WASHINGTON — Ten years ago on Friday, then-Treasury Secretary Henry Paulson referred to the unprecedented government action at that time to keep Fannie Mae and Freddie Mac afloat as a "time out."
"We will make a grave error if we don't use this time out to permanently address the structural issues presented by the" government-sponsored enterprises, Paulson said at a press conference on Sept. 7, 2008, one day after the GSEs had been placed in conservatorship.
But a decade later, nothing about the federal takeover of the mortgage giants seems temporary. It is the status quo. Efforts for comprehensive housing finance reform keep getting derailed, leaving many to wonder if it will take a disruptive event — a sudden change in political power, another crisis or something else — to force policymakers to set the GSEs on a permanent path forward.
“If you told us back then that we would have been stuck in this limbo for this long, I think there might have been more of an appetite to tackle Fannie and Freddie" reform, said Jim Parrott, a fellow at the Urban Institute and a former housing adviser to President Obama.
The 10-year limbo has been eventful. With the companies stabilized under the watch of Treasury and the Federal Housing Finance Agency, lawmakers have mounted concerted efforts to pass GSE reform, but all have failed. The FHFA has taken steps at administrative reform. Meanwhile, the chaos of the 2008 crisis have been replaced with debates over the necessity of the conservatorships, how the takeover has affected the GSEs' capital and whether the government should simply let go of the GSEs.
While it is hard to see any end in sight for this "time out," experts have placed bets on a triggering event that could bring more certainty. Predictions that the Democrats could retake the House in November leave some hopeful that congressional leaders will break their stalemate over GSE reform. Others point to the Trump administration soon being able to pick its own FHFA director as a reason for optimism.
But none of those are sure bets, leaving open the possibility of more uncertainty and even that another crisis could arrive before long-term GSE reform.
“Housing prices are rising annually and that is a worrying recollection of similar price hikes in the run-up to the financial crisis," said Thomas Wade, the director of financial services policy at the American Action Forum. "I don’t feel prepared to bet on that, but certainly those are worrying signs despite the economy doing so well.”
What was supposed to be temporary became a 'long slog'
Few if anyone believed that the conservatorships of Fannie and Freddie would last nearly this long.
“The conservatorship was always intended to be a temporary measure and that has demonstrably shown to not be the case," said Wade.
If anything, the FHFA's grasp of the two mortgage giants has grown stronger over the past 10 years.
Scott Olson, the executive director of the Community Home Lenders of America, originally thought that within three to five years, Fannie and Freddie would be released from conservatorship.
It was only in 2012 that Olson realized how unshakable the federal takeover had become. That was when the third amendment to the "preferred stock purchase agreement" between Treasury and the mortgage companies — which lays out the terms of the government's assistance and how it is repaid — effectively required the GSEs to hand over nearly all quarterly profits.
“That was to me the pivotal moment, and when that happened then I think a lot of people believed that was a signal that this was going to be a long slog,” Olson said.
FHFA has made meaningful reforms
But Olson shares the view of others that the federal takeover and the FHFA's oversight of the companies have brought meaningful reforms, which he says supports the argument that they should be able to hold on to more of their capital.
"They’ve been predominantly reformed except for the one most critical thing, which is to make sure they have capital to weather the storm,” he said.
In fact, some experts argue that GSE reform isn’t urgent at all right now, and the mortgage giants have sufficiently paid back the government.
“If you look at what the GSEs are intended to do, they’ve actually been doing it very well in conservatorship and they’ve stopped doing many of the pernicious activities they were doing that arguably got them into conservatorship,” said Libby Cantrill, the head of public policy for PIMCO, an investment management firm.
A positive effect of the conservatorships is that the GSEs are much less risky than before the takeover. Administratively, the FHFA has taken steps to establish a common securitization platform for the two companies. In general, the FHFA, which was launched barely a month before it seized Fannie and Freddie, has proven a strong regulator. Observers also point to a more explicit government guarantee, versus the implicit backing before the conservatorships, as bringing market clarity.
