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Government takes another step toward ending its control of Fannie Mae and Freddie Mac

The Federal Housing Finance Agency has told them to prepare for privatization

A brown brick building surrounded by trees with a sign in the front.
The exterior of The exterior of Fannie Mae’s headquarters in Washington, D.C.
Getty Images

The Federal Housing Finance Agency (FHFA), the regulator that’s overseen Fannie Mae and Freddie Mac since 2008, told the two mortgage facilitators on Monday to prepare for transition out of government control, the latest in a string of developments that push Fannie and Freddie toward being private companies again.

The FHFA gave the directive through its 2020 “scorecard” for Fannie and Freddie, an annual document that outlines the FHFA’s goals for the two companies. Among the things the scorecard asks Freddie and Fannie to do is to prepare a roadmap toward the end of conservatorship, in consultation with the FHFA, Department of the Treasury, and the Department of Housing and Urban Development.

The news comes a month after the Trump administration announced that Fannie and Freddie can keep their own profits for the first time since getting bailed out by the federal government during the financial crisis in 2008.

Previously, Fannie and Freddie funneled the vast majority of their profits to Treasury as a way of paying back the $191 billion bailout that kept the two companies afloat and put them under government control. They have since paid back the bailout money and contributed an additional $115 billion to Treasury’s coffers.

It’s the first big step toward releasing the two companies from government control and putting them back in private hands. During the height of the housing bubble in 2006, Fannie and Freddie issued less than half of all mortgage bonds; investment banks and other financial institutions accounted for the rest. Today, Fannie and Freddie issue 95 percent of all mortgage bonds.

Keeping their own profits will allow the companies to build up enough capital to cover any potential losses they incur, instead of leaving the government on the hook.

Called “recap and release” for short, the plan to recapitalize and release Fannie and Freddie from government hands is part of a broader push by the Trump administration to reform how the two companies operate and reduce the government’s role in the mortgage market.

Fannie and Freddie play a critical role in helping Americans secure a mortgage. The two companies buy mortgages from banks and lenders and pool them into bonds that are sold to investors. The proceeds of these sales are used to buy more mortgages, providing mortgage lenders with more money to issue more mortgages.

Reform advocates believe Fannie and Freddie shouldn’t account for so much of the market. In September, the Trump administration released a two-part proposal for reforming Fannie, Freddie, and the mortgage market.

The first part was a recommendation to Congress for legislative reform that would not only release Freddie and Fannie from government control, but charter the creation of multiple new competitors to Fannie and Freddie in hopes of ending the problem of the two companies being “too big to fail,” which is what forced the government to bail them out in 2008.

The second part of the proposal is a list of administrative changes that Trump officials will pursue if Congress fails to act. Those changes, which boil down to a recap and release plan, would take Fannie and Freddie back to their pre-crisis state, where they operate as a duopoly that would require another bailout should catastrophe strike again. The move to allow the companies to keep their profits is a step in the direction of pursing the administrative proposal, as is giving them the directive to prepare for the transition to privatization.

But few in Congress support a simple recap and release plan for reprivatizing and reforming Fannie and Freddie. The plan is instead meant to be a spur to action: the threat of implementing an unpopular approach is meant to motivate Congress to begin the legislative process.

To date, congressional gridlock and other priorities have prevented Congress from making a serious push for reform, and it seems unlikely to become a priority for the foreseeable future. This makes a simple recap and release more likely if the Trump administration continues to press the issue with more moves like the one announced today.