WILL THE GSEs EXIT CONSERVATORSHIP THIS YEAR?

WILL THE GSEs EXIT CONSERVATORSHIP THIS YEAR?

An Interview with Dr. Michael Stegman, Senior Fellow, Housing Finance Program, Center for Financial Markets at the Milken Institute

By Brian Honea

The once mighty GSEs were controversially forced into conservatorship by the FHFA in September 2008 amid the greatest housing crisis the country has ever seen.

The FHFA has now been operating the GSEsin conservatorship for a dozen years and theconservatorship remains just as controversial as it wasin 2008 as Fannie Mae and Freddie Mac continue toturn profits. In the months leading up to the presidentialelection, rumors swirled regarding a possible exit fromconservatorship in 2021, but just how likely is that?

The Mortgage Banker Magazine recently spoke withDr. Michael Stegman, Senior Fellow, Housing Finance Program, Center for FinancialMarkets at the Milken Institute and a former senior policy advisor for housing on thestaff at the National Economic Council, and former counselor to the secretary of theTreasury for housing finance policy about that possibility.

MBM:

What is the prospect of the GSEs exiting conservatorship in 2021?

Stegman:

If there is not a premature release under a consent order before January 20, which I think would be a very big mistake, I am quite certain that the GSEs will still be in conservatorship by the end of 2021. Unlike the Trump administration, the Biden team will not see ending the conservatorships as a policy priority. They will take their time formulating their strategy for the future of the GSEs and the role government should play in a reformed housing finance system.

MBM:

There have also been rumors that the conservatorship will end in 2024. How would you address that?

Stegman:

As I said, ending the conservatorship is not going to be a be all, end all policy goal of the Biden administration. It will be the natural outgrowth of a GSE reform strategy that I think ultimately will involve at least one more serious effort at bipartisan legislation to clean up what you can’t do administratively, such as an explicit paid-for federal guarantee of their MBS. To say 2024 is purely speculative, likely based on a combination of the time it would take for the GSEs to build capital to required levels, and more importantly, a recognition that the new administration has many other major crises to deal with before it turns to GSE reform. I can’t say if they are going to exit in 2024, but it’s certainly not going to be near term. As I said, recapitalizing and releasing the GSEs is not a Biden administration policy goal. In terms of a timeline, I would think that they would want to keep the GSEs in conservatorship at least until we reach the other side of the pandemic to maximize their role in helping struggling families who are on the edge of eviction and losing their homes because of the pandemic. Before settling in on a plan for the future, the team will take a real serious look at how the GSEs could improve racial equity and do more to help close the racial homeownership gap. Those are going to be far more important than putting a date certain on ending the conservatorships.

MBM:

What must happen for the conservatorship to end? There would seem to be more pressing matters to contend with in housing.

Stegman:

There really are. When I look at 2021, there are several critical dates, none of which marks an exit. One is January 5, which will determine the Senate majority and which party controls which bills are brought to the floor for a vote. We have the Collins v. Mnuchin decision coming down from the Supreme Court, possibly in June, which will determine the administration’s options for changing the director and direction of FHFA. A third date I’m paying particular attention to, and I hope the administration will too, is Oct. 1, 2021. This is when the temporary 10 basis point addition to the GSEs’ guarantee fee on single family mortgages expires, which Congress imposed as pay-for for a two-month extension of a temporary payroll tax cut during the financial crisis a decade ago. When that 10-basis point “mortgage tax” expires, rather than reducing the g-fee, the $4-$5 billion in annual revenues it generates should be redirected to support affordable housing, and there needs to be a strategy for that. I think there is a way of doing this without an act of Congress, but there is also a legislative opportunity there. These are all critical 2021 dates that are going to have significant effects on the future of the GSEs and the administration’s efforts to move the dial on black homeownership, racial equity, and more.

MBM:

How will the residential mortgage market be affected if the GSEs do not exit conservatorship this year?

Stegman:

The market is working well now although credit is a little tighter and we expect to see low interest rates for some time because of the slowed economy and the effects of the pandemic. So, I wouldn’t expect any market disruptions from continuing conservatorships or from significantly extending the exit ramp. On the other hand, a premature exit, especially through a consent order before January 20th, could well cause chaos throughout the mortgage finance system. Given the serious macroeconomic challenges we face, it would be wrong for the outgoing administration to set the GSEs free as they head out the door after professing that exiting conservatorship will be based on milestones reached, and not the calendar. The public interest requires, and the Biden administration deserves, to have maximum policy room to address the serious housing challenges the nation confronts as we turn over a new year.

Michael Stegman

Senior Fellow, Housing Finance Program, Center for Financial Markets | Milken Institute