Unfinished business
But others point to a lot of unfinished business with housing finance policy, In particular, there is still no answer to the major question of what happens to the system after the conservatorships cease. In the immediate aftermath of the 2008 takeover, broad consensus emerged that the two companies should be wound down and replaced with a new housing finance vehicle.
Parrott said with the hindsight of knowing how long the conservatorships have lasted, it would have made sense to include GSE reform "as part of Dodd-Frank or at the very least [take] a more aggressive approach to pivoting to Fannie and Freddie after Dodd-Frank.”
At the top of the list today for reform includes reducing reliance on the GSEs' taking credit risk as well as reducing reliance on the management of the securitization infrastructure. The FHFA has already taken steps to implement a common securitization platform, the second phase of which is set to be released next year.
Observers are hopeful that the FHFA's plans to continue work on a risk transfer policy and common securitization framework offer hope for real reform that does not require congressional action.
"The risk transfer and the common platform standardization is actually reform in all but name and in all but legislation," said Mark Zandi, chief economist of Moody's Analytics.
But there are bigger questions that spark intense debate and disagreement across the markets and the political spectrum.
Olson said the question of the net worth sweep and whether or not Fannie and Freddie should be allowed to keep their profits might be “the most difficult thing to resolve.”
The sweep “was a pivotal step in hamstringing them and preventing them from recovering financially,” he said.
Political developments could trigger greater focus on GSEs
Yet observers say a resolution to such tough questions could be more likely if the Trump administration becomes more engaged in the GSE debate over the next year.
Although Wade says he hasn't seen any "indication that GSE or housing reform more generally have crossed the mind or the desk of President Trump," he is encouraged by Treasury Secretary Steven
The term of FHFA Director Mel Watt — an Obama appointee — is winding down. He is due to depart in January 2019, and some have speculated that he could depart sooner amid an investigation that he sexually harassed an employee.
Wade believes that Mnuchin, rather than Trump, will select the next director of the agency and could pick someone with a bullish attitude toward reform.
"To say that the future is starting to look promising I don’t think is an overstatement," Wade said.
The midterm elections in November could also determine if Congress decides whether or not to tackle the issue of housing finance, some observers said.
Up until now, bipartisan GSE reform proposals in the Senate have found it difficult to win the necessary support to become law. More partisan solutions have also failed to gain traction. House Financial Services Committee Chairman Jeb Hensarling's bill to mostly privatize the housing market cleared his panel but stalled afterwards.
But Democrats are
Rep. Maxine Waters, D-Calif., the likely chair of the Financial Services Committee in that scenario, has expressed interest in reforming Fannie and Freddie, telling the audience at a CNBC Capital Exchange Event in July that the
Wade said if Waters were to become committee chair, it would be a factor to watch for any sort of development on GSE reform, especially given her relationship with Hensarling, who is leaving Congress but who has
"I find it fascinating that on both sides of the aisle we are getting very strong and affirmative statements that GSE reform will be a priority in 2019," he said.
Progress is no sure thing
However, Zandi said that he wouldn't "expect much of anything on GSE reform" if Democrats were to win the House, and that hope for reform lies instead with Republicans in the House.
"If the Republicans maintain control of Congress and maintain control of our government, they might take a crack at GSE reform," he said. "I don’t hold up a lot of hope that they’ll actually get legislation through for lots of different reasons, but they may take a crack at it."
Zandi said the lack of a long-term GSE reform plan could begin to have broader economic consequences, particularly since the government's continued backing of Fannie and Freddie preserves taxpayer risk.
"Not passing a piece of legislation has costs, and they’re not going to be borne today and they’re not going to be borne next year, but at some point they will be borne and so it makes little sense to wait until that day to do this," he said.
Administrative actions might also turn Congress’ attention toward GSE reform, Parrott said.
“I think if you begin to see this administration beginning to move on administrative reform, the parties that view the status quo as tolerable will begin to see the status quo as itself at risk by the movement that you would see on administrative reform,” he said. “It may force them to come to the table in earnest.”
