Fannie and Freddie: The End of Conservatorship

Hello Hampton Roads,

I read an intersting article about a talk that Mark Calabria, the Director of the FHFA gave to the MBA (Mortgage Bankers Association) a little more that a week ago that advocates moving Fannie Mae and Freddie Mac out of government conservatorship. As many of you remember, back in Sept. 2008, these 2 GSEs were placed under conservatorship and given about $200 billion  to stay solvent (this wasnt a gift, they've paid this money back and more) and help prevent further de-stabilization of the housing market.  Both entities are now turning a profit and with more than 10 years of conservatorship, what started as a temporary solution is turning out to be more long term than anticpated.

What are the roles of Fannie and Freddie?  They purchase loans from lenders and package those loans into MBS (Morgage Backed Securities) guarantee the payment and sell them to investors.  Since the banks/lenders can sell their loans to Fannie and Freddie, they have more money availble to make more loans to other buyers. It keeps the market liquid.

Since the housing crisis, both GSEs have grown in size with the US government guaranteeing the majority of home loans made today thus putting more risk on the American taxpayers.   In Dr. Calabria's talk he says that the capitalization of Fannie and Freddie is leveraged nearly "1000 to 1"!

Let's talk about this 1000 to 1 leverage--it's definitely not a good thing to be hugely undercapitalized and not financially secure but Fannie and Freddie were only allowed to keep $3 billion in capital for both companies with a quarterly sweep of anything above this $3 billion level going directly to the Treasury. As of last September 2018, they have paid back $279.7 billion. The taxpayers made out but the shareholders suffered and law suites ensued.

The vision for post-conservatorship endures.  A couple of options to moving forward were given in Dr. Calabria's talk:

  • Issue more GSE charters so that it is not just 2 entities that bear the risk and are thought of as being "too big to fail" and, 
  • Fannie and Freddie must raise capital by ending the quarterly sweep and or through public offerings to raise cash or both.

As Dr. Calabria said, "I don't make a habit of predicting the future, but if there's one thing I know for sure it's that Fannie and Freddie will look much different at the end of my five-year term than they do today...the status quo is no longer an option. The status quo is over."

It will be interestng to see what the future holds!

Thanks for Reading,


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