Paul Fiorilla, Research Director of Yardi Matrix

Rumors that the outgoing Trump administration would trigger an 11e The hour-long effort to privatize Fannie Mae and Freddie Mac was halted when overseers at government-funded companies struck a deal to limit their growth, but without major structural changes.

The agreement between the Federal Housing Finance Agency and the Treasury Department includes elements such as: a permanent cap on the volume of multi-family loans from agencies; lock in requirements to focus on affordable housing; allowing them to keep much more of their profits; and an obligation to comply with rules that require them to set aside more regulatory capital.

Taken together, these arrangements put Fannie and Freddie on the path to ending trusteeship by strengthening their long-term financial position. While this may lessen their dominance in the multi-family loan market somewhat, the new rules fall short of efforts to privatize agencies that are rumored to be underway.

“The amendment will allow the director of the FHFA, Mark Calabria, to bring the GSEs slightly closer to an exit from supervision, (but) it does not open the door to the end of the supervision without the adhesion of the administration Biden or new congressional legislation, ”said David McCarthy, senior director of government and policy relations at CRE Finance Council, a Washington, DC-based business group.

Miss the clock

Image courtesy of Fannie Mae

The Trump administration, in particular FHFA director Mark Calabria, has set ambitious goals to free GSEs from tutelage, where they have been since their bailout by the federal government in 2008. After being appointed to a five-year term in 2019, Calabria came to an end. the money transfer that sent Fannie and Freddie’s profits to the federal treasury, the first step towards financial stability and their release.

The change of administration set off a regulatory clock for Fannie and Freddie. Not only will new Treasury Secretary Janet Yellen likely have a different take on GSEs, the new president could try to immediately sack Calabria. It’s still unclear if that’s Biden’s intention, but the president’s power to fire an agency head without cause is the subject of a Supreme Court case.

This left Calabria and former Treasury Secretary Steve Mnuchin on a tightrope between negotiating a deal that would help meet their privatization goals and reducing GSEs’ trade footprint without upsetting the mortgage industry. , which has been running without too many problems lately. years. Industry housing trade groups, including the Mortgage Bankers Association, sent a letter to Mnuchin last month urging him not to push agencies to step out of the umbrella until they had enough capital.

In the end, it was impossible to raise the capital necessary to release the GSEs from supervision before taking over the new administration. Thus, the agency heads have opted for a gradual change that puts Fannie and Freddie on the path of privatization, but which cannot be done without the support of a future administration.

Weaker competitive position

Mark Calabria, Director of the Federal Housing Finance Agency Image courtesy of the FHFA

The new deal places limits on Fannie and Freddie, leaving more room for competitors. The most obvious limits are an annual cap of $ 80 billion and the requirement that at least half of creations be on properties that meet an affordability threshold. The FHFA has set annual ceilings in the past; for 2021, it is $ 70 billion, after a limit of $ 80 billion in 2020.

The new cap is permanent, although it can be changed by agreement between Yellen and the director of the FHFA. This gives Calabria some control over whether he can remain director of the FHFA until the end of his term, a possibility which depends on the outcome of the trial in the Supreme Court.

Another element of the deal is that it allows GSEs to keep their capital above the previously agreed level of $ 45 billion ($ 25 billion for Fannie and $ 20 billion for Freddie). To date, Fannie has amassed around $ 21 billion and Freddie $ 14 billion, according to CREFC. Now, however, agencies can retain profits of up to a total of $ 280 billion, which is what the FHFA has estimated to be the level necessary for privatization.

For more than a decade after trusteeship began in 2008, Fannie and Freddie were forced to sweep profits into federal coffers. Preferred shareholders of GSEs, which own around $ 31 billion in preferred shares that have not received a dividend since 2008, remain involved in a lawsuit that argues the cash transfer agreement was illegal. The Supreme Court is expected to rule on the case during its current term, which ends in June.

Another element of the new agreement is that it ties GSEs to the capital framework adopted by the FHFA in 2020. The rule requires GSEs to maintain a level 1 capital of 4% of assets, which is equivalent to an increase in the amount. regulatory capital. GSEs must hold on. This serves to protect them from losses but also increases their cost of capital.

Freddie Mac’s headquarters. Image courtesy of Freddie Mac

Together, these and other elements of the new deal put Fannie and Freddie on a path to better financial health while slightly reducing their competitive position in the multi-family housing market. The main advantage of GSEs has been their low cost of capital, which allows them to beat their competitors on lending rates. This advantage is somewhat diminished by the higher capital threshold. Meanwhile, Fannie and Freddie are also limited by origination limits and the requirement that half of their business must include properties that meet the affordability test.

Mixed reviews

Permanent reform has been under discussion for years and the commercial mortgage industry would prefer a permanent framework for GSEs, but a deal was not possible. No solution has achieved consensus among policymakers and the absence of a looming problem in mortgage markets has made it less of a political priority.

As such, the new agreement is welcomed by most of the industry. Lenders such as commercial banks, insurance companies and CMBS programs would all want a better competitive position with GSEs so that they can make more loans on apartments. The usefulness of the agency model, however, was demonstrated in 2020 during the pandemic, when Fannie and Freddie remained active as most lenders stopped writing new business due to COVID-19.

Rob Van Raaphorst, vice president of communications at MBA, said the new deal “preserves and expands a level playing field for lenders of all sizes and business models while avoiding short-term measures that could have threaten market stability… This is extremely important. that measures to guide the market footprint of GSEs carefully balance the need for them to fulfill their mission of affordable housing for single and multi-family homes.

For some, the action was mostly about optics, as most changes can be undone when new appointees gain oversight powers. “The only thing that happens is that the profits can continue to be held,” said a longtime industry insider. “The rest is about optics and politics and it’s unlikely to last very long.”


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