Mission (Im)Possible? Charting a Path Out of GSE Conservatorship (If Policymakers Choose to Pursue It)

Chris Bennett is chairman of mortgage industry hedge advisory firm Vice Capital Markets, now in its third decade of service to mortgage lenders across the country.

More than 15 years after being placed into conservatorship, Fannie Mae and Freddie Mac continue to play a central role in the functioning of the U.S. mortgage market. The conservatorship structure was never intended to be permanent, yet it continues largely unchanged. While there is renewed discussion about what it would take to release the government-sponsored enterprises, or GSEs, the path forward is complicated. Any solution must address capital, structure and the role of the federal guarantee, all of which have significant implications for lenders, investors and borrowers. It is, in effect, a complex mission waiting to be claimed.

The capital requirement
The largest obstacle is capital. Combined, Fannie Mae and Freddie Mac hold roughly $150 billion to $170 billion in net worth. While that may appear substantial, it falls short of the level required to operate as fully private, well-capitalized institutions.

When the federal government placed the enterprises into conservatorship in 2008, it did so with a senior preferred stock agreement carrying a 10 percent dividend. In August 2012, the terms were amended so that nearly all profits were swept to the U.S. Treasury. When the structure was updated again in 2019 and 2021, policy shifted to allow the GSEs to retain earnings to build capital. However, as compensation, the liquidation preference, meaning what the GSEs would have to pay to exit conservatorship, increased the government’s senior claim dollar for dollar. Even as policy has shifted to allow some capital retention, the accumulated obligation remains large and continues to grow with every dollar retained.

To exit conservatorship under the current structure, the enterprises would need to raise more capital than the public markets have ever absorbed in a single offering. Various analyses suggest that fully paying off Treasury and meeting post-crisis capital standards could require several hundred billion dollars of equity, potentially $600 billion to $700 billion. By comparison, the total value of all initial public offerings in the United States in a typical year is around $50 billion to $60 billion. The math alone explains why capital remains one of the primary barriers.

The policy and political considerations
Even if the capital challenge were addressed, Congress would still need to act. The current administration cannot unwind the conservatorship in a meaningful or permanent way without legislative direction. Historically, this has been the limiting factor. Other priorities have taken precedence, and the mortgage market has continued to function under the status quo.

There is also disagreement over the nature of the federal guarantee. Some policymakers support an explicit guarantee similar to Ginnie Mae’s model. Others prefer a reserve structure that provides protection without a full government backstop. These differences matter. The structure of the guarantee directly affects pricing, taxpayer exposure and the competitiveness of the secondary market. Any legislative solution would need to resolve these questions in a way that offers durability and clarity for investors.

What competition could look like
Conservatorship has also affected how the enterprises compete. Before the financial crisis, average guarantee fees, commonly called g-fees, were about 15 to 25 basis points. Recent reports from the Federal Housing Finance Agency indicate that average ongoing g-fees range from the mid-40s to the low-60s in basis points, depending on product mix. These fees are assessed in addition to risk-based loan-level pricing adjustments, or LLPAs, which can translate into an additional quarter point to a full percentage point in interest rate for some borrowers. Part of the increase reflects post-crisis risk standards, while some is the result of the environment created by conservatorship. When two organizations with similar mandates operate under the same regulator with limited flexibility, pricing naturally converges.

If Fannie Mae and Freddie Mac were released under a structure that allows for true competition, pricing pressure could emerge. That scenario, should policymakers choose to pursue it, would depend entirely on how the framework is built, how capital requirements are set and how the federal guarantee is defined. In a more open system, there may also be room for additional entities to participate in the conforming market. The Uniform Mortgage-Backed Security, introduced in 2018, was designed in part with that possibility in mind.

Lower guarantee fees would not solve affordability challenges on their own, but they would be reflected directly in mortgage pricing. If the future system promotes competition, lenders and borrowers could see benefits. Whether that happens depends on choices policymakers have not yet made.

What a workable exit might require
A realistic path likely exists between two extremes. If the federal government maintains its full senior preferred claim, the capital required to release the enterprises becomes prohibitively large. On the other hand, a substantial reduction or restructuring of that claim could make an exit feasible, though the enterprises would still require significant capital infusions. The impact on existing shareholders would be uncertain, as would the valuation of any newly issued equity.

Timing also matters. A release from conservatorship requires congressional alignment, which is not often achieved. Even with political interest, the window for action is narrow. If the opportunity passes, the issue may again recede into the background. As with any complex mission, success depends not only on design, but also on timing and commitment.

Releasing the enterprises from conservatorship will require difficult decisions, particularly regarding capital, the federal guarantee and the future competitive landscape. If a new framework is designed thoughtfully, it could produce a system that is more open, more flexible and potentially more competitive. That may lead to improvements in pricing and access to credit, but those outcomes depend entirely on the structure policymakers choose.

The conservatorship was never meant to be permanent. Whether it ends will depend on the willingness of Congress and the administration to address an issue that is complex yet foundational to the housing finance system, a mission only they can choose to complete.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)