If Britney Spears is out of conservatorship after 13 years, why not Fannie Mae and Freddie Mac?

No senator asked that question of Sandra Thompson at her confirmation hearing to be the director of the Federal Housing Finance Agency, but several pressed her on ending the conservatorships.

Although a small regulatory body, the FHFA is unlike other financial institution regulators by virtue of its role as conservator of Fannie Mae and Freddie Mac, the government-sponsored enterprises. It is the unfettered manager of the firms that dominate housing finance in this country with a 60% market share. They guaranteed more than $2.5 trillion of new mortgages last year, which pushed their combined balance sheet to nearly $7 trillion.

The FHFA took control of Fannie and Freddie as a critical step, with the assistance of massive Treasury guarantees, in limiting the damage of the financial market crisis of 2008. It was meant to be only a brief timeout, not 13 years and counting.

There was wide consensus in the early days that the failures of those GSEs reflected their seriously flawed structures of private profits and socialized losses. Politicians of both parties agreed that the housing behemoths needed to be replaced by a new structure that wouldn’t concentrate so much risk on taxpayers and wouldn’t use government power to underprice the private sector. Sporadic legislative attempts to create that new structure have failed. The sense of urgency has disappeared. The current administration has shown no real interest in ending the conservatorships.

Over the past six months, the FHFA has reversed a 2020 increase in fees for refinance loans, eliminated restrictions on the purchase of high-risk loans, proposed a sharp reduction in the GSEs’ capital requirements, and raised the conforming loan limits. In high-cost areas, they can now buy loans up to almost $1 million and elsewhere $647,200, which is 85% more than the median house price.

Since the Supreme Court ruled that the director serves at the pleasure of the president, the agency is no longer independent. Every new administration can completely reorient the FHFA to suit its own interests. Even though the Executive branch controls Fannie and Freddie, their growing $7 trillion of liabilities are off-budget and not counted against the debt limit.

Some are pushing the FHFA to direct Fannie and Freddie to raise prices for some borrowers and use the extra profits to benefit (cross-subsidize) other lower-income borrowers. Early signs are that the Biden administration agrees. Such thinking may turn out to be costly — the special affordable programs of Fannie and Freddie were the worst money losers in the GSEs’ pre-crisis portfolios and wiped out too many lower income Americans’ net worth. Despite these well-meaning programs, homeownership rates are the same now as they were in 1997, and in 1980 for that matter. In recent years, increasing demand for houses in lower price tiers, stimulated by policies designed to help low- and moderate-income borrowers have mainly served to push up the prices of homes to first-time buyers, making them less affordable.

House prices are soaring at 16% annually. In view of the increasing risk of price reversals, as interest rates rebound, sanity — and safety — strongly argue for fee increases now on all Fannie/Freddie business, not on just a few high-end categories. Policies that make it easier for borrowers are too reminiscent of the beginnings of the bubble that burst 15 years ago.

The FHFA took a bold regulatory step in 2020 to incent Fannie and Freddie to raise their charges when housing markets are hottest by tying capital requirements to market conditions. That countercyclical policy is critical in preventing the massive peaks and valleys in house prices. However, that only works if the FHFA directs the GSEs to respond to overheated markets.

It is long since time for Congress to address the future of Fannie Mae and Freddie Mac. Yes, housing prices have performed well over the past decade, and the FHFA has made many improvements in the GSE’s risk management. But the extraordinary house price inflation cannot continue. The temptation to use them as a big piggy bank for housing programs has intensified as the interest in preparing them for dissolution or privatization has dissipated.

Improvements made by the previous FHFA director to make it easier to exit conservatorship are being undone. Despite our years of pressure, Congress waited far too long to prevent the housing crisis in 2008. Market reliance on the GSEs and outstanding portfolios are bigger than ever. Now is the time to act.

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