Residential Magazine

Secondary Symptoms

GSE reform will be affected by the pandemic, but the severity is debatable

By Jacob Wolinsky

Fannie Mae and Freddie Mac have been in conservatorship for more than 10 years. Many stakeholders agree that more than enough time has passed to make the necessary changes to the government-sponsored enterprises (GSEs).

The coronavirus pandemic has thrown a virtual wrench into the works, but some experts have differing opinions on how much the government’s recapitalization-and-release plan will have to be altered. Mortgage originators should continue to watch as GSE reform plays out because it could have a dramatic impact on the mortgage industry.

Millions of Americans have filed for unemployment during the pandemic. As a result, lawmakers included a provision that allows borrowers to request forbearance on their government-backed mortgages for up to a year. This put pressure on nonbank mortgage servicers, which still have to make monthly payments on loans that are in forbearance.

Immediately, there were calls for Fannie Mae and Freddie Mac to step in and support nonbank servicers. Initially, the Federal Housing Finance Agency (FHFA) pushed back against those demands but after a short while, provisions were made that involved the GSEs, potentially without seriously derailing their efforts to exit conservatorship.

More than 4 million borrowers had entered forbearance as of late May 2020, according to the Mortgage Bankers Association, a number that was only expected to increase. One bit of relief for nonbank servicers came from FHFA, which said servicers only have to make four months of payments on loans that are in forbearance. After that, they can suspend payments until the mortgages exit forbearance.

Fannie Mae and Freddie Mac also have provided relief to lenders in another way during the COVID-19 pandemic. FHFA is allowing the GSEs to buy mortgages that are in forbearance or about to enter forbearance. The provision applies to loans that enter forbearance not long after closing.

There’s no denying that the coronavirus pandemic will have some impact on when [GSE reform] will happen, but the size of the impact is up for debate.

Delay likely

The most important issue regarding GSE reform may be the timing of when Fannie Mae and Freddie Mac will be recapitalized and released from conservatorship. There’s no denying that the coronavirus pandemic will have some impact on when that will happen, but the size of the impact is up for debate.

Before the pandemic hit, ACG Analytics put together a timeline of when things could happen in the GSE-reform effort. As of January 2020, the company was expecting Fannie Mae and Freddie Mac to exit conservatorship under a consent decree in the second quarter of next year. They were looking for an equity offering shortly after that, sometime between July 2021 and June 2022, followed by the end of the consent decree in 2023.

The COVID-19 pandemic is sure to delay things at least slightly. Nomura analyst Matthew Howlett said in a recent note that the pandemic is merely introducing speed bumps, not detours, into the GSEs’ exit from conservatorship. He said the initial timeline he set for recapitalization and release is now more challenging but not unrealistic.

Howlett continues to expect Fannie and Freddie to be ready to complete their capital raises in 2021. He added that if President Donald Trump is not reelected this fall, and Democratic challenger Joe Biden wins the White House, the recapitalization-and-release plan will stop.

Odeon Capital analyst Dick Bove believes the pandemic will have a much greater impact on the timing of the agencies’ release from conservatorship. He said in a recent note that he doesn’t see the GSEs exiting until three to five years from now. He cited the measures being taken during the pandemic as the reason for his view.

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Essential role

The GSEs’ role in the mortgage market is complex, but it’s clear that their role is essential. Banks and nonbanks can originate loans, although nonbanks almost always sell their loans to a bank, or a third-party packager like Fannie Mae or Freddie Mac.

Fannie and Freddie guarantee loans, especially 30-year mortgages, and the coronavirus pandemic threatens to take a bite out of their ability to exit conservatorship. After all, if borrowers don’t pay their mortgages and nonbank servicers don’t have the funds to pay loans that are in forbearance, it is up to the GSEs to step up and honor their guarantees.

For mortgage bankers, this guarantee is an important part of the mortgage market. After all, no bank wants to sit on a fixed-rate loan with a low interest rate for 30 years while they watch the Federal Reserve raise interest rates. They want to make room for loans with higher interest rates that earn more money.

The 30-year mortgage emerged from the New Deal policies enacted by President Franklin Roosevelt’s administration in the 1930s and the creation of the Federal Housing Administration, which insured mortgages against default and set standards for mortgages such as 15-, 20- and eventually 30-year terms. In the 1970s, Congress authorized Fannie Mae and Freddie Mac to purchase 30-year mortgages from banks and take the risk away from these institutions.

Without Fannie Mae and Freddie Mac, the 30-year mortgage could cease to exist. At the very least, 30-year mortgages would be expensive and much harder to come by. As a result, fewer people would be able to own their homes.

Because of the GSEs’ important role in the mortgage market, mortgage professionals have a vested interest in what happens to GSE reform. Whether Fannie and Freddie exit conservatorship under Trump or remain under the government’s purview during a Biden presidency, the mortgage market will be impacted.

The goal of the conservatorship was to strengthen Fannie and Freddie so they would never need another taxpayer bailout. Given the strength of their earnings … it appears that they are ready to stand on their own.

Endless quagmire

The GSEs were put into conservatorship as part of the bailout that saved them during the 2008 financial crisis. The U.S. Treasury injected funds to keep them from failing and taking a large chunk of the mortgage market down with them in the process.

The goal of the conservatorship was to strengthen Fannie and Freddie so they would never need another taxpayer bailout. Given the strength of their earnings released over the past several years, it appears that they are ready to stand on their own.

Not everyone in the government, however, wants them to exit conservatorship. They’ve turned into a major source of income for the Treasury thanks to the net-worth sweep, which has funneled all GSE profits into the Treasury. The plan to recapitalize and release them has led to new rules allowing them to retain capital, but the process is much easier said than done.

A key question facing Fannie Mae and Freddie Mac is what will happen to the 30-year mortgage after the GSEs exit conservatorship. Bove has emphasized in the past that the government must take steps to ensure that the 30-year mortgage remains in play. Millions of homeowners depend on 30-year mortgages as an affordable path to buying a home.

A major change to the GSEs could have unexpected consequences. Mortgage originators will be greatly impacted if the 30-year mortgage is not preserved when the GSEs exit conservatorship. Based on everything regulators have said so far, it sounds like efforts are being made to support 30-year loans even after the government is no longer overseeing Fannie and Freddie. This will help keep the mortgage market intact.

Another way the mortgage market could change is through an increase in competition. The FHFA has said it wants to increase competition, and it has taken steps to make it easier for other companies to compete with Fannie and Freddie.

It is unlikely that others will want to compete for 30-year mortgages. As a result, the mortgage market may look very much the same as it does now once the GSEs exit conservatorship. The market will have become much more stable, however, because Fannie and Freddie will be strong enough to stand on their own two feet. •


  • Jacob Wolinsky

    Jacob Wolinsky is the founder of, a popular value-investing and hedge fund-focused investment website. Wolinsky worked as an equity analyst, first at a microcap-focused private equity firm, followed by a stint at a small- and midcap-focused research shop. He lives with his wife and four kids in Passaic, New Jersey.

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