After the 2008 Great Recession, the government bailed out Fannie and Freddie to save them from insolvency and placed them in conservatorship. Congress created the Federal Housing Finance Agency (FHFA) to regulate the companies, giving it broad authority to put them in a solvent condition and preserve their assets.
The FHFA entered the GSEs into an agreement with the Treasury Department, under which their net profits would be swept into the Treasury to repay their debt.
Since then, the FHFA has reigned in the GSEs’ more risky activities. With Congress unable to enact broad GSE reform legislation, the Trump administration has been working independently to return Fannie and Freddie to the private sector.
Biden undoubtedly will want to change this path, although he may face some hurdles depending on events over the next few months.
The Trump “Recap and Release” Plan
The Trump administration’s game plan for Fannie and Freddie, often referred to as recap and release, first involved building the GSEs capital to bolster their safety and soundness. Once they were recapitalized, they could exit government conservatorship and compete as private companies with the private-label securitization market.
Recapitalization meant allowing Fannie and Freddie to retain more of the profits that currently are being swept into the Treasury, as well as sell shares in public offerings. Reducing the size of Fannie and Freddie’s loan portfolios would further reduce their risks in financial downturns.
Leading this effort has been FHFA Director Mark Calabria. Since assuming that post in April 2019, Calabria has begun to recapitalize the two enterprises by working with Treasury Secretary Steve Mnuchin to reduce the profit sweeps. Even after it became apparent that Biden would be president, Mnuchin testified before Congress that the Treasury and the FHFA are considering a consent order to release Fannie and Freddie from conservatorship before their full capital levels are reached—probably with some government restrictions.
What to Expect From the Biden Administration
President-elect Biden is expected to roll back the Trump administration’s recap and release program. Given his campaign pledges to make housing more affordable and address economic inequality, he’s likely to want to use Fannie and Freddie as tools to increase the availability of low-interest mortgages.
Since higher capital requirements would make their mortgage pool smaller, the GSE profits would likely be returned to the government rather than be retained by the companies. In this case, it’s likely that Fannie and Freddie would remain under government control with an expanded affordable-housing mandate.
A Wild Card: The Supreme Court
Any plans that Biden has, however, could prove to be more difficult if a consent order is reached between the FHFA and Treasury to release Fannie and Freddie from conservatorship before he takes office—particularly if he can’t fire FHFA Director Mark Calabria before his five-year term expires in 2024.
In that regard, the U.S. Supreme Court will have its say. On Dec. 9, 2020, it heard oral arguments in the case of Collins v. Mnuchin, which will determine whether the FHFA’s structure is unconstitutional because it’s headed by a single director who can be removed by the president only for cause (inefficiency, neglect of duty or malfeasance.)
If the Supreme Court rules that the FHFA’s structure is unconstitutional, Biden would be free to replace Calabria. Most observers expect the court to give him that power since it recently declared the Consumer Financial Protection Bureau’s (CFPB) similar single-director structure to be unconstitutional—but the FHFA’s powers are not generally considered to be as far-reaching as those of the CFPB, and a declaration of unconstitutionality could impact the future of other independent federal agencies. U.S. Supreme Court opinions typically are handed down by the last day of the court’s term in late June or early July.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.