Ending the Fannie/Freddie conservatorships

Near the end of the first Trump Administration, the Federal Housing Finance Agency (FHFA) finalized a capital rule for Fannie Mae and Freddie Mac. A December 2020 Housing Wire article reported that this was part of an overall effort by FHFA to fulfill the statutory mandate of responsibly ending the Enterprises’ conservatorships — with Treasury Secretary Mnuchin testifying before Congress that the GSEs could be released from conservatorship once they accumulated significant capital.

With a second Trump Administration imminent, speculation is growing that the GSEs could soon exit conservatorship. At a September CHLA Roundtable, former FHFA Director Mark Calabria said that there is “maybe a 70% chance” this will be accomplished by 2027, adding that “You can get them out.  It’s all feasible, doable.” [See  Housing Wire story on the CHLA Roundtable].

Is taking Fannie and Freddie out of conservatorship a good idea?  CHLA has for many years thought so.  But it must be done the right way. A framework should be established for Fannie and Freddie to operate as a true utility – balancing their critical mission of affordable homeownership and rental housing loans with financial and operational guardrails, so they don’t go off the cliff again like they did in 2008.

Equally important, there must be substantive small lender protections to protect community independent mortgage banks (IMBs) and community banks – to ensure that a level playing field is created. This is essential for rigorous competition, which benefits borrowers through lower rates and more choices.

Before people sound the alarm about Fannie and Freddie being returned to the private sector, it is critical to understand that significant financial reforms have taken place since 2008.   

The 2008 HERA legislation created a strong regulator — FHFA — with responsibilities to ensure that the GSEs operate in a financially sound manner. In turn, as noted, FHFA adopted strong capital requirements for Fannie and Freddie, and they have already accumulated $146.6 billion in combined capital.

Interest rate risk has significantly been taken out of the equation, through strict caps on the volume of loans GSEs can hold in portfolio. The GSEs have been engaging in credit risk transfers, which both shift credit risk to other players and foster market discipline.  

Post conservatorship, CHLA (and many others) believe the GSEs should operate under a true utility model, to rein in the types of actions that led to the conservatorship in the first place. 

FHFA should not set pricing for guarantee fees — but it should prevent Fannie and Freddie from using their GSE status to maximize profits, instead keeping fees at levels commensurate with a fair return on capital. FHFA should not allow the GSEs to pursue risky loans like they did pre-conservatorship with no doc, no income loans. FHFA should not allow the GSEs to engage in activities unrelated to their core affordable housing mission of purchasing and bread and butter single family and multi-family mortgage loans.

At the same time, Fannie and Freddie should fully and vigorously pursue their affordable housing mission. CHLA has concerns here, because, for example, FHFA imposed arbitrary volume caps in 2020 on individual lenders originating GSE single family loans for investor properties and second homes.  

CHLA would oppose re-imposition of these types of caps — or any other actions that arbitrarily reduce the GSEs’ footprint. Banks have broadly retreated from portfolio mortgage lending since 2008 and the private label securitization (PLS) market for single family loans is moribund. Therefore, it would be folly to assume, without evidence, that the “private sector” will step in if Fannie and Freddie retrench.

The second imperative is to ensure that smaller lenders are protected, that there is a level playing field.  

In the years leading up to 2008, Fannie and Freddie offered sweetheart pricing deals to mega-lenders like Countrywide and WAMU. We saw how that turned out.  So FHFA during the first Trump Administration commendably adopted a conservatorship policy of mandating G Fee parity.  

G Fee parity — no pricing discounts based on lender size or lender GSE volume — needs to be an explicit policy post-conservatorship. This should be broadly defined to avoid loopholes, like price discrimination with regard to buy up/buy down grids or any use of proxies for volume discounts.  

CHLA also believes private mortgage insurers should not be able to price discriminate based on the size or volume of the lender, since mortgage insurance is an essential component of lower down payment GSE loans. The same should be true for other essential third party services for GSE loans (e.g., FICO’s 2023 pricing scheme to provide significantly lower pricing to a select group of 50 lenders they picked).

Second, there must be an ongoing commitment by both Fannie and Freddie to maintaining a robust cash window, with full access to all approved seller-servicers on a non-discriminatory basis. The cash window is critical to creating robust competition. It has worked very well during the conservatorship.

Third, Wall Street Banks should not be given new GSE charters. We know Wall Street banks desire a GSE charter (back-stopped by taxpayers), so they can gain an unfair competitive advantage — solely for their own bank customers.  This is antithetical to the principles of competition and fair mortgage markets.  

The final issue is Congress’ role in taking the GSEs out of conservatorship. As CHLA has long pointed out, the 2008 HERA statute gives FHFA and the Treasury Department the authority to accomplish this. Therefore, while Congress is of course welcome to participate in the process, it is not essential.  

CHLA’s concern about a conservatorship exit through legislation is that Wall Street Banks, with their lobbying and PAC powers, will exert unfair influence over the final legislation. We witnessed that a decade ago with the last major Congressional GSE reform.  Fortunately, a coalition of small lenders, homebuilders, and consumer groups beat back efforts to give the big banks an unfair advantage.

Put simply, the overriding principle governing taking Fannie and Freddie out of conservatorship must be a level playing field for all lenders, which leads to robust competition and maximum borrower choices.

Fasten your seatbelts. It could be an interesting ride.

Scott Olson is the Executive Director and Rob Zimmer is the Director of External Affairs for the Community Home Lenders of America (CHLA), which represents small and mid-sized IMBs.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

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