Why the GSEs need Congress to exit conservatorship
Urban Institute fellow Jim Parrott and guest Jim Millstein discuss the prospect of long-term administrative reform of Fannie Mae and Freddie Mac. The discussion begins with Parrott’s commentary, “Why Long-Term GSE Reform Requires Congress” and continues with Millstein's blog post, “It’s time for administrative reform to end the GSE conservatorships.” This is the concluding post.
In “Why Long-Term GSE Reform Requires Congress” I conclude that Fannie Mae and Freddie Mac (the enterprises or the GSEs) are hemmed into conservatorship by the terms of their Preferred Stock Purchase Agreements with Treasury (PSPAs). In “It’s time for administrative reform to end the GSE conservatorships,” Jim Millstein offers the logical response: why not just change the terms of the PSPAs?
Unfortunately, it’s not that easy.
Section 6.3 of the PSPAs limits their amendment, prohibiting any changes that would compromise the interests of the agencies’ mortgage-backed security (MBS) investors. And nothing would compromise their interests more than removing the government’s full faith and credit from their investment. So it is difficult to see how the Treasury and FHFA could change the agreements to make it easier to escape conservatorship without that protection.
Exiting with the backstop poses a similar challenge. Recall that under the PSPAs the taxpayer is owed a dividend and a fee equal to the value of the backstop, which together would render the enterprises economically unviable outside of conservatorship (for an explanation, see my original commentary). To make them viable, the Treasury and FHFA would have to reduce or eliminate one or both- yet this does not appear to be permitted under federal law.
Under 31 U.S. Code § 3711 and 31 CFR 902.2 the government can only “compromise a debt” owed the taxpayer when the debtor cannot pay, the cost of collection is prohibitive, or there is significant doubt as to the government’s ability to prove that the debt is owed. None of those apply here, so the Treasury would appear to be prohibited from reducing or eliminating these commitments.
While those with more creative legal minds may ultimately see a way out of this box, the challenge is more than a matter of weakness of political will, as Mr. Millstein suggests.
It is important to be clear about what this actually means for reform, though. Mr. Millstein claims that I take any administrative reform to be futile, which fortunately is not true. What I am skeptical of is an administrative path for long-term reform, reform that is intended to last decades, and not just until the next rough patch in the housing market.
For that kind of reform, we need Congress.
Of course, Congress is unlikely to pass long-term GSE reform into law any time soon and even then it will take years more to transition the enterprises out of conservatorship. So while it is important to continue to push for legislated long-term reform, it is also important, in some ways almost equally important, to take steps to reform the enterprises while in conservatorship.
To my mind this means increasing the stability and efficiency of the enterprises, so that they provide broader access to credit at less risk to the taxpayer. Director Watt laid out many such steps in his strategic plan earlier this month. It also means putting them into better position to transition to a future system that is in line with the broad consensus we've seen build over the last year. This is a more controversial aim, but increasingly worthy of debate the longer conservatorship drags on.
Some of Mr. Millstein's proposal may make sense within this framework of improving the system while in conservatorship. He is, after all, primarily focused on ways to bring more private capital into the system without undermining much of what historically has worked, objectives we should all share.