Despite recent skepticism surrounding a possible exit from conservatorship for Fannie Mae and Freddie Mac, officials from the Federal Housing Finance Agency (FHFA)—the overseer of both agencies—indicated that the door hasn’t yet been shut on the idea.
After more than a decade under federal government oversight, Sandra Thompson, the acting director of the FHFA, confirmed that the agency has been preparing the government-sponsored enterprises (GSEs) for life after conservatorship.
“We are preparing the enterprises to adjust to supervision in a way that they would be regulated outside of conservatorship,” Thompson said during an interview with Dennis Shea, head of the Bipartisan Policy Center’s Terwilliger Center for Housing Policy.
The March 31 event covered several topics with Thompson outlining what was on the horizon for FHFA and the GSEs. Housing affordability and closing the racial gap in homeownership were among the issues being discussed, as well as the longstanding conservatorship relationship, which was a large part of the conversation.
It’s been 14 years since the FHFA took over Fannie and Freddie in response to the subprime mortgage crisis and Great Recession, where the organizations lost more than $200 billion in two years. Now, the enterprises are on the path to profitability, backing 62% of all conforming mortgages in 2020 and touting a combined net worth of $67 billion, according to September figures.
Still, Thompson admitted that the extended time under conservatorship exceeded expectations.
“I don’t think anybody expected the enterprises to be in conservatorship as teenagers,” she said. “That wasn’t the expectation that anybody had at the time that they were placed into conservatorship and going forward.”
While the door isn’t closed on the idea of Fannie and Freddie exiting their government oversight, Thompson also noted there are still several steps that need to be taken before the separation can happen.
“One, there’s the big-ticket items, the things that are obvious to everybody—certainly conversations with the Treasury as a significant shareholder have to take place,” she said. “I know that lots of people have views on that, but those conversations are not as easy as they could be.
“The nice thing is we’ve had precedential conversations given what happened in the Great Recession,” She continued. “So the issues, while they’re specific to Fannie and Freddie, are not necessarily new to the federal government at large.”
According to Thompson, the FHFA has been conducting a pricing review for Fannie Mae and Freddie Mac products—admittedly the first time since 2015—as part of its preparation for an exit.
While Thompson didn’t indicate when the conservatorship would end, an audience member who claimed to have “started HUD 50 some years ago” and predicted that Fannie and Freddie would exit at their 17 year-mark in “a cicada event.”
A reluctant Thompson declined to comment on the audience statement when given a chance.
However, earlier in the event, she stated, “If the enterprises ever get out of conservatorship, everyone knows it’s going to be the largest IPO ever, but there are going to be questions that investors want to know.”
“There are just questions that investors are going to want answers to before they put any dollars in, and some of those questions I cannot answer,” Thompson explained.
Aside from discussions around GSE conservatorship, Thompson also delved into her take on promoting safe and affordable access to mortgage credit for borrowers.
“In my background at the FDIC, I have served during two crises, and I don’t want another one,” Thompson said. “Having said that, there are some lessons learned. One of the lessons learned especially from the most recent crisis—the Great Recession—is that safety and soundness are two sides of the same coin.”
She admitted that the Great Recession offered several lessons that the agency has heeded in recent years while overseeing the GSEs, including identifying and avoiding irresponsible lending.
“People thought that they were promoting access to credit, but the lesson that we learned is the ability to repay,” she said. “There is absolutely no point in giving someone a loan that they don’t understand and a loan that they can’t afford.”
Considering the number of borrowers that ended up upside down in their mortgages during the Great Recession, Thompson said that the FHFA and the GSEs had prioritized sustainability and affordability in their lending activity recently.
Access to credit was another aspect that touched on during the interview, and Thompson stated that the FHFA has worked with Fannie Mae and Freddie Mac to provide access to underserved areas safely.
Housing affordability remains one of the top issues plaguing the housing market, as lagging supply and strong demand enabled sky-high home prices in the past two years. With mortgage rates climbing from record lows to 5% in a little over a year, the affordability gap widens for millions of buyers.
According to Thompson, the FHFA and GSEs have been exploring ways that enterprises can contribute to the supply issues plaguing the housing market, including pilot programs to purchase accessory dwelling units (ADUs) and use the cash flow from the units in the underwriting criteria. The enterprises have set up similar programs for manufactured housing.
“We’ve really been thinking about ways that the enterprises can contribute to the supply issue,” she said. “When you talk about the lack of supply, you are also talking about historic increases in home prices. It is really—especially at the entry-level for homebuyers—affordability is a huge issue.”
Jordan Grice is RISMedia’s associate online editor. Email him with your real estate news ideas at jgrice@rismedia.com.
