Senators Push Back Against FHFA Efforts to Release Fannie and Freddie from Conservatorship

A bipartisan group of Senators recently sent a letter urging Federal Housing Finance Agency (FHFA) Director Mel Watt to wait on “comprehensive reform” from Congress before “taking any steps that may facilitate the release of government sponsored enterprises, Fannie Mae and Freddie Mac, out of conservatorship.”

Their letter is written in response to efforts by congressional Democrats last month, asking the FHFA to do the opposite. FHFA Director Watt has publically supported the rebuilding of GSE capital calling their lack of capital the “most serious risk” they face.

The reality of the situation is that Fannie Mae and Freddie Mac directly contributed to the housing bubble and economic collapse in 2007-08 by artificially expanding homeownership to unsustainable levels, which resulted in a loss of over $9 trillion in home equity.

As the authors of the letter correctly acknowledge “the pre-crisis GSE model came with a laundry list of government-provided benefits that gave the GSEs a competitive advantage in the market and put taxpayers at risk. Beyond the sizable and ongoing government support provided since 2008, that list of benefits included a direct line of credit to the Treasury; tax-exempt status from state and local jurisdictions; the ability to issue special SEC-exempted TBA securities; the ability for the Federal Reserve to purchase GSE securities through monetary policy operations; favorable capital treatment for GSE securities, which make holding them less costly for banks; and the GSE federal charter, the primary source of the implicit government guarantee. Put together, these benefits facilitate a government-backed duopoly that led to excessive risk-taking and cost taxpayers and the economy dearly.”

The threat of GSEs destabilizing the housing market remains as their presence continues to crowd out private actors and delay a healthy recovery of the housing market. Comprehensive legislative reform should wind down and completely abolish GSEs altogether.

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