Termination of Fannie/Freddie’s conservatories

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 meet the statutory mandate to responsibly terminate the Enterprises’ conservatorships – with Treasury Secretary Mnuchin testifying before Congress that the GSEs could be released from conservatorship once they had accumulated significant capital.

With a second Trump administration underway, speculation is growing that the GSEs could soon leave conservatorship. At a CHLA roundtable in September, former FHFA Director Mark Calabria said this is true “Maybe a 70% chance” this will be achieved by 2027, and counting ‘You can take them out. It is all feasible, achievable.” [See  Housing Wire story on the CHLA Roundtable].

Is it a good idea to release Fannie and Freddie from conservatorship? CHLA has been thinking that for years. But it has to be done the right way. A framework must be created in which Fannie and Freddie can operate as a true utility company – balancing their critical mission of affordable homeownership and rental housing lending with financial and operational guardrails so that they don’t go back into the abyss like they did in 2008.

Equally important, there should be substantial protections for small lenders to protect community independent mortgage banks (IMBs) and community banks – to ensure a level playing field. This is essential for strong competition, from which borrowers benefit through lower rates and more choices.

Before people sound the alarm about Fannie and Freddie’s return 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, the FHFA has implemented strict capital requirements for Fannie and Freddie, and they have already amassed $146.6 billion in combined capital.

Interest rate risk has been significantly discounted, through strict caps on the volume of loans that GSEs can hold in their portfolio. The GSEs are engaged in credit risk transfer, which both shifts credit risk to other players and promotes market discipline.

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

The FHFA should not set prices for guarantee fees, but should prevent Fannie and Freddie from using their GSE status to maximize profits and instead keep fees at levels commensurate with a fair return on capital. The FHFA should not allow the GSEs to pursue risky loans as they did before the conservatorship, without documents, without income loans. The FHFA should not allow the GSEs to engage in activities unrelated to their primary affordable housing mission: purchasing and making bread-and-butter mortgages for single-family and multi-family homes.

At the same time, Fannie and Freddie must fully and vigorously pursue their affordable housing mission. CHLA is concerned about this because in 2020, for example, the FHFA imposed arbitrary volume caps on individual lenders making GSE single-family loans for real estate investors and second homes.

CHLA would oppose re-imposing these types of caps – or any other actions that arbitrarily reduce the GSEs’ footprint. Banks have largely retreated from portfolio mortgages since 2008, and the private label securitization (PLS) market for single-family home loans is moribund. Therefore, it would be foolish to assume without evidence that the “private sector” will step in when Fannie and Freddie make cuts.

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

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

G Fee parity – no price discounts based on lender size or lender GSE volume – should be an explicit policy post-conservatorship. This should be broadly defined to avoid loopholes such as price discrimination regarding buy/redemption networks or the use of proxies for volume discounts.

CHLA also believes that private mortgage insurers should not be able to discriminate in prices based on the size or volume of the lender, as mortgage insurance is an essential component of GSE loans with lower down payments. The same should apply to other essential third-party services for GSE lending (for example, FICO’s 2023 pricing program to offer significantly lower prices to a select group of 50 lenders of their choosing).

Second, both Fannie and Freddie must remain committed to maintaining a robust cash window, with full access to all approved merchant servicers on a non-discriminatory basis. The cash window is critical to creating robust competition. It worked very well during the conservatory period.

Third, Wall Street Banks should not be granted new GSE charters. We know that the Wall Street banks demand a GSE charter (which is being blocked by taxpayers) so that they can gain an unfair competitive advantage – exclusively for their own banking customers. This is contrary to the principles of competition and fair mortgage markets.

The final issue is Congress’s role in removing the GSEs from conservatorship. As CHLA has long emphasized, the 2008 HERA statute gives FHFA and the Treasury Department the authority to accomplish this. While Congress is of course welcome to participate in the process, it is not essential.

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

Simply put, the overriding principle governing the removal of Fannie and Freddie from receivership should be a level playing field for all lenders, leading to stiff competition and maximum choice for borrowers.

Fasten your seat belts. 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 staff and its owners.

To contact the editor responsible for this piece: [email protected].