Independent Banker - November 2023 - 41

Ending the conservatorship will ensure
Fannie and Freddie focus on their
founding purpose of expanding the
secondary mortgage market.
to the Treasury to pay for things
unrelated to housing-such as the
2021 infrastructure bill. And because
the FHFA director effectively runs
both companies and answers to the
president, the GSEs serve as a de facto
arm of the administration to further its
policy agenda.
As conservator and regulator, the
market in the process.
To calm the housing market, the
Treasury and the newly formed Federal
Housing Finance Agency (FHFA)-
announced the conservatorship, saying
it would be a short-term " timeout. "
This move would reassure investors,
help stabilize the mortgage market and
provide a lifeline of equity to the GSEs
to support their operations and help
them work through their mounting
defaults and losses. Once they
were stable, they would be released
from conservatorship.
The strategy worked. The housing
market stabilized, with the GSEs
eventually drawing $180 billion
from the Treasury between 2008 and
2012. The U.S. government would
end up with a like amount of senior
preferred stock warrants from the two
companies, granting the government
80% ownership of Fannie and Freddie,
which they still have today.
The return to profitability
In late 2012, both companies
returned to profitability, and in 2013
they began to repay their debt to the
Treasury. By 2017, the GSEs had
completely repaid all the aid they
received plus a 10% dividend.
Initially, there were calls from
policymakers and others to " reform "
the GSEs through legislative action.
Congress debated but never voted.
The reason was simple-the market
was working well, and no one
wanted to ruin it.
Moreover, the government had
discovered that the GSEs were a
great source of cash for various
initiatives that could not get funded
through the normal appropriations
process. In fact, when the FHFA and
Treasury realized the GSEs would
soon return to profitability in 2012,
they changed the terms of the GSEs'
bailout agreement to require them
to sweep all excess earnings to the
Treasury, preventing the rebuilding
of equity capital.
This contract is still in place
and has only temporarily been
paused until the GSEs are fully
recapitalized. Then the net-worth
sweep resumes in perpetuity.
Fifteen years is enough
After 15 years of a resilient housing
market, it's time for the FHFA and
Treasury to return the GSEs to
private ownership and control, as
required by the 2007 Housing and
Economic Recovery Act.
First, ending the conservatorship
will ensure Fannie and Freddie
focus on their founding purpose of
expanding the secondary mortgage
market. The GSEs currently
serve as cash machines subject to
political influence, sending revenue
FHFA can also dictate credit, pricing
and operational policy, in addition to
its customary safety and soundness
responsibilities. This type of control
can have unintended consequences,
destabilize the mortgage market and
put taxpayers at risk.
Meanwhile, the GSEs cannot access
the capital markets to raise outside
equity. So, they remain in a netherworld
between being able to operate like any
other federally chartered, shareholderowned,
privately run corporate entity
(which they are) and a government
agency run by political appointees,
similar to the Department of Housing
and Urban Development or Ginnie Mae.
The road ahead
It has been 15 years since the GSEs
were placed into conservatorship.
Based on current earnings, it will be
at least another 10 years until they are
fully recapitalized per the GSEs' capital
framework. Unless something changes,
the net worth sweep will then resume.
At the Hotel California, you can
check out anytime you like, but you
can never leave. FHFA and Treasury
need to follow HERA, resolve the
Treasury's ownership, acknowledge it's
paid in full and release the GSEs from
conservatorship. If not, they too will
never leave.
Ron Haynie (ron.haynie@icba.
org) is ICBA senior vice president,
housing finance policy
independentbanker.org // 41
http://www.independentbanker.org
Independent Banker - November 2023

Table of Contents for the Digital Edition of Independent Banker - November 2023
