FREJN - White House And Treasury Housing Leadership Should End GSE Conservatorships

2023-12-13 04:48:50 ET

Summary

• Fannie Mae and Freddie Mac have been retaining earnings since 2019 on their path out of conservatorship.
• The government has been sued by investors for imposing the net worth sweep, but courts have mostly ruled in favor of the government.
• The White House, FHFA, and Treasury are now engaged in discussions about increasing housing supply and potentially ending the conservatorships.

Fannie Mae ( FNMA ) and Freddie Mac ( FMCC ) are two companies that were placed into conservatorship in 2008. Since 2019 they have been retaining earnings on their path out of conservatorship. Investors have sued the government for imposing the net worth sweep saying that it was a takings and that it was illegal. The courts have ruled that the government can do whatever it wants and that it isn't a takings if they take everything for nothing --- because the law is written to enable FHFA to act in its own best interests. There are still two valuable pieces of pending litigation, the ROP case and the class action case where a jury ruled that the government breached the contracts of shareholders. The rulings so far, however, continue to leave the outcome here to administrative action.

Investment Thesis

Ending the conservatorships of Fannie and Freddie, according to the government's CBO report would put junior preferred stockholders in a position to be made whole. The $100B of warrant proceeds from the CBO report could then be allocated across the 435 congressional districts or $230M per congressional district to address local affordable housing initiatives nationwide. Since the Supreme Court ruled that FHFA is a pollical appointee position, continued conservatorship leaves their current policies unprotected from the next FHFA director from using its endless powers as conservator to change everything around. Thus, the Supreme Court ruling makes continued conservatorship more risky than ending the conservatorships. Administrative action can be taken by any presidential administration to restructure Treasury's equity stake and end the conservatorships. Treasury already has an agreement in place with the companies to do just this that it entered into in 2021 but has not yet been implemented as the companies continue to retain capital.

White House Is Engaged

The Director of the National Economic Council Lael Brainard spoke at a housing symposium December 7. This is notable in its own right because this is the first time she publicly talked about housing. In her prepared remarks I found two interesting snippets:

Our first major priority is increasing the supply of affordably priced homes in order to lower housing costs. We are using every lever at our disposal – legislative proposals, our administrative authorities , our convening power, and our bully pulpit – to do so.

...

But we cannot wait for Congress to act . Through our Housing Supply Action Plan, we are reducing barriers to housing and offering new and improved financing for affordable housing development.

Housing Supply Action Plan

When you look at the Housing Supply Action Plan , it was announced May 2022 to close the Housing Supply gap in 5 years. Although there are no explicit references to Fannie and Freddie, this plan was released a month after FHFA released its strategic 5 year plan for FY 2022-2026. Executing objective 1.3.3 ends the conservatorships:

Oversee the Enterprises' implementation of capital plans to achieve regulatory capital requirements

2021 Fact Sheet

The Housing Supply Action Plan is based on a September 2021 fact sheet where Biden says they will do everything they can to produce more affordable housing:

President Biden is committed to using every tool available in government to produce more affordable housing supply as quickly as possible , and to make supply available to families in need of affordable, quality housing – rather than to large investors.

This fact sheet addresses learning and listening sessions:

Launching Learning and Listening Sessions with Local Leaders: The persistent imbalances in the U.S. housing market have formed over many decades and it will take concerted effort and iterative policymaking to correct them. To this end, the White House, HUD, and FHFA will convene state and local officials and stakeholders for a series of peer learning and listening sessions. These sessions will allow for the exchange of best practices on locally led zoning reform to address supply and affordability challenges, including a virtual session on accessory dwelling units hosted by FHFA in September. The sessions will also identify the obstacles to implementation that remain, which the President’s Build Back Better Agenda and potentially federal administrative action, can help address .

One such listening session was held in Franklin TN in October of this year.

FHFA's Sandra Thompson flew to Franklin TN to talk workforce housing in October. There she learned about how administrative action can help solve the affordable housing crisis. The Mayor of Franklin Ken Moore said this, "We are confident that Director Thompson will take these ideas and lead at a national level to enhance sustainable communities where everyone can live and work."

FHFA is engaged. Now Treasury is engaged.

Treasury Is Engaged

Now Treasury is engaged. Treasury's Deputy Secretary Wally Adeyamo traveled to Georgia to talk about the importance of investments to increase housing supply:

At 7:30 AM ET, Deputy Secretary Adeyemo will convene a roundtable with financial institution leaders on the importance of an equitable and inclusive national financial strategy . This event is closed press.

At 1:00 PM ET, Deputy Secretary Adeyemo and Atlanta Mayor Andre Dickens will tour Two Peachtree, a former office building that is being converted into a multi-use space that includes affordable housing units and a housing assistance center thanks to federal support for cities during the pandemic and economic recovery. Following the tour, the Deputy Secretary and Mayor will host a roundtable to discuss the importance of investments to increase housing supply and lower rental costs. This event is closed press.

FHFA and Treasury are now talking with local Mayors on the importance of investments to increase housing supply. The Biden administration has said before that such listening sessions would potentially lead to federal administrative action to help address obstacles to implementation.

Housing Industry Leaders Call For End of Conservatorship

The day the White House leaders spoke at Solutions 2023, David Stevens, Ted Tozer and Scott Olson published on HOUSINGWIRE that FHFA and Treasury should release the GSEs from conservatorship as soon as possible.

David Stevens directly gave me the following quote:

I think the growing call to release the GSE’s warrants attention by the administration. Clearly there is increased concern about the risks of an endless array of politically motivated FHFA Directors tinkering with these important companies. Release is the only option to protect them.

In their article they emphasize the problems with continuing conservatorship:

1. Continued conservatorship makes it harder for the GSEs themselves to focus on long-term management and housing affordability objectives.
2. Continued conservatorship makes it harder to retain talent at Fannie and Freddie as senior executives keep leaving after concluding there is no end of conservatorship in sight.
3. Continued conservatorship puts the taxpayers at risk in the event of a downturn when there is broad agreement around a true utility model.

The authors argue that FHFA has a duty to end the conservatorships:

But ultimately FHFA has the authority — even a duty — under HERA to take the GSEs out of conservatorship, working with the Treasury which holds its preferred stock.

Continued conservatorships seem to undermine the administration's policy objectives stated earlier.

Prior CFO of Fannie Mae Tim Howard

Tim Howard addresses his thoughts on why the Biden administration would want to resolve the conservatorships:

As I’ve said often, returning the companies to their former states of shareholder-owned companies, with capital requirements that allow them to set their guaranty fees on an economic basis to the benefit of lower-income borrowers (whose share of loans guaranteed by Fannie and Freddie has plunged since the conservatorships), should be a “wheelhouse” initiative for a Democratic administration that claims to support affordable housing. And as I detailed in my current post–which was written with the administration’s senior policymakers, and those who know or might influence them, in mind (and that I know has been circulated widely)–there IS in fact “An Easy Way Out” of the Fannie and Freddie conservatorships that would be a win for all stakeholders, and for which the Biden administration could take credit.

Will they embrace that way out? I wish I knew. But “kicking the can down the road” won’t result in a better resolution than the one I’ve proposed, and it WILL result in some other administration getting the credit (and the value of Treasury’s warrants for 79.9 percent of the companies’ common stock) for whatever that resolution ultimately turns out to be.

For further details see: