Treasury, FHFA Amend GSE Agreements to Ensure “Orderly” Release from Conservatorship
Written By: Joel Palmer, Op-Ed Writer
The U.S. Treasury Department and the Federal Housing Finance Agency (FHFA) have amended the Preferred Stock Purchase Agreements (PSPAs) between Treasury and Fannie Mae and Freddie Mac. The move was made “to help ensure that the eventual release of the GSEs from conservatorship will be orderly.”
The new agreement contained two key provisions. First, the amended PSPAs restored Treasury’s right to consent to a release of the GSEs from conservatorship. This had been previously been part of the PSPAs when conservatorship began in 2008, but was removed in 2021 along with other portions of the agreements.
Second, FHFA agreed that, prior to releasing the GSEs from conservatorship, the agency will seek public information and comment. FHFA agrees to provide Treasury with recommendations for ending the conservatorship based on the public input and assessment of potential impacts on the housing markets and the enterprises. The agency agrees to consult other stakeholders, including the President.
“This process will increase transparency to the public and key stakeholders and will help inform FHFA’s and Treasury’s decision making,” the letter stated.
Treasury stated that the agreements do not reflect the GSEs’ capital retention or dividend payments under the senior preferred shares issued to Treasury. There is also no amendment to the expiration dates of the warrants for GSE common stock held by Treasury, though the department said it expects a future extension of the current 2028 expiration date “to the extent appropriate in order to avoid possibility of a disorderly or disruptive exit from conservatorship.”
“The enterprises play a vital role in the national housing finance system,” said FHFA Director Sandra L. Thompson. “Today’s announcement will reassure stakeholders that the enterprises’ eventual release from conservatorship will follow a methodical process intended to minimize disruption to the housing and financial markets.”
Last month, the Congressional Budget Office (CBO) reported that Fannie and Freddie are in better financial position to repay the U.S. Treasury for its stake in the enterprises than they were four years ago. CBO also noted that it’s more likely today that “GSEs could be recapitalized through the sale of common stock and could repay the Treasury for its stake in the enterprises.”
Fannie and Freddie have been under the conservatorship of the Federal Housing Finance Agency, which also regulates the entities, since the financial crisis of 2008. For a decade, the entities paid nearly all of their earnings to Treasury, which owns the dominant stakes in the two GSEs.
In late 2019, after several years of profitability, Treasury allowed the GSEs to retain more of their earnings to rebuild their capital reserves. This was considered a vital step for Fannie and Freddie to raise the necessary capital to once again become fully private enterprises.
The last four years, however, have seen little movement toward ending conservatorship, as the Biden Administration emphasized housing affordability. The Independent Community Bankers Association wrote that under the outgoing administration, “the FHFA maintained a posture implying perpetual conservatorship.”
As recently as April 2024, FHFA Director Thompson’s testimony to Congress indicated that Fannie and Freddie were far from ready to exit conservatorship. She said the enterprises have smaller retained portfolios than they had prior to conservatorship, and that the enterprises still had to increase their capital reserves and meet requirements of the Enterprise Regulatory Capital Framework.
It’s widely believed the incoming Donald Trump administration will seek a quicker end to conservatorship than his predecessor.
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.
