Background:
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are government-sponsored enterprises (GSEs) established to expand the secondary mortgage market in the United States. During the subprime mortgage crisis, they were placed into conservatorship by the Federal Housing Finance Agency (FHFA) on September 7, 2008, to prevent their collapse and ensure stability in the housing market.
Why Conservatorship?:
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Financial Instability: As was the case with many large mortgage lenders at the time, both GSEs faced significant losses due to their exposure to subprime mortgages.
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Market Confidence: The conservatorship was intended to restore confidence in the housing finance system.
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Prevent Foreclosures: It was intended to protect homeowners and mortgage borrowers.
Why It’s Time to End Conservatorship:
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Profitability: Fannie Mae and Freddie Mac have been profitable again for more than a decade, having repaid the government bailout funds with significant interest. Since 2012, they have paid over $300 billion in dividends to the Treasury, far exceeding the $187 billion in bailout funds.
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Private Capital: Under the conservatorship, 80% of the dividends go to the U.S. Treasury and only 20 percent to equity shareholders. This hinders the return of private capital to the mortgage market, creates uncertainty and discourages investment.
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Unnecessarily High Mortgage Interest Rates: With the conservatorship’s termination, mortgage interest rates would decline by as much as half a percent, providing significant support for the struggling ability of would-be buyers and sellers in today’s housing market.
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Market Distortion: The conservatorship gives Fannie Mae and Freddie Mac an unfair competitive advantage, distorting the housing finance market and limiting competition.
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Government Risk: The current situation places a significant portion of the mortgage market’s risk on taxpayers. Ending conservatorship would reduce government exposure.
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Regulatory Improvements: Since 2008, there have been significant regulatory improvements in the housing finance system to prevent a recurrence of the crisis of 2008, significantly, reducing the need for a conservatorship.
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Expert Opinions: Economists and housing finance experts agree that conservatorship was only intended to be a temporary remedy to the 2008 crisis, and today’s well-capitalized and well-regulated Fannie Mae and Freddie Mac can operate effectively without it. They suggest that an orderly exit strategy would promote market stability and protect taxpayers.
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Housing Policy: Continued conservatorship limits the ability of Fannie Mae and Freddie Mac to fulfill their mission of providing liquidity, stability, and affordability to the mortgage market.
Conclusion:
While the conservatorship of Fannie Mae and Freddie Mac was crucial because of the 2008 financial crisis, the reasons for its continuation have diminished over time. The return to profitability, improved regulatory environment, and the need for a competitive and stable housing finance system argue for an end to conservatorship. A carefully planned exit strategy would protect taxpayers, incentivize home sellers and buyers, promote private capital investment, and ensure the long-term health of the U.S. housing market.