BIG Changes Being Weighed Concerning Fannie Mae and Freddie Mac

FHFA Head wants to make one final push to end GSE conservatorship

With the highly publicized 2020 election finally drawing to a close and shifts in the government set to take place, we are only just beginning to get back to the normal stream of multifamily and commercial real estate industry news. One such interesting topic that has come up is the Trump Administration’s consideration of a move to privatize the industry-giant government-sponsored enterprises (GSEs) Fannie Mae (FNMA) and Freddie Mac (FRMC). Arguably, a change of this magnitude has the potential to shake up the entire multifamily and commercial real estate finance industry.

As many in the industry know, Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency (FHFA) for more than a decade. The near-catastrophic subprime mortgage crisis back in 2008 nearly toppled the housing-finance giants, leading to massive bailouts and the creation of the FHFA as a new regulator. However, this was only done in an effort to oversee the recoveries of both agencies as the industry healed, and the federal government was repaid.

Flash forward to today, and most people would simply assume that the wrongs had been righted, and the industry has resumed some decorum of normalcy. Ask any shareholders of FNMA or FRMC, however, and they have a slightly different story to tell. As it turns out, with the exception of the federal government, not a single shareholder has received a dividend payment in all this time since the bailout. The profits have almost all been routed to the United States Treasury Department. 

Still, the permanence of the conservatorship has always been veiled in uncertainty. That is, up until April 2019, when Mark Calabria was appointed as the director of the FHFA. It is no secret that since taking the helm of the regulatory agency, Calabria has been focused on making moves that would eventually lead to the end of the longstanding conservatorship. 

With the current administration preparing for a transition, it seems as though Calabria intends to speed up the process of Fannie Mae and Freddie Mac’s privatization ahead of President-elect Joe Biden’s inauguration. It can be safely assumed that Calabria’s fear is that once Biden is seated officially as president, his administration won’t prioritize ending the conservatorship or may not even consider it during his term. This, of course, goes against Calabria’s original roadmap that would see both GSEs part from their conservatorship at some point in 2022. 

Aiming for the conservatorship to end before Biden is inaugurated would be a move that would shorten the original end goal by about a year. As of right now, the primary thing standing in his way is the inability to reach a deal with current Treasury Secretary Steven Mnuchin, even though the two agree that the time has come for Fannie and Freddie to return to private control. Still, many believe that cutting the original plan’s timeline short by a year is a hasty decision that may not even be possible to execute. 

More importantly, the effects of such a move are still being considered. Both Fannie and Freddie are crucial players on the secondary market, securitizing the lion’s share of mortgage investments and providing the market with both stability as well as liquidity. Shaking them up in any way, particularly with the current state of the pandemic economy, may turn out to be more risk than reward.

Earlier this month, the FHFA announced the capital requirements that set the minimum equity amount that Fannie and Freddie must have to protect against another economic downturn. The new capital requirements dictate that between both Fannie and Freddie, around $283 billion should be held. Currently, between the two GSEs, they share roughly $35 billion in capital. 

To privatize, however, that $283 billion would have to be met, which is an all but impossible feat to pull off given the new timeline that Calabria insists on following. There is a way around that, however, in the form of a consent order from the FHFA. All the FHFA would have to do to get the privatization ball rolling would be to enter into a consent order agreement with both Fannie and Freddie that grants the regulator extended and heightened oversight powers until predetermined conditions are met ― for instance, full recapitalization of the housing finance giants. It would also allow the FHFA to construct a plan to help both companies reach that goal. 

That’s where Mnuchin comes in. The consent order must be approved by the Treasury Department, which currently holds more than $200 billion in preferred shares of the GSEs. Shares that, by all rights, would have to be addressed and modified for the recapitalization of Fannie and Freddie to work. Sadly, any such changes in the shares could impact the taxpayers significantly, which is something that should be avoided in the current economic climate. 

While the housing market has finally picked up steam since the Covid nightmare began, a significant change to the industry could destroy that positive trend and send the market back into a spiral. It isn’t hard to imagine the privatization driving mortgage costs back up and creating strife for investors of mortgage-backed securities. With a second wave of the pandemic on the U.S.'s front door, who knows the consequences this could bring our economy. 

The ball is currently in the U.S. Treasury’s court, and if an agreement is reached, we could see some major shifts in the multifamily and commercial finance market space. If anything, at least we have a date to watch out for: January 20, 2021. Until then, it’s business as usual.