FHFA Director’s Senate Testimony Points to Indefinite Conservatorship of Enterprises
Written By: Joel Palmer, Op-Ed Writer
Those looking for an indication when Fannie Mae and Freddie Mac may exit conservatorship did not receive one during recent Congressional testimony from the director of the Federal Housing Finance Agency (FHFA).
Under the Donald Trump administration, the end of conservatorship was a matter of when, not if. That has changed somewhat during the Joe Biden administration.
When FHFA released its 2024 Scorecard for Fannie and Freddie in January, there was no mention of the 15-year conservatorship.
More recently, FHFA Director Sandra L. Thompson spoke highly of how well Fannie and Freddie have operated in conservatorship during testimony in April to the U.S. Senate Committee on Banking, Housing, and Urban Affairs.
Thompson pointed out that the enterprises have:
Retained earnings and built their combined net worth to over $125 billion.
Deployed multiple mechanisms to transfer credit risk to private investors.
Reduced the size of their retained portfolios, which were a large source of losses in 2008.
Improved their underwriting and loss mitigation policies.
Developed books of business that reflect historically low levels of delinquencies and high levels of borrower equity.
Created a new UMBS to increase liquidity in the market, as well as new securitization infrastructure to support this security.
Enhanced their support for affordable housing and underserved communities.
Improved their internal risk management and corporate governance.
Thompson’s testimony was accompanied by the release of the agency’s annual Housing Mission Report, which described the activities taken by Fannie Mae and Freddie Mac, and the Federal Home Loan Banks, in 2023 to promote access to financing for affordable, sustainable, and equitable housing and targeted economic development.
“Today, the Enterprises operate much differently than they did in the lead-up to the 2008 financial crisis. They are more safe and sound, and are better positioned to achieve their missions in a sustainable manner – both during conservatorship and following the conclusion of the conservatorships,” Thompson said during her Senate testimony.
Though the last four words of that paragraph point to an eventual exit, most of her testimony related to conservatorship indicated otherwise.
Thompson told committee members that FHFA reforms have “strengthened the Enterprises' financial conditions, improved risk management and corporate governance, and better insulated taxpayers from exposure to mortgage credit risk.”
She noted that the enterprises have smaller retained portfolios than they had prior to conservatorship. Furthermore, those portfolios “are used primarily for loan aggregation and loss mitigation purposes rather than for investment in risky products.”
“Despite this progress,” Thompson concluded. “the Enterprises must continue to increase their capital reserves and make further progress toward meeting the minimum requirements set forth in the Enterprise Regulatory Capital Framework. The Enterprises' combined net worth has grown substantially over the past few years, but the Enterprises remain well below their minimum capital requirements. In addition to matters related to capital, FHFA is working to ensure the regulatory and supervisory framework for the Enterprises will support their safety and soundness as well as their ability to fulfill their statutory missions.”
The call to end conservatorship, loud in previous years, has been somewhat muted recently. A few organizations took the opportunity of the 15th anniversary of conservatorship in September 2023 to call for an end, including the Independent Community Bankers of America.
A number of legislative bills have been introduced in the last decade aimed at ending the arrangement, but none have progressed far beyond committee.
It appears conservatorship of Fannie and Freddie by the FHFA will remain for the foreseeable future. Any change to the long-term timetable of transition will likely hinge on the results of the upcoming elections.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
