Industry voices concerns about GSE conservatorship exit

Four trade organizations representing the building, buying and financing aspects of the real estate industry have come together to express their apprehensions about an expedited exit from conservatorship for Fannie Mae and Freddie Mac.

Specifically, the American Bankers Association, Mortgage Bankers Association, National Association of Home Builders and National Association of Realtors have jointly undersigned a letter voicing concerns on ending the government-sponsored enterprises’ (GSEs) conservatorship without necessary safeguards. The letter was addressed to Treasury Department Secretary Steve Mnuchin and carbon copied to Mark Calabria, director of the Federal Housing Finance Agency (FHFA).

“We believe there are tangible near-term steps that the U.S. Treasury Department can take, in coordination with the Federal Housing Finance Agency, to promote critical reforms of the GSEs and bolster their safety and soundness,” the groups wrote. “We are concerned, however, that other potential actions to release the GSEs from conservatorship without the necessary safeguards would undermine investor confidence, create volatility in the single-family and multifamily mortgage markets and impede access to credit for consumers.”

The four organizations reiterated that they have not supported, nor do they currently support, an “endless” conservatorship, and that their end goal is to see the GSEs undergo reform and leave government control. But with President-elect Joe Biden’s victory in the 2020 election confirmed by electors and the GSEs’ release a stated goal of President Donald Trump’s administration, the groups articulated that a rushed effort to unfetter the GSEs could do more harm than good.

“During conservatorship,” said the letter, “investors have relied on the Treasury backstop of the GSEs, which totals over $250 billion, as well as the effective control of the GSEs by the federal government. A sudden shift in the government’s relationship with the GSEs, which could end conservatorship without an explicit federal backstop in place, could cause investors to reassess the nature of any backstop and result in severe market disruptions.”

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Such disruptions, the groups specified, could include a significant pullback in investor demand for mortgage-backed securities (MBS); potentially large hits to the valuations of GSE securities; and downgrades of Fannie and Freddie from rating agencies. Subsequently, those developments could result in uncertainty about the Federal Reserve’s ability to acquire GSE MBS through its large-scale asset purchases; changes to the regulatory treatment — both domestic and abroad — of GSE securities; and disruption to the Uniform MBS framework.

Finally — and most succinctly — the groups warned that the premature release of the GSEs could lead to an increase in mortgage credit costs during the next economic crisis; less revenue to support underserved markets and communities; and, with the expiration of the GSE patch and revisions to the QM rule, further reduction in mortgage credit availability.

“These significant concerns would upend the mortgage market at a time when it is one of the few bright spots in an economy heavily impacted by the effects of the COVID-19 pandemic. … There is little to gain from this approach, but as noted above, much to lose,” the letter said.

The groups also reaffirmed their collective belief that there are steps that the Treasury Department and FHFA can and should take to ready the GSEs for post-conservatorship without risking market turbulence in the short-term.

For one, the letter suggested upwardly adjusting the threshold of the GSEs’ allowable capital reserves. Both Fannie and Freddie are both likely soon to cap out their allowable reserves, which together equal $45 billion in capital. Capping out would block the GSEs from retaining their earnings and further growing their buffers — a significant impediment given that the FHFA estimated in June that the GSEs would require a combined $283 billion to be adequately capitalized for release.

While public offerings would likely be needed to hit that level of funds, the government could reduce the target size of such equity raises by letting the GSEs continue to accrue capital organically, the groups argued.

Despite their apprehensions, the groups acknowledged and lauded the progress made under Mnuchin and Calabria’s watch.

“Our associations thank you for your ongoing efforts to implement reforms to the GSEs and move them closer to a state in which they can safely exit conservatorship,” the letter said. “While the GSEs are not yet in such a state, important progress has been made in recent years, and we hope you will continue this critical work.”


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