their respective risk portfolios. In light of a 2021 Supreme Court decision in Collins v. Yellen and the advent of a second Trump presidency, there is some renewed rhetoric around the two GSE’s leaving conservatorship and the oversight of the FHFA.

What Happed in Collins v. Yellen?

Collins v. Yellen was a Supreme Court case that delt with whether or not it was unconstitutional for a president to only be able to terminate the head of the FHFA, a single-person led government organization, for cause. The case was building on the decision that the Court made in Seila Law LLC v. CFPB, which was decided in June 2020. In the CFPB case, the Court determined that for a single-person government organization with significant executive power, the inability of a president to remove its director due a statutory high standard of termination was an unconstitutional restriction of the executive powers of the President. For the CFPB, this standard of termination was “inefficiency, neglect of duty, or malfeasance.”

In Yellen, the Court considered if the standard of “for cause” for termination of the FHFA director was similarly restrictive of the President’s executive powers. The Court found that it was. This decision came in June 2021, during the beginning of the Biden presidency. Though Biden used the decision to immediately place the FHFA director, the decision afterward became nothing more than interesting precedent for the Supreme Court.

What Does a Trump Presidency Mean for the FHFA?

The timing of the increased talk about ending conservatorship for the GSE’s as the Trump inauguration approaches is no coincidence. During Trump’s first term, then Secretary of the Treasury, Steven Mnuchin revealed the possibility of taking Fannie and Freddie out of conservatorship, but did not propose a solid plan to do so. The Yellen decision, however, makes its possible for the Treasury and the President’s National Economic Council (NEC) to jointly decide on the fate of the GSE’s. In this scenario, the Treasury would be acting on its 80% ownership in the GSE’s, which it received upon their conservatorship and the NEC would be acting in its post Yellen role as overseer of the FHFA. This arrangement was not previously possible, when the FHFA operated independently of the president’s cabinet.

In anticipation of a movement toward the end of conservatorship, Fitch has issued an opinion on how exiting conservatorship would affect the credit ratings of Fannie and Freddie. Additionally, the Treasury and the FHFA have amended their conservatorship agreements. These amendments will have long term implications, but any plan that for Fannie and Freddie to exit conservatorship will take many years to roll out.

What Are the Effects of Ending Conservatorship?

The ultimate goal for anyone hoping that conservatorship for the GSE’s will end soon is the desire for the mortgage market to experience potential growth. This will lead to a larger mortgage secondary market, according to some projections. An end to conservatorship for Fannie and Freddie will also be followed by a Treasury sell off of some of its ownership stake. This sell off will allow equity investors to more directly participate in the housing and mortgage markets by investing in Fannie and Freddie. By all accounts, a more privatized Fannie and Freddie will lead to both organizations being more profit-driven.

Despite the best intentions of the proponents of the GSE’s leaving conservatorship, an actual roll out of a plan for leaving conservatorship would take a number of years, as lending guidelines are relaxed, the market is given time to adjust, fees and market pricing is developed, and the Treasury divests itself of ownership. This timeline is further extended by the fact that Trump’s pick for Treasury Secretary has yet to be confirmed and will likely need to “make the rounds” before a plan is formulated. Former Trump director of the FHFA, Mark Calabria (the person Biden replaced after the Yellen decision) has been quoted as saying that there is a 0% chance that the GSE’s will beginning leaving conservatorship in 2025. He speculates that 2027 is a more likely timeframe to expect the beginning of a roll out. Whatever the timeframe may be, most agree that any such roll out will continue well beyond the end of a Trump presidency.

 Should They Leave Conservatorship?

There are a number of arguments that proffer that the demand or at least potential of the residential market is being stifled by the oversight of the FHFA. There are just as many articles on the benefits that an end to GSE conservatorship would have on the GSE’s stocks. These articles have become so entrenched in thr current newscycle that in anticipation of privatization, both Fannie and Freddie’s stocks have recently risen. Others support the end of conservatorship for ideological reasons like this 2023 article from the Independent Community Bankers Association.  

Despite the soundness of some these articles, the stability of the housing market over the past decade and a half has shown that some oversight is necessary. The housing market should not be looked on as a purely financial market, but as one of the pillars of US economic stability. Although nearly 20 years have passed since the time of “irrational exuberance” in the real estate markets, the lessons from that period of time should not be forgotten. Fannie and Freddie should never lose sight of their intended statutory purposes of facilitating homeownership for homeowners and facilitating movement in the secondary market.

A more privatized Fannie and Freddie may be necessary to facilitate the true capacity of the real estate finance market, but this growth should not take place without some level of oversight. Even if the oversight does not come from the FHFA or comes from a more scaled back version of the regulator, it must come from somewhere. A world in which the GSE’s are focused primarily on profits and not on facilitating the housing market is a world rife with potential  for abuse or unintended outcomes. The temptation from market forces to either enter into more risky territory or enact profit-driven practices that either disenfranchise homeowners or take Fannie and Freddie from the mission of market facilitation is too great in an open market scenario. Though more risk and profit will generate more money for some, it will have a net effect that is unfavorable to the country. The more boring yet effective Fannie and Freddie are at market facilitation, the better we all are.