Page 32 - January 16, 2025 Bulletin

BUSINESS PARTNERfeature article

The Next Step for the GSEs

Andrea F. Pringle

Financial Strategist and MBS analyst
The Baker Group

The reelection of Donald Trump to the US presidency has Their Conservatorship Arrangement
ignited a flurry of speculation about whether his second
administration will attempt to reprivatize Fannie Mae and
Freddie Mac, also known as government-sponsored enterprises Prior to the GFC, the GSEs were funded entirely with private
“GSEs.” President Trump previously sought to end the capital but had a $2.25 billion line of credit with the Treasury,
conservatorship of Fannie and Freddie in his first term, but which was interpreted as an implied government backing. As the
those endeavors were cut short when his tenure came to an housing market deteriorated, the ability of the GSEs to service
end. The effort is expected to gain momentum under the their $5+ trillion of outstanding debt became questionable
second Trump administration as his party will also control and the government intervened. That intervention came in the
both branches of Congress. If the Trump administration does form of “conservatorship,” which is a legal status that allows
pursue privatization, the process is unlikely to move quickly as their regulator, the Federal Housing Finance Agency “FHFA,”
several significant hurdles remain. to essentially fulfill the role of and replace the rights of the
companies’ shareholders and board of directors.

Background
The Treasury also stepped in financially through a formal
“Preferred Stock Purchase Agreement” (PSPA) that assured the
Fannie and Freddie are technically private, shareholder owned Treasury would support the creditworthiness of both companies.
corporations but have been under government conservatorship In the first few years of conservatorship, the GSEs drew about
since the Global Financial Crisis “GFC” (September 2008). They $190 billion in funding from the Treasury in the form preferred
were chartered by Congress with a public mission to promote stock and warrants. In return, they were required to send most of
homeownership and provide stability to the mortgage market. their profits back to the Treasury for repayment. Consequently,
Due to their conservatorship arrangement, the US Treasury has the GSEs were not retaining earnings to rebuild capital until
the largest financial interest in Fannie and Freddie today, akin to a 2019 amendment under the first Trump administration
that of a majority shareholder. permitted them to retain some of their earnings.

As a reminder, the GSEs don’t originate or service mortgage loans Even after the Treasury’s capital injection was paid back, the
themselves. They buy and securitize mortgages originated by other Treasury continued to receive the bulk of GSEs’ profits. Those
lenders and guarantee the principal and interest, which transforms payments have gone into general Treasury funds, reducing the
individual mortgage loans into marketable bonds. This enables amount the government has to borrow each year. Since the
a competitive takeout for lenders, which means they don’t have 2019 amendment, Fannie and Freddie have been permitted to
to hold loans on their books or hold capital against them. It also maintain modest capital reserves.
enables non-depository institutions to compete in the space, all of
which helps to bring the cost of mortgages down.

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