Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) and since their inception, they have played a significant role in the country’s housing finance industry. After the chaos that was in 2008-9, the Federal Housing Finance Agency took over the management of the GSEs’ assets and their business concept- conservatorship. Ever since these two entities have relied upon the government for their financial support. In addition, most of their earnings in turn have been to the Treasury that has a major stake in these two GSEs.
Not too long ago, the Treasury decided that it was time to allow the two GSEs to retain most of their earnings in order to rebuild their capital reserves. That in addition to the administrative actions that were aimed at making the GSEs private entities, meaning recapitalization and an end to conservatorship. This consequently led to a legislative action to resolve the GSE’s longstanding conflict of their identity and status. But, is this the right time?
Its been ten years since the last chaos in the housing industry. And in that time, we have lost memory of what happened. It has been ten quiet years and you know what happens in the good times, we forget! We forget about the mistakes that we made in the past that made us regretful and we let our guard down. Our forgetfulness is a costly risk!
When Mark Calabria entered office as the new director of the Federal Housing Finance Agency (FHFA), he had four main agendas;
- Reduce the apparent risk exposure posed by the GSEs.
- To build a ‘safety net’ of regulatory capital held by the GSEs.
- To make FHFA into a world-class regulator.
- To streamline the process of recapitalization of the GSEs ending the wardship state.
While the GSEs are still under conservatorship, much has already been done. In September of 2019, the Treasury and the Department of Housing and Urban Development made public the housing finance reform plans which codify the approach that seeks to prioritize both the congressional and administrative reforms. The plans also put forward quite strongly the commitment to the involvement of the Financial Stability Oversight Council (FSOC) and confirm that after the release from conservatorship, the GSEs would be recognized as important financial institutions in the country. Under Mark’s leadership, the FHFA and the GSEs have already undergone a wide range of programmatic changes and this includes an exit from the risky products and pilots and the institution’s commitment to balancing the playing field and also improving the competition in the secondary mortgage market.
One of the most seemingly visible changes to the GSEs under Mark is the plan to accumulate more capital. The GSEs are required to at least keep $280 billion in capital and in order to do this, the GSEs were allowed to retain their earnings and to these achievements, the FHFA is looking to add liquidity requirements in addition to the capital requirements. This proposal would add an additional $10 billion in liquidity to protect the GSEs against any potential pitfalls.
Over the last four years, the previous administration worked hard to make it a reality the release from conservatorship. This means the GSEs will return right back to the state they were in before the crisis in 2008-10.
With a new regime in place, there is a new face to these two GSEs. the new opportunity provided by the regime will help the GSEs return to conservatorship to support the delicate housing market in the country. The previous administration had managed to overturn the notion of GSE reform to give it back to the private stakeholders, rather than figuring out how best to help the GSEs through the government backstop in order to help the nation meet its delicate housing needs.
As we look forward to the future, let us not forget about the tough times that lie ahead. In some way, this recession resembles the last, only that it is caused by a pandemic. This is not the time to recapitalize the GSEs. releasing these companies as is without any reforms would be a big error which might return us to the position in which they were brought in. in addition, we should not look at the GSEs from a superficial perspective, rather they should be viewed as important utilities for the housing sector. For one, they provide equitable access to the long-term financing for residential real estate in the U.S., and secondly, they are extremely important in advancing access to mortgage in good and bad times.