Since spring, people around Donald Trump have been discussing how to end the conservatorship of the two government-sponsored enterprises — Fannie Mae and Freddie Mac — and return them to private control. Bill Ackman, chief executive of hedge fund Pershing Square, recently predicted that the conservatorship would end within the first two years of Trump’s second administration.
When Fannie Mae was turned into a private corporation, long after its inception as part of the New Deal in 1938, the change was meant to be permanent. Two years later, Congress created another private corporation, Freddie Mac. Again, the intent was, while under regulation, to remain private. But the U.S. real estate quakes during the global financial crisis shook the foundations of the two GSEs and, given the wide holdings in their bonds, there was a risk of massive financial impact.
So, there was a government takeover, placing the two firms under conservatorship by the Federal Housing Finance Agency (FHFA).
“I think it can fairly be said that no one at that time ever expected conservatorship to last so long, especially as Secretary of the Treasury [Henry] Paulson publicly referred to it as a ‘time out,’ with its short-term connotation,” Donald Layton, senior visiting fellow from Practice at the NYU Furman Center and a former chief executive of Freddie Mac, previously wrote.
If they do come out in the next two to three years, what will the impacts on the companies and the broader single-family and multifamily industries be?
Focusing on the commercial real estate aspect, Mark Calabria, a senior advisor to the Cato Institute and former director of the Federal Housing Finance Agency during the first Trump administration, told GlobeSt.com that there wouldn’t be a sudden dissolution of their regulatory requirements. “Congress did create the housing goals and trust funds separate from the conservatorships,” he said.
For example, the Housing and Community Development Act of 1992 specified that the two “have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return.”
There could be some changes in focus, including the currently heavy attention on tenant rights and proposals like a national cap on rent increases that the Biden administration has called for.
“It’s unlikely under Trump that the GSEs would be as heavily involved with affordability,” Calabria says. He added, “At the end of the day, I don’t think it does much for affordability for the market,” arguing that under Biden, they had been throwing money at deals that don’t make any sense. “Taking them out of conservatorship could mean they will make decisions in pricing more in a commercial manner and, yes, that’s a good thing because it will be less distortionary on the overall market” and return more competitive balance.
“What I experienced as director was a regular stream of people like insurance companies saying, ‘I lost that deal to Freddie by 10 basis points,’” he said.
Current caps on annual multifamily lending that the FHFA could be altered or removed. But there have been years where a GSE didn’t lend up to the cap, so the issue of more limited lending than technically necessary has already been faced. The two corporations might decide to lend more, adding greater flexibility to financing.
“Maybe Fannie and Freddie make fewer deals that don’t make economic sense,” said Calabria. “At the end of the day, there are strong competitors in the multifamily space, and when Fannie and Freddie do dumb things, that impacts the multifamily market perhaps differently than the single-family.”
Layton also noted that, in his view, exiting the conservatorship would take three to five years — “a roughly estimated time needed for net worth to grow via earnings retention to reach a level of capital that might be deemed sufficient for conservatorship exit and for all the other mechanics to be put into place for post-conservatorship regulation that retains the GSE conservatorship reforms made in the last fifteen years.”
Layton pointed out that government control after exiting conservatorship would remain because the Department of the Treasury would own “the vast majority of the company's equity.” Selling its shares and resolving stockholder-related issues could take another three to five years.