EXECUTIVE SUMMARY:

• The release of the GSEs from conservatorship is one of the last remaining pieces to clean up from the GFC, but the stakes of releasing Fannie Mae and Freddie Mac (F&F) are high given that abundant and affordable mortgage credit is the lifeblood of the US housing market. In this piece, we provide an overview of possible outcomes and their potential impact on mortgage rates and the housing market.
• We see four clear paths forward, including a legislative release through Congress, an administrative release through the Executive Branch, the maintenance of status quo under conservatorship, and a value release without ending conservatorship. That said, the Trump administration appears comfortable pushing ahead with a creative administrative release that would see the government retain substantial ownership in F&F.
• Allowing the release of Fannie & Freddie from conservatorship in a way that materially impacts mortgage rates and systemic risks while enriching investors is an untenable outcome. The Trump administration appears aware of this and is attempting to find a solution that benefits F&F investors without meaningfully hurting consumers.
• Despite the Trump administration’s stated goal of releasing the GSEs from conservatorship without impacting consumers, we question whether the release of a well-capitalized F&F can be executed without commensurate pressure on mortgage rates.
• That said, we expect that the associated pressure on mortgage rates and the negative impact to housing demand will be manageable.

Fannie Mae and Freddie Mac (F&F) are the twin government-sponsored enterprises (GSEs) at the center of the US housing finance system. In conservatorship under the oversight of the Federal Housing Finance Agency (FHFA) since 2008, F&F collectively guarantee ~$6.7 tn in mortgage-backed securities (MBS), roughly half of all US mortgage debt. Their business model is focused on providing liquidity to lenders by purchasing residential mortgages (single-family and multifamily), securitizing them into agency MBS, and guaranteeing investor principal and interest in exchange for a fee.

The release of the GSEs from conservatorship is one of the last remaining pieces to clean up from the GFC. At this point, the conservatorship era appears closer to its end than its beginning, but exactly when and how it concludes will define the legacy of the 2008 crisis and set the course for housing finance for decades to come. We see four paths forward: utilizing congressional authority to legislate a release, relying on the Trump administration to pursue an administrative release without congressional action, maintaining the status quo of conservatorship, or pursuing a value release for common shareholders without ending conservatorship.

Allowing the release of F&F from conservatorship in a way that materially impacts mortgage rates and systemic risks while enriching investors is an untenable outcome. The Trump administration appears aware of this and is attempting to find a solution that benefits both F&F investors and taxpayers without hurting consumers. We question whether the release of a well-capitalized F&F can be executed without commensurate pressure on mortgage rates, though we believe that the pressure on mortgage rates and the associated impact on demand would be manageable under most plausible outcomes.

Implications for Homebuilders & the Housing Market

We expect that any exit from conservatorship would attempt to limit perceived credit risks within the deeply liquid agency MBS market by bolstering the financial resilience of these strategically important businesses while maintaining the quasi-explicit backing of the US government. If done well, the release of F&F from conservatorship would likely have only a modest, though decidedly negative, impact on the broader housing market. That said, the Trump administration appears willing to get creative with a new structure, potentially structuring a “deal” that would allow value to accrue to common shareholders while maintaining a sizable ownership share in F&F through Treasury.

Assuming F&F are released without meaningfully increasing perceived agency MBS credit risk, which is not a certainty, guarantee fees (g-fees) appear to be the likely mechanism that will modestly increase mortgage rates for consumers post-release. G-fees sit at the core of F&F’s business model, and they represent F&F’s compensation for securitizing mortgage assets and providing protection against credit losses from those securitized products.

Under normal market conditions, g-fees are the primary driver of F&F’s earnings, implying that they must be high enough to clear return on equity (ROE) hurdles for investors.

For context, g-fees were held at extremely low levels of ~20-30 bp prior to the GFC (versus ~65 bp on recent originations).