Conservatorship Continues Seven Years Later With No End In Sight

On September 6, 2008, the government seized control of Fannie Mae and Freddie Mac after bailing out the mortgage giants to the tune of a combined $187.5 billion, and the FHFA's conservatorship of Fannie Mae and Freddie Mac began.

Last week marked the seventh anniversary of the FHFA's conservatorship of the GSEs. Seven years later, the topic of how much of a role, if any, the government should play in housing finance remains hotly contested. While many housing stakeholders and lawmakers agree that the conservatorship needs to end, the issue of the GSEs' future remains a source of contention. Some of the GSEs' biggest investors, such as Fairholme Funds and Pershing Square, have filed lawsuits over the sweeping of GSE profits into Treasury, which began in 2012 when Fannie Mae and Freddie Mac returned to profitability.

As a result of the contention over the future of Fannie Mae and Freddie Mac, little progress has been made to "appreciably disentangle the government from the housing finance system," according to Andy Winkler, Director of Housing Finance Policy at Washington, D.C.-based think tank American Action Forum.

The GSEs have returned a combined $239 billion in dividends to Treasury since the bailout, but there is the possibility the GSEs will not remain profitable, Winkler said.

"While Fannie and Freddie have been recently profitable, dividend payments over the last couple years were buoyed by income from legal settlements and one-time tax benefits, totaling $88 billion in income to the GSEs," Winkler said. "This money made them appear more profitable than reality. In fact, dividend payments are expected to continue shrinking. There is still a very real risk that they will need to draw funds sometime in the future if the entities are not reformed."

The payment of $239 billion in dividends to Treasury does not mean the taxpayers have been repaid for the bailout, Winkler said, pointing out that Treasury, researchers from the New York Fed, and others have pointed out that taxpayers made an investment in the GSEs to keep them operating–and "current dividends being paid to the government are compensation for the ongoing risks borne by taxpayers. As such, it is not repayment."

Housing finance reform remains "the most important unfinished business" of the recession," according to Winkler, and while Dodd-Frank addressed many facets of the financial services industry and beyond, the controversial law did not address the future of Fannie Mae and Freddie Mac. Attempts by lawmakers to pass bills to reform the GSEs have all stalled. Perhaps the most notable attempt was made by Senators Bob Corker (R-Tennessee) and Mark Warner (D-Virginia), who co-sponsored a bill in 2013 to eliminate Fannie Mae and Freddie Mac and replace them with a private insurance company system with a government backstop. The bill, known as the Housing Finance Reform and Taxpayer Protection Act of 2014 (S.1217), passed in the Senate Banking Committee by a vote of 13 to 9 in May 2014 but has made little progress.

"In lieu of a GSE reform, these initiatives can help limit risks borne by taxpayers and provide insight into how a new housing finance system may function."

In July at a discussion on housing finance reform at the Bipartisan Policy Center in Washington, D.C., U.S. Reps. Randy Neugebauer (R-Texas) and John Delaney (D-Maryland) both agreed that the main reason why GSE reform has not taken place is that the White House has not made it a priority.

"I hope that's changing," Delaney said. "When you think about what happened in the Senate, where they did make a pretty decent run at a bipartisan proposal, I think a lot of the Democratic Senators working on that turned around and expected to see the White House behind them and there was no one there."

The GSEs have intensified their risk-sharing initiatives as of late to transfer more risk to the private sector, and the GSEs' conservator, FHFA, has been working to establish a common securitization platform.

"While it may be difficult for comprehensive housing finance reform to move forward, FHFA has worked to establish a common security and securitization platform for both GSEs and encourage various risk-sharing experiment in which private capital assumes more credit risk," Winkler said. "In lieu of a GSE reform, these initiatives can help limit risks borne by taxpayers and provide insight into how a new housing finance system may function."