For more than sixteen years, the commercial real estate industry has waited for a resolution to the conservatorships of Fannie Mae and Freddie Mac. The question of when these government-sponsored enterprises will regain independence continues to loom large over the sector. While the timeline remains uncertain, two industry experts believe that recent legislative developments and mounting regulatory momentum could bring the long-awaited end to conservatorship within the next few years, provided key conditions are met.
To shed light on what may lie ahead, GlobeSt.com spoke with two leaders at Mphasis Digital Risk, a firm specializing in loan quality due diligence and outsourced underwriting for mortgage lenders. Jeffrey Taylor, the company’s founder and managing director and a member of the Mortgage Bankers Association board of directors, believes the recent passage of a sweeping congressional bill could finally provide momentum. “I think that we will see this really kind of pick up in earnest, at least that's our thoughts, in probably the next couple of months, where he'll probably announce it and try to get some framework around it,” Taylor told GlobeSt.com.
Taylor emphasized that success hinges on two critical factors. First, there must be an “explicit, not implicit, guarantee, on all the mortgage-backed securities.” He explained that an implicit guarantee would be a “non-starter,” adding, “There's nobody who's going to have the confidence in the bonds or debt if it's not. There probably would be some kind of a debt or equity raise.”
The second factor, according to Taylor, is ensuring that Fannie Mae and Freddie Mac have adequate capital levels to withstand full market cycles. This includes maintaining stability, providing equal secondary market access to lenders of all sizes, while ensuring sustainable credit access and liquidity for the development and preservation of affordable housing.
Kimberly Lanham, senior vice president of industry and client relations at Mphasis Digital Risk, sees a countdown beginning. “I really don't think they’re just going to become a utility,” she told GlobeSt.com. “Ultimately, it is the better thing for them to go private and behave like private companies with that legally blinding, explicit guarantee. So, we have about three years to figure it out [the end to the conservatorship].”
A major concern with an explicit guarantee is whether it might encourage moral hazard and excessive risk-taking. Lanham, however, expects strict oversight to remain. “There’s still going to be regulation over them. FHFA is not going to go away,” she said. Even if the agencies are renamed, she noted, regulation will persist," she said.
"In some ways, they still will be playing with one hand tied behind their back a little bit. We have been assured — the MBA has been in lots of communications — that the Treasury will have a very, very firm control and handle on this. It's not going to be done probably at that level, at the housing level, it's going to be done at the Treasury level, which should also give more confidence.”
Other uncertainties remain. “What types of products are going to fall under the explicit guarantee?” Taylor asked. “Is it going to be everything? Is it going to be certain types of product offerings? Those are all the details that are incredibly important. That will be ironed out. If not, you're going to end up with this utility function that we have today.”
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