Since the 2008 housing crisis, there have been significant changes that prompted the Treasury to place Fannie Mae and Freddie Mac under conservatorship. While the conservatorship has allowed for the mortgage market to be restored to its pre-crisis state and strengthened these two government-sponsored entities (GSEs), there are significant downsides to maintaining the status quo indefinitely.
It’s now been 15 years since the Housing and Economic Recovery Act (HERA) was signed into law and the Federal Housing Finance Agency (FHFA) took over Fannie Mae and Freddie Mac. The two entities have since paid back the $191 billion bailout and almost $100 billion more in profits to taxpayers. For the good of the American housing industry, the FHFA and the Treasury must follow HERA and return the GSEs to private ownership.
When FHFA and the conservatorship were created, it was pitched as a temporary status that would be terminated once the GSEs were stable. Obviously, that has not happened.
Instead, under recent court rulings, the president was given the power to fire and nominate successors for the position of director of the FHFA, which acts as the Conservator. Understandably, that means that appointees tend to follow policies that track the political party in power — zig-zagging back and forth with each administration. Moreover, under the conservatorship, FHFA has enormous powers to implement specific policies for Fannie and Freddie.
This makes it harder for the GSEs themselves to focus on long-term management and housing affordability objectives. This makes it harder to pursue innovations and to create sound industry standards in the broader mortgage market — one of the GSEs’ key statutory mission objectives. This has also subjected homeowners and lenders to the whiplash of periodic policy changes.
Ending the conservatorship would also help stem the “brain drain” that has come from senior executives leaving the companies after concluding there is no end in sight to the conservatorship.
But perhaps the strongest argument for releasing Fannie and Freddie right now from conservatorship is that it is better to do this in a stable, profitable period in order to establish long-term goals and objectives without having to solve a short-term crisis at the same time. The alternative is waiting for the next financial crisis — which history shows is a bad time to make major structural changes to financial entities and structures.
We know the best framework for a permanent post-conservatorship Fannie Mae and Freddie Mac. They should operate under a true utility model, with clear policy guidelines that balance their statutory mission of affordable housing with sensible guardrails to ensure safety and soundness to ensure that they don’t go off the deep end like they did in the 2008 crisis.
So how do we get there? For years we watched as Congress flailed — and failed — at trying to pass legislation for the GSEs to exit conservatorship, a complicated enough task made more difficult by the current gridlock in Congress. In fact, this was never the route intended by Congress when it passed HERA in 2008. Instead, HERA explicitly provided guidelines for FHFA to take the GSEs out of conservatorship.
Is there a role for Congress? Of course there is. Congress needs to create an explicit guarantee of mortgage-backed securities (MBS) and other debt needed to fund their operations, in place of the current indirect backstop.
Congress can hold hearings, calling experts to testify and develop a consensus on the best path forward on the best way to develop a utility model. It can also provide guidance on key policies, like G fee parity and encouraging competition in the secondary market, FHFA authority to approve new products, and a directive to FHFA to prevent reckless mortgage purchases like we saw in the subprime crisis or ruinous pricing just to garner market share.
But ultimately FHFA has the authority — even a duty — under HERA to take the GSEs out of conservatorship, working with the Treasury which holds its preferred stock.
Moreover, there are already statutory guardrails in place. HERA codified housing goals and added a Duty to Serve, which gives FHFA the tools to ensure that Fannie and Freddie stay focused on affordable housing and serving the housing needs of low- and moderate-income families instead of using a federal backstop to just cherry-pick the most lucrative loans.
HERA also gave FHFA the tools as a world-class regulator to ensure that the GSEs post-conservatorship won’t pursue reckless lending strategies or take excessive risks. Additionally, FHFA just recently adopted stringent capital requirements and the GSEs are rebuilding a capital buffer.
Fannie Mae and Freddie Mac are far too important to homebuyers, our economy and the housing and mortgage industries to be left in limbo indefinitely. FHFA and the Treasury should release the GSEs from conservatorship as soon as possible. There is too much at stake to maintain the status quo.
David Stevens is former CEO of the Mortgage Bankers Association and former assistant secretary of Housing and FHA commissioner under President Obama.
Ted Tozer is former president and CEO of Ginnie Mae.
Scott Olson is executive director of the Community Home Lenders of America.
