End of GSE conservatorships could be sudden and quick

The government-sponsored enterprises’ exit from conservatorship could be unexpected and quick, the senior vice president of mortgage finance policy at the Independent Community Bankers of America said.

While a methodical process may take place, he wouldn’t be surprised if the opposite happens, Ron Haynie said, speaking during an online presentation from Lenders One and the Community Home Lenders of America.

“Given the way the administration tends to operate, I think it’s going to be spur of the moment,” Haynie said. “I think it’s going to happen overnight or over a weekend,” much the same way the government seized control of Fannie Mae and Freddie Mac in the first place.

Plus, given Federal Housing Finance Agency Director Bill Pulte’s penchant for spreading his message on social media, as he did for the immediate adoption of Vantagescore 4.0, “It might be, you find out on X, guess what, they’re out of conservatorship,” he said.

The panel was an update of a similar discussion in April.

Because the conservatorships have gone on for so long, FHFA is going to have to undergo a mindset shift if they are released. 

“FHFA is going to have to learn how to be the safety and soundness regulator, and not the entity running the companies,” Haynie said.

Plus, Fannie Mae and Freddie Mac are going to have to learn how to behave like private companies, something they haven’t been since 2008.

Haynie does expect some sort of consent order from both to be able to exit conservatorship because they will not be fully recapitalized. The current minimum capital requirement is approximately 4.25%. While both have been able to retain earnings since the net worth sweep was suspended, they are not close to that level. The net worth sweep should be terminated, the panelists said.

Haynie thinks that the capital requirement will keep Fannie and Freddie from doing the things that got them placed in conservatorship in the first place.

“We’ve always maintained that you need a really strong capital position,” Haynie said. “Clearly more capital is better, and capital forces discipline.”

Furthermore, under government control, both have focused on credit quality, and Haynie does not see that changing.

“We want to see both companies continue to be providing liquidity in all markets at all times, to all lenders, right, not just the big guys,” Haynie said.

His counterparts on the panel were mostly in agreement.

The biggest challenge in what is likely to be the largest initial public offering to be undertaken, is getting Fannie Mae and Freddie Mac up to that capital requirement in the coming years, said Mike Calhoun, president of the Center for Responsible Lending. 

“The challenge that this IPO has is a lot of uncertainty for investors about what would be the nature of the GSEs going forward,” he said.

There’s another debate about how the IPO proceeds would be used. The senior preferred stock has a liquidity preference which has been growing and would need to be addressed, Calhoun said. A concurrent issue is that the government holds warrants.

But those warrants can be assigned by Treasury to whomever they want and don’t necessarily need to be used for deficit reduction, said Rob Zimmer, external affairs consultant for the CHLA.

Among the ideas proposed is to use the proceeds to fund a sovereign wealth fund. The CRL, among other groups, would like the government to use the money to build workforce housing, Calhoun said.

The CHLA also would rather see the money be used to fund housing, in particular supporting home ownership, “especially [for] younger families,” Zimmer said.

Prior to conservatorship, the GSEs had been the backstop purchaser of mortgage-backed securities. That role had fallen to the Federal Reserve, but as part of quantitative tightening, it has been reducing its holdings.

Zimmer recounted back in 2022, he said at a briefing with the Treasury Department, “my concern was, for the first time in 40 years, the U.S. was going on an experiment. What happens if there’s no backstop bid for MBS, and we’ve gotten the answer, and it’s not pretty.”

His suggestion was for the regulator or conservator to set a policy which says if the mortgage/Treasury bid gets an amount to be determined, the GSE should be able to come into the market.

“If you start relieving the pressure, other people may come in,” said Zimmer.

Since 2008, Fannie Mae and Freddie Mac have been greatly reformed, Zimmer said. Prior to conservatorship, they did not have “a world-class regulator,” and now they do.

“We’ve got to solve today’s issues, and they’re out there, and they’re pretty obvious. So we do need some new ideas,” said Zimmer. “We do need the GSEs to move forward into the future.”