Why This Matters

Fannie Mae and Freddie Mac, collectively known as the government-sponsored enterprises (GSEs), have been in conservatorship since 2008. There was a movement during the first Trump administration to give the GSEs a pathway to exit conservatorship, one that some in the second Trump administration have expressed an interest in pursuing. Administrative action to release the GSEs from conservatorship could have a significant impact on the mortgage market. This issue is critical, as the GSEs hold 45 percent of outstanding single-family mortgage debt and close to half of outstanding multifamily mortgage debt.

Key Takeaways

In this report, I review the history of the GSEs’ time in conservatorship—including the causes, the preferred stock purchase agreements and related amendments, and the GSEs’ evolution and current capital positions. I show the following:

• At the time the conservatorship was established, there was no plan for an exit path. The expectation was that, through legislation action, the GSEs would be restructured or possibly wound down as part of comprehensive reworking of the housing finance system. But legislative attempts—though earnest and significant—failed. This gave rise to the current push to administrative reform.
• The GSEs have continued to evolve and are now very different entities than when they entered conservatorship 16 years ago. If they looked in 2008 like they do now, they would likely not have been in conservatorship as a result of the financial crisis.
• I make the case that before transitioning to a new system, several fundamental questions must be answered. We need to know (1) the purpose of the new system and who it would serve, (2) how new competitors and government lines of credit would be handled, (3) how the mortgage-backed securities (MBS) market and mortgage rates would be affected, and (4) the logistics and timing of an initial public offering.

This third point about a potential new system (the MBS market and mortgage rates) is particularly important, and this report looks closely at what will happen to mortgage spreads—that is, the increment the mortgage borrower must pay over the risk-free rate. This increment will inevitably rise if the GSEs were released from conservatorship, but the amount of the increase depends on the amount of continued government support that will be provided to these entities, as well as how the market evaluates that support.

My fundamental concern is that without a well-defined vision, exit from conservatorship could cause havoc in financial markets and in the US housing market. And I do not believe there is any consensus on what this vision should be.