FHFA Director Watt Demystifies Challenges and Risks Behind GSE Conservatorship

Fannie Mae and Freddie Mac have been under conservatorship for almost eight years following a massive taxpayer-funded bailout. While many in the industry have called for a GSE reform on numerous occasions over the years, the future of the conservatorship remains uncertain.

In September 2008, the GSEs were placed into conservatorship by the Federal Housing Finance Agency (FHFA) at which point they received a $187.5 billion bailout from taxpayers to continue operations. Treasury purchased senior preferred stock in the GSEs as a result of the bailout and was given sole discretion as to what to do with those shares.

In November 2015, U.S. Senators Bob Corker (R-Tennessee) and Mark Warner (D-Virginia) have introduced a bipartisan amendment (Jumpstart GSE Reform Act) to the Transportation, Housing and Urban Development, and Related Agencies Appropriations Act (H.R. 2577) in an effort to spur substantive and structural housing finance reform, according to an announcement from Corker.

“Although the FHFA is taking important steps to de-risk Fannie Mae and Freddie Mac, taxpayers will continue to be on the hook for a future bailout if Congress does not produce legislation to transform our housing finance system,” Corker said. “There is overwhelming consensus that congressional action is needed, and it is hard to imagine that anyone would ever want to harm taxpayers and return to the failed model of private gains and public losses. While comprehensive reform is my preference, this amendment will ensure the future of Fannie and Freddie will be determined by Congress.”

Melvin L. Watt, Director FHFA, delivered a speech at the Bipartisan Policy Center in Washington, D.C., Thursday morning touch on two important facets of the conservatorship to provide the industry some clarity on what it encompasses. First, he talked about accomplishments among the GSEs since the establishment of the conservatorship. Second, Watt provides a future outlook on some of the challenges and risks associated with the conservatorship.

Since the GSEs were put into conservatorship, Watt stated that we have a "safer and more stable housing finance system." In his speech he noted that guarantee fees have increased by two and a half times since 2009 to an appropriate level, stronger credit standards have removed unsound risk layering, and the FHFA is focused on how to support sustainable access to credit for homeowners.

"In all of these things, we have also placed greater attention on diversity and inclusion in the Enterprises’ business operations, consistent with legal standards and with projections that the future composition of homeowners, renters, and the country as a whole will be more diverse," Watt stated.

"FHFA’s conservatorship decisions have helped navigate the Enterprises through a financial crisis and, despite the substantial negative impact of the crisis, helped prevent it from being far worse." -Director of the FHFA Melvin L. Watt

Of the challenges and risks associated with the conservatorship, Watt stated that a lack of capital and declining buffers among the Enterprises is the largest issue they are facing. Another issue identified in the speech is Fannie Mae and Freddie Mac’s insulation from normal market forces that would otherwise inform their operations and business practices. A final challenge that Watt pointed out is the uncertain future of the consevatorship.

"We have made these ongoing conservatorships work thus far through the dedication of staff at FHFA and the staffs of both Enterprises and we, of course, remain committed to continuing this task," Watt stated. "We know that the stakes are high for the housing finance market and for the broader economy.  However, as I have indicated in my remarks today, there are substantial challenges and risks associated with the unprecedented size, complexity, and duration of the conservatorships of Fannie Mae and Freddie Mac. After more than two years at FHFA, I can assure you that these challenges are certainly not going away, and some of them are almost certain to escalate the longer the Enterprises remain in conservatorship."

Click here to view Watt's full speech.