No Freedom for Fannie & Freddie

FHFA Director Mark Calabria's push to release the GSEs from conservatorship falls short.

In the death throes of the lame-duck administration, there was some talk about the FHFA releasing Fannie Mae and Freddie Mac from government conservatorship before President-Elect Joe Biden and his administration assume control. FHFA Director Mark Calabria openly made it known that it was his goal to release the GSE’s before the inauguration takes place. An overly ambitious goal, given what would need to take place for that to happen, but one he seemed sure he could pull off. 

In the days that followed, no one was too convinced that the end of GSE conservatorship would (or could) actually happen, but it was still a concern for anyone who makes their livelihood off of capital markets. In order to free the mortgage giants from the government conservatorship they’ve been under since 2008, Calabria has been hard at work trying to pave the way for a transition. Of course, there were quite a few ducks he would need to get in a row before anything substantial could take place.

Of all of the roadblocks in place, the glaring elephant in the room would have to be the equity requirement for Fannie and Freddie put in place earlier this year. The FHFA announced that the new capital requirements dictate that between both Fannie and Freddie, around $283 billion should be held in order to protect against another possible economic downturn. As of today, to say that they fall short of that amount would be a comical understatement, as the total capital they currently share is closer to $35 billion. 

Under normal circumstances, in order for Fannie and Freddie to privatize, the capital requirements would have to be met first, which would be impossible to pull off before January 20th. However, the one ace up Director Calabria’s sleeve would be getting a consent order from the United States Treasury Department. A consent order would essentially allow the GSEs to be freed under strict supervision while they recapitalize, as well as allow the FHFA to create a strategy towards that goal. 

Long time advocate of ending GSE conservatorship and current Treasury Secretary Steven Mnuchin would have to sign off on such a strategy before it could be actionable, and in a shocking turn of events, it seems as though that isn’t something he is willing to do, at least not before Biden is in office. According to Mnuchin in a recent House Financial Services Committee hearing that took place earlier this month, while a consent order was a definite method of releasing the conservatorship, they would still need a substantial amount of capital before that strategy was workable. Before he steps down from his position, the current understanding is that he will leave them to the will of the incoming Biden administration. 

In a recent Wall Street Journal Interview, Mnuchin even went on to explain that he didn’t want to pursue any action that might put the American taxpayers at risk or limit access to home loans. Of course, the market response to Mnuchin’s determination saw Fannie Mae shares drop by roughly 17% to about $2.28 per share, with Freddie Mac perfectly mirroring its counterpart in both percentage of decrease as well as share price. Still, the risk of abruptly ending the conservatorship without the GSEs meeting their $283 Billion capital requirements could have sown seeds of chaos in an already chaotic $10 trillion mortgage market in the midst of the covid-19 pandemic. 

While it may have ruffled a few feathers, Mnuchin’s approach of trying to address capital concerns first and foremost is the safer bet for taxpayers. While a release from conservatorship likely won’t be happening under his watch, he is still in favor of working on the Fannie and Freddie bailout agreements. He also indicated that he would work on a strategy for the housing finance system in general for his successor.  

At this time, there has been no indication that Biden’s team will be taking action towards ending the conservatorship for Fannie Mae and Freddie Mac. While shareholders may find this to be frustrating news, there is a silver lining. At least for the moment, the multifamily market will not have to adjust to the privatization of the GSE giants, and therefore can operate with some form of “stability” or at least at its current capacity during this pandemic.