The White House has made a strong push in recent months for reform at Fannie Mae and Freddie Mac, two government-sponsored enterprises that work to stabilize the U.S. mortgage market. However, the administration’s plans for how exactly it would accomplish its goals were unclear until Tuesday, when the acting director of the Federal Housing Finance Agency issued a statement confirming the agency would be working with Congress in the coming weeks to iron out a plan.
The news may alleviate some fears that the U.S. housing market would face a shock to its system if the lending giants were hastily reorganized, but questions still remain, pending hearings between the FHFA and congressional committees.
Previously, based on the administration’s statements and actions, it appeared as though President Trump and the Treasury Department would act alone to fully return Fannie and Freddie to private shareholder ownership.
Since 2008, the organizations have been in a state of conservatorship in which the Treasury Department owns the majority of public shares in both companies and oversees most operations. The federal government also claims any proceeds generated by Fannie and Freddie, which prop up the U.S. mortgage market by buying up loans and repackaging them as securities. This arrangement began in the wake of the housing market crash as the Treasury Department purchased around $160 billion worth of Fannie and Freddie shares to stabilize the companies and the broader economy.
Other Fannie and Freddie shareholders have sued the government multiple times in the intervening years, arguing that its ownership of the companies was unconstitutional. These suits gained little traction until President Donald Trump appointed new leaders to replace outgoing Obama-era officials at the FHFA and Treasury. Joseph Otting, the acting director of the FHFA, recently told staff that his agency would be releasing a plan to remove Fannie and Freddie from government control within the coming weeks. Politico further reported that Otting “told staff the administration takes the view that the FHFA ‘director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do.'”
In past statements, Mark Calabria, the current nominee to replace Otting as FHFA director, has also agreed with Fannie and Freddie shareholders who argue that the structure of the FHFA is unconstitutional and that conservatorship should end.
With information moving at a fast pace through public and private channels, the path forward for the FHFA and the future of Fannie and Freddie was unclear until the Jan. 29 statement from acting director Otting. Politico and the Wall Street Journal reported that this may have been prompted by increased pressure from newly installed Democrats in Congress, particularly House Financial Services Committee Chairwoman Maxine Waters and Senate Banking Committee Ranking Member Sherrod Brown. Both legislators responded with alarm to previous reports that the FHFA would move to end conservatorship for Fannie and Freddie through executive action rather than the legislative process.
What it means for mortgage, housing markets
The ultimate effect of ending Fannie and Freddie’s conservatorship status is debated, and may largely depend on exactly how the federal government winds down its involvement. In the days before the FHFA’s first confirmation that the process would move through congressional channels, reports had suggested a potential shock to the system of the U.S. mortgage market.
“Repeated efforts to overhaul the firms have failed since the financial crisis as the issue is politically fraught; a change to the status of the firms could hurt the price and availability of mortgages for millions of Americans,” Wall Street Journal reporters Juliet Chung and Andrew Ackerman wrote just days before the FHFA’s clarification. However, since there is no real precedent in the case, any effects on the housing finance system are purely speculative, especially until a concrete plan is made public. The Mortgage Bankers Association told Boston Agent Magazine that it looked forward to reviewing the detailed plans once they are released before issuing a statement on the situation.