New Plans Envision Sharply Curtailed Role for Agencies
Fannie Mae (FNMA)’s net loss widened to $16.9 billion in 2011, the housing agency reported last week, up from $14.0 billion a year earlier. Under the terms of conservatorship, its current net-worth deficit of $4.6 billion will be expunged by an offsetting investment from the Treasury. After three and a half years of such offsets, the Treasury’s investment in Fannie Mae will reach $117.1 billion. In turn, Fannie Mae’s quarterly dividend payment will climb to almost $3 billion, ruling out a near-term return to profitability as it draws on its Treasury line simply to fund that payment.
Freddie Mac (FMCC), which had not announced fourth-quarter results as of last weekend, has received $71.2 billion from the Treasury thus far.
The announcement of Fannie Mae’s fourth-quarter loss coincides with renewed questions about the future of Fannie Mae and Freddie Mac (together, the Enterprises). The Federal Housing Finance Agency (FHFA), the successor of the Office of Federal Housing Enterprise Oversight, sent its updated plans for conservatorship to Congress on Feb. 21. Guided by its legislative mandate to “take such action as may be necessary to put the regulated entit[ies] in a sound and solvent condition,” the plan outlines very general steps the FHFA will take to 1) establish a new secondary mortgage market infrastructure, 2) reduce the market role of the Enterprises, and 3) fulfill the Enterprises’ mandate to support the housing market during the ongoing transition.
The FHFA’s second goal bears significantly on the Enterprises’ role in the apartment market. Foreshadowing a curtailment of their activities in this arena, the plan requires that “each Enterprise will undertake a market analysis of the viability of its multifamily operations without government guarantees.” Those operations are more significant now than ever before. During 2011, Fannie Mae provided $24.4 billion in debt financing in support of the multifamily market, almost all of which was packaged into mortgage-backed securities. Rising 32 percent from the prior year, Freddie Mac’s multifamily volume reached $20.3 billion. By virtue of their unique relationship to the government, the Enterprises have been able to provide this financing on more favorable terms than would be the case otherwise, sometimes crowding out private credit in the process.
Since the ultimate fate of Fannie Mae and Freddie Mac rests with lawmakers and not the conservator, the FHFA’s plan does not conclusively address the endgame of its current efforts. Instead, the plan seeks to achieve its three broad goals while “leaving open all options for Congress and the administration regarding the resolution of the conservatorships and the degree of government involvement in supporting the secondary mortgage market in the future.” With the future of housing finance still a cause for debate among lawmakers, the FHFA is constrained in driving toward a more specific set of objectives. The plan reflects that whatever else it does, the conservator must ensure an orderly transition irrespective of how lawmakers recast the Enterprises’ roles. As relates to their multifamily mission, this currently means an examination of their activities rather than an abrupt or irreversible change.
Avoiding oversteps of its mandate, the FHFA’s plan nonetheless seeks to reduce the activities of the Enterprises in a manner consistent with its conservatorship authority. In reference to the residential market, the FHFA cites the need for “appropriate underwriting and pricing of mortgages” even though it is clearly constrained in having to meet the competing objectives of market support and market retrenchment. The plan emphasizes a path to achieving the latter, stating that the various risks to the taxpayer are “best managed by contracting the Enterprises’ footprint in the marketplace.” With respect to the benefit of a government guarantee, the report signals that reasoning will apply to apartment financing and not just to residential housing, even though the former remains profitable.
Sam Chandan, PhD, is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.