Calabria Eyes GSE Privatization by 2022, but Experts Are Skeptical

The Federal Housing Finance Agency director pledged to minimize disruption to the residential and multifamily mortgage markets.
FHFA Director Mark Calabria testifies at his Senate confirmation hearing, February 2019. Image courtesy of U.S. Senate Committee on Banking, Housing and Urban Affairs
FHFA Director Mark Calabria  Image courtesy of U.S. Senate Committee on Banking, Housing and Urban Affairs

Federal Housing Finance Agency Director Mark Calabria this week outlined plans to reform and privatize government sponsored enterprises Fannie Mae and Freddie Mac within two years, but housing experts are skeptical about his ability to accomplish those ambitious plans.

Calabria last year started the process of reforming the two mortgage giants, which were placed into conservatorship in 2008 in the wake of the financial crisis. The FHFA ended a cash sweep that deposited their profits into the federal treasury as part of a plan that envisions releasing the agencies from conservatorship and recapitalizing them so they can stand on their own. While there is broad agreement that the mortgage industry would prefer the GSEs to have a permanent structure, there is less consensus on what that structure should entail.


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Speaking at the 36th Annual National Association for Business Economics Economic Policy Conference, Calabria said he wants the GSEs to operate on a more market-driven basis. Since the decision to end the cash sweep, Fannie and Freddie’s operating leverage has been reduced to 40:1, down from 100:1, he said.

Calabria said the agencies should reduce the number of loans they guarantee that have multiple risk factors, such as loans with high loan-to-value ratios and borrowers with low credit quality. He said he planned to create an office of research statistics to build out research capabilities, better understand what drives efficiency and share data with the market.

In his speech at NABE, Calabria that said his goal was to get the agencies out of conservatorship by 2021 and to potentially have a public equity offering for Fannie and Freddie in 2022. “Part of my goal is to make sure they get their books in order to make the market prepared to accept that,” he said. The FHFA last year asked Congress for the authority to charter new guarantors, with the idea of creating more competitors.

Thorny Issue

Despite the ambitious plans, Calabria signaled that he wanted to avoid disrupting the residential and multifamily mortgage markets, which have been operating smoothly for several years. “I’m not intending to do anything that will make you update your forecasts for the housing and mortgage markets,” he said at the beginning of his talk.

After Calabria spoke, a panel of housing experts poked holes in the FHFA plan, noting that before a permanent solution is implemented, there are a host of practical considerations that will challenge an equity offering and unanswered questions about the agencies’ mission that need to be resolved.

Fannie and Freddie were public entities before the financial crisis. When being placed into conservatorship, the government pledged to provide up to $100 billion in capital for each agency in exchange for inducements that included the right to issue $1 billion of preferred stock with a 10 percent dividend going to the Treasury, and the right to exercise stock warrants that would give the government a roughly 80 percent stake in each agency.

Frank Nothaft, chief economist at CoreLogic, noted the difficulty in raising capital for an entity that is 80 percent-owned by the government and might be required to pay a 10 percent dividend on preferred stock. “It would be easier if it weren’t for the warrants,” Nothaft said. “It’s an easy step that’s actually difficult to accomplish.”

The GSEs’ relationship with the federal government is another key issue that would have to be clarified before a capital raise. Fannie and Freddie have operated with the implicit guarantee that the government will cover losses if they are unprofitable. That enables them to have a lower cost of capital than private competitors. But given the experience of the last cycle, when investors in the agencies were virtually wiped out, whether the guarantee is implicit or explicit would have to be resolved.

Unfortunately, it can only be resolved by a vote of Congress, which has little incentive to act, even if the polarized parties in Washington could agree on what to do. “Broadly speaking, the mortgage market is healthy,” Nothaft said. “When there is no crisis, there is little incentive for Congress to spend political capital to come up with a solution.” Taxpayers also would have the right to expect payment of the preferred dividend and commitment fees, which have been waived since the agencies were rescued, said Edward Pinto, co-director of the American Enterprise Institute.

Unanswered Questions

The financial considerations, however, might not be the thorniest issues that need to be ironed out before the GSE structure is resolved. At stake is also the mission and direction of the agencies. Fannie and Freddie were chartered in order to provide stability to the housing markets, so there would always be a way to finance housing, even in the event of a financial downturn when private lenders are not in the market. Coming out of the financial crisis, Fannie and Freddie dramatically increased volume and market share of multifamily lending. Would the restructured GSEs still be responsible to provide liquidity in down cycles when other lenders are inactive?

Fannie and Freddie are also required to finance underserved markets and low-income borrowers. For that reason, the FHFA current requires Fannie and Freddie to commit 37.5 percent of their 2020 multifamily mortgage allocations to properties that have an affordable component.

Laurie Goodman, vice president of housing finance policy at the Urban Institute, asked a series of question about how a privatized Fannie and Freddie would operate. Will they remain required to finance underserved borrowers? Who would set fees? Would they be allowed to make unlimited returns? And what would stop Congress from creating more competitors, which would affect stock value?

Goodman said that the best solution for the market would be for Congress to legislate a housing finance system. Absent that, she said the best option is for the GSEs to operate as they are now. “It’s not clear what will be accomplished with privatization,” she said. “Getting them out of conservatorship for the sake of getting them out of conservatorship is a ridiculous goal.”