Why The Fate Of Fannie Mae, Freddie Mac Remains Unclear

The fate of Fannie Mae FNMA and Freddie Mac FMCC, the government-sponsored enterprises (GSEs) at the heart of federal housing finance policy, remained unresolved at the conclusion of the Trump administration.

What Happened: The GSEs buy loans from mortgage lenders and bundle them into securities for sale to investors with a guarantee backed by the federal government.

The GSEs were placed in federal conservatorship in September 2008 after their collapse during the economic chaos that fueled the Great Recession.

Multiple proposals for reforming and releasing the GSEs from conservatorship have been raised over the years, but to date there has been no consensus from either side of Capitol Hill on how to achieve this goal, which was given a much lower priority in the past year due to the COVID-19 pandemic and its challenges to the housing sector.

The last development on the GSEs' fate came a few days before the Biden inauguration, when Mark Calabria, executive director of the Federal Housing Finance Agency, the regulatory agency in charge of the GSEs, reached an agreement with then-Treasury Secretary Steven Mnuchin to amend the preferred stock purchase agreements for the shares in the GSEs that the federal government held since they were put into conservatorship.

The agreement enables Fannie Mae and Freddie Mac to retain all of their earnings until they reach $283 billion in unadjusted total capital. A 2019 amendment set the retained earnings level at $25 billion for Fannie Mae and $20 billion for Freddie Mac, and before that their respected earnings were channeled into the Treasury Department as a dividend to repay the government's 2008 bailout following the collapse of the housing market.

But the agreement did not give the GSEs the ability to raise private capital, nor did it set a timetable for bringing the conservatorship to a close.

Calabria acknowledged this was not the beginning of the end of the conservatorship period, which would have required the approval of the Treasury Department. Mnuchin chose not to unilaterally end the conservatorship during the lame duck weeks of the Trump White House.

"Retained earnings alone are insufficient to adequately capitalize the Enterprises," said Calabria. "Until the Enterprises can raise private capital, they are at risk of failing in the next housing crisis."

Why It's Important: The Biden presidential campaign offered no strategy on ending the conservatorship and the new administration has not addressed the issue in depth.

According to a Wall Street Journal article from last month citing unnamed "advisers close to Biden," the new president is not in a rush to end conservatorship, but instead would use the GSEs to further "boost housing affordability and promote homeownership."

The GSEs have enjoyed financial vitality during the pandemic period, with the housing market enjoying record-breaking sales and median prices.

Fannie Mae posted net income of $4.2 billion in the third quarter, up from $2.5 billion in the second quarter and higher than the $3.9 billion during the third quarter of 2019.

It also reported $4.2 billion in comprehensive income, up from $2.5 billion in the previous quarter and $3.9 billion one year earlier.

Freddie Mac's third quarter included $2.5 billion in net income, up from $1.77 billion in the second quarter and up from $1.7 billion in the third quarter of 2019. It also reported $2.4 billion in comprehensive income, up from $1.9 billion in the previous quarter and up from $1.8 billion one year earlier.