Residential Magazine

Viewpoint: Will GSE Reform Happen in 2020?

There are many impediments to remove Fannie Mae and Freddie Mac from conservatorship

By Jacob Wolinsky

If Mark Calabria, the director of the Federal Housing Finance Agency (FHFA), is going to remove Fannie Mae and Freddie Mac from federal conservatorship by the end of this year, he has his work cut out for him. Some people in the housing-finance industry argue that the timeline is simply too tight and it won’t be possible to get the government-sponsored enterprises (GSEs) out of conservatorship so quickly.

For those who support GSE-reform efforts, not all hope is lost, but Calabria’s plan to recapitalize and release the agencies from federal control may need to occur by December 2020. This is because there has been a long-standing debate about what happens to GSE reform if Joe Biden wins the presidency this November. A recent Supreme Court ruling means Calabria could lose his position if Biden becomes president. Thus, if Calabria wants Fannie Mae and Freddie Mac out of conservatorship, he may need to do it before Biden takes office.

Because the GSEs are so intertwined with the U.S. mortgage market, originators should care about their fate and follow the progress of privatization efforts. Fannie and Freddie were responsible for nearly 40% of all single-family securitizations in first-quarter 2019, according to a Federal Deposit Insurance Corp. report.

Legal implications

The recent Supreme Court case that indirectly impacts the FHFA is the Seila case regarding the Consumer Financial Protection Bureau (CFPB) and its director. The court ruled that the CFPB’s director position is unconstitutional and this means the president can remove the bureau’s director at will. 

The decision also has implications for the FHFA and other agencies that are headed by a single director and have what the Supreme Court views as too much power with insufficient oversight. If Biden wins the presidential election in November, the decision may mean that he could remove Calabria as FHFA head when he enters the White House next year. As of late July, Biden hadn’t stated a position on what to do about the GSEs. 

Path to reform

The GSEs have been in federal conservatorship for more than a decade but only within the past few years have efforts to free them gotten serious. The turning point was Calabria’s appointment and confirmation as FHFA director in April 2019. He immediately made it his mission to get the GSEs out of conservatorship. 

In September of last year, the U.S. Department of the Treasury released a pivotal report about Fannie and Freddie, and an interim capital agreement was reached later that month. The FHFA retained Houlihan Lokey as its financial adviser in February 2020 and Milbank as its legal adviser in April 2020.

This past May, FHFA proposed a capital framework for the GSEs that differed slightly from a plan originally put forth in 2018. The new rule would require Fannie and Freddie to hold a combined $234 billion in capital, an amount based on the assets they held as of Sept. 30, 2019. In June 2020, Fannie and Freddie hired financial advisers, furthering the process of their exit from conservatorship. Much is left to be done, however, before the GSEs will be out of the government’s purview. 

What’s to come

The next big step in the GSEs’ exit from conservatorship is the finalization of the capital rule. The proposed rule was published in the Federal Register at the end of this past June and the comment period ended on Aug. 31. 

At this point, the capital rule will have to be finalized. ACG Analytics expects it to be adopted this November, but if Calabria is going to meet a December 2020 deadline, it almost certainly will have to be finalized before that. It’s unclear whether it will be possible to approve the rule prior to November. It depends on how many comments are received, how the debate over the proposal goes and whether any changes are made to the rule before it is finalized.

If and when the capital rule is finalized, an amendment to the preferred-stock purchase agreement between the FHFA and the Treasury Department must then be finalized. ACG Analytics expects this to happen sometime between November 2020 and January 2021. Depending on the timing of that, Fannie Mae and Freddie Mac may be able to start operating through a consent decree until they build the required amount of capital. 

The best-case scenario would have the enterprises exiting conservatorship immediately, but that would require them to have the funds spelled out in the finalized version of the FHFA’s capital-framework rule. Achieving the end of conservatorship in January 2021 is a blue-sky scenario and everything has to line up perfectly.

Continued debate

It’s difficult to imagine that Fannie Mae and Freddie Mac will be privatized by the end of this year. If President Donald Trump is reelected, however, the timeline won’t matter as much. Trump hasn’t shown displeasure with anything Calabria has done, so if the president remains in office, GSE reform will likely continue without any hiccups. 

Many analysts agree that Fannie and Freddie will not be able to exit conservatorship until next year at the earliest. Others, including Dick Bove of Odeon Capital, believe this task will take several more years even if Trump remains in the White House. Clearly, the timeline for getting the GSEs out of conservatorship hinges on the capital rule. If the FHFA requires Fannie and Freddie to have so much capital that it takes them a long time to raise it, their privatization plans could be years away from fruition. 

Another key part of GSE reform is to hold public offerings for the enterprises. Assuming the GSEs eventually operate under a consent decree, the public offerings will enable them to finish raising the necessary capital reserves to comply with the FHFA’s finalized capital rule. Debate about the capital rule was quick to heat up, so it could take some time after the comment period ended in August for the rule to be finalized. 

Critics of the proposal say it requires Fannie and Freddie to hold far more capital than what they will need. In fact, former Freddie Mac CEO Don Layton wrote this past May that he believes the capital rule, as it stands, makes it nearly impossible to invest in the GSEs. Layton believes the enterprises can become viable independent companies with much less capital than what the FHFA wants to require. 

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For now, everything hinges on what the capital rule looks like when it is finalized. The timing of that could provide further insight into just how quickly Fannie Mae and Freddie Mac can exit conservatorship, but a December 2020 deadline looks like an extreme long shot. ●


  • 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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