The Agencies Have Been Recapitalized Somewhat… Now What?

No one expects conventional conforming rates to drop if & when they leave conservatorship which they’ve been in for over 16 years. The Federal Housing Finance Agency (FHFA) and the U.S. Department of the Treasury (Treasury) announced amendments to the Preferred Stock Purchase Agreements (PSPAs) governing the conservatorships of Fannie Mae and Freddie Mac (the GSEs).

The MBA points out that the amendments “make various modifications, including deleting previously portions of the PSPAs that were suspended through the September 14, 2021, Letter Agreements, clarifying that the GSEs must meet the capital requirements established by FHFA as those rules are modified over time, and technical changes or clarifications applicable to the GSEs’ financial reporting. Notably, the amendments also reinstate the requirement for Treasury's consent prior to terminating the conservatorships and incorporate a side agreement between Treasury and FHFA to establish a process for eventual public input on termination options and potential impacts.

In a press statement, MBA President and CEO Bob Broeksmit, CMB, said, “The MBA believes strongly that any efforts to remove Fannie Mae and Freddie Mac from their federal government conservatorships must fully consider the impact on single-family and multifamily housing markets and overall financial stability. This includes the critical move that Congress establishes an explicit federal backstop for mortgage-backed securities. Conservatorship was never intended to be perpetual, and we support efforts toward the GSEs' release. We appreciate the rationale behind today’s changes to the PSPAs, which are designed to foster transparency across government agencies, share market impact analysis, and give appropriate time for market participants to provide feedback on proposed reforms.

“The suspended portions of the PSPAs that were deleted through this amendment were the artificial limits on GSE acquisitions of loans secured by second homes and investment properties, loans with multiple risk factors, lenders’ use of the cash windows, and multifamily lending volumes caps. These disruptive and unworkable backward-looking limits were initially suspended in response to intense MBA advocacy, and we welcome their removal from the PSPAs… The MBA strongly believes conservatorship was never intended to be permanent and supports efforts toward a careful and deliberate release of the GSEs' with appropriate reforms.”

Ed Groshans with Compass Point Research and Trading, LLC, has thoughts that are blunter. “Treasury’s and Federal Housing Finance Agency’s (FHFA) action clearly indicate that the Biden administration is concerned that President-elect Donald Trump will attempt to release Fannie Mae and Freddie Mac from conservatorship, in our view. Publishing these documents is positive for the GSEs in our assessment.

“The Biden administration last amended the Preferred Share Purchase Agreements (PSPA) in September 2021, and now, 17 days before Trump is sworn into office, it amends the PSPAs and attempts to establish a notice and comment period for an orderly exit as well as a requirement to brief the Financial Stability Oversight Council (FSOC), an entity that since its inception has not determined the GSEs to be systemically important financial institutions (SIFI).

“If the Trump administration determines to recap and release the GSEs, there are several actions it could implement: 1) amend the PSPAs again and modify the elements that hinder recap and release, 2) issue an executive order nullifying the recent changes, 3) determine that the changes exceed the statutory authority of FHFA and rescind them, 4) adhere to the changes and complete them in an expedited process (i.e., <12 months), or, less likely, 5) ignore them and face potential litigation.

“Our take is Trump is likely to release the GSEs. There is no other reason for the Biden administration to make these changes other than to attempt to prevent the release of the GSEs. The Trump transition team is working with each federal agency to prepare to implement Trump’s agenda once he is inaugurated. It appears that the preparations at Treasury and/or FHFA have raised concerns for the Biden administration, which resulted in the publication of the letter agreement and side letter agreement.

“Treasury and FHFA are part of the government’s executive branch. The President oversees the executive branch. Yesterday’s action to amend the PSPAs were done at the direction of or in consultation with President Biden. Once sworn in, Treasury and FHFA will report to Trump who will direct the agencies’ actions and any of the recent changes that are not aligned with Trump’s goals will be undone.

“The Housing and Economic Recovery Act (HERA) created FHFA and set its authority as conservator of the GSEs. HERA Section 1367 (a)(7) states: AGENCY NOT SUBJECT TO ANY OTHER FEDERAL AGENCY. ‘When acting as conservator or receiver, the Agency shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of the Agency.’ The changes yesterday would require FHFA to receive Treasury’s written consent prior to ending conservatorship, to receive public input on options for ending conservatorship, and brief FSOC on the public input received.

“Each of these requirements appears to be in direct contravention of the statutory text of HERA. The letter agreement’s clarifications would set heightened standards. The letter agreement’s PSPA changes would require the GSEs to meet the Enterprise Regulatory Capital Framework (ERCF). Specifically, it states, the GSEs ‘shall comply with the’ ERCF. Our assessment is this means the GSEs must meet the minimum RBC requirements plus the buffers. ERCF requires Fannie to hold adjusted total capital of $187 billion as of 3Q24. Freddie's adjusted total capital requirement was $141 billion for 3Q24.

“The amendments specifically state that any paydown of Treasury’s investment would be applied to the liquidation preference. As of 3Q24, Treasury’s liquidation preference of its FNMA senior preferreds were $208 billion compared to the book value of $121 billion. Its Freddie senior preferreds liquidation preference was $126 billion versus the book value of $73 billion as of 3Q24.”

Ed’s note wrapped up with, “Our primary takeaways are that the Biden administration implemented these changes to prevent the incoming Trump administration from releasing the GSEs from conservatorship. The changes will only hold any force to the extent they are permitted to remain in place by the Trump administration. Congress did not pass a law requiring these changes. Any changes implemented by one administration can be altered or eliminated by a subsequent administration. We view the action as the clearest signal yet that the Trump administration will begin the process to release the GSEs.”