Tuesday, September 6, marks the eight-year anniversary of the Federal Housing Finance Agency (FHFA)'s conservatorship of Fannie Mae and Freddie Mac. In response to a substantial deterioration in the housing markets that severely damaged Fannie Mae's and Freddie Mac's financial condition and left them unable to fulfill their mission without government intervention. On September 6, 2008, the newly-created FHFA used its authorities to place Fannie Mae and Freddie Mac into conservatorship.
FHFA launched initiatives to recover losses resulting from the housing crisis of 2008 as well as avoid further liability to Fannie Mae and Freddie Mac. The agency sought to decrease the amount of outstanding repurchases, and they worked to also decrease the amount of loans originated with manufacturing defects due to poor underwriting standards. Finally, FHFA assumed actions to decrease the amount of operational loss events at Fannie Mae and Freddie Mac.
The FHFA notes that a key component of the conservatorship is the commitment of the U.S. Department of the Treasury to provide financial support to Fannie Mae and Freddie Mac to enable them to continue to provide liquidity and stability to the mortgage market. In doing so, the Treasury Department has provided $189.5 billion in support. This includes an initial placement of $1 billion in both Fannie Mae and Freddie Mac at the time of the conservatorship and an additional cumulative $187.5 billion investment from the Treasury Department.
In addition, as conservator, FHFA assumed the authority of the management and boards of Fannie Mae and Freddie Mac during the period of the conservatorship. The agency states though that while it has broad authority over Fannie Mae and Freddie Mac, the focus of the conservatorship is not to manage every aspect of their operations.
At the time of their conservatorship in September 2008, Fannie Mae’s total outstanding debt stood at $843 billion and Freddie Mac’ total outstanding debt stood at $814.9 billion. As of their most recent monthly volume summary report for July, Fannie Mae’s total outstanding debt stands at $362.3 billion and Freddie Mac’s total outstanding debt stands at $389.4 billion. Both of the GSE’s have reduced their outstanding debt by over half.
In regard to the aggregate unpaid principal balance for the GSEs' mortgage portfolios, both Fannie Mae and Freddie Mac have seen a reduction of over half since the time of conservatorship to the most current report in July 2016. Fannie Mae sits at an aggregated UPB of $308.9 billion compared to an aggregated UPB at the time of conservatorship in September 2008 of $761.4 billion. Likewise, Freddie Mac sits at an aggregated UPB of $319.3 billion in comparison to an aggregated UPB in September 2008 of $736.9 billion.
Not everyone shares positive feelings for the FHFA's conservatorship of the GSEs, however. The subject of GSE reform has long been a hotly contested one among lawmakers and the housing industry. Though both Democrats and Republicans have pushed for GSE reform in recent years, little has been done by Congress to change the conservatorship or even consider a path toward reforming the current system. Recently, however, GSE reform has been hot in the news, with parties on both sides of the aisle making pushes in Congress.
In mid-May, 12 right-center organizations wrote a letter that urged Congress to pass the Mulvaney Bill, a GSE reform bill sponsored by Rep. Mick Mulvaney (R-South Carolina) that would suspend the GSE’s obligation to fund the National Housing Trust Fund and Capital Magnet Fund until they were better capitalized. The GSEs' capital buffer, which is currently at $1.2 billion, is required to be wound down to zero by January 1, 2018, which has caused a great deal of consternation among industry stakeholders who are concerned that the GSEs will need another taxpayer-funded bailout.
Not long after the press to pass the Mulvaney Bill, a group of 32 Democratic House of Representatives members wrote to Treasury Secretary Jack Lew and FHFA Director Mel Watt to demand reassessment of the Preferred Stock Purchase Agreement (PSPA), which requires the GSEs to have a capital buffer of zero by January 1, 2018. This request came on the back of Watt’s February speech at the Bipartisan Policy Center, when he proclaimed the GSEs’ dwindling capital buffer as one of the biggest risks of conservatorship to date.
Additionally, a new bill was proposed by Congressman French Hill (R-Arkansas) in June, called the HR 5505 GSE Review and Reform Act. The bill would require the U.S Treasury Secretary to study the Federal Housing Finance Agency’s conservatorship of Fannie Mae and Freddie Mac annually, as well as the impact ending that conservatorship might have. The bill would also require the Treasury to present recommendations to Congress each year on how to progress GSE reform and move toward ending the conservatorship.
The next move for the GSEs is still unclear, but one thing is clear: There will not be any movement with GSE reform until the next administration takes office. And the FHFA's conservatorship of the GSEs, which was intended to be temporary, is eight years old and counting with no end in sight.