The GSEs and the Second Trump Administration: Answering Ten Key Questions About Conservatorship Exit (Part 1 of 2)

The incoming presidential administration of Donald Trump (Trump II) is now developing key policy priorities to implement once it takes office in January.  In addition to those needed to fulfill campaign promises, various interest groups are advocating to add to that list, including calls to prioritize having Freddie Mac and Fannie Mae, the two large government-sponsored enterprises (GSEs)[1], exit their 16-year-long conservatorships.

The possibility of a GSE conservatorship exit has sparked considerable media attention, particularly in housing and mortgage industry circles. Separately, Trump II has the ability to directly reshape GSE mortgage policies. Given that the GSEs together finance approximately 50 percent of the near-$13 trillion in first-lien residential mortgages, this can significantly impact millions of current and prospective American homeowners.[2]

This article, the first of a two-part series, will ask and then answer ten key questions about the long-discussed issue of when and how the GSEs might exit conservatorship. The answers will shed light on the complex and often misunderstood process that could eventually lead to the GSEs leaving conservatorship.[3] Part Two will focus on how Trump II might change GSE mortgage policies. 

The ten questions are:

1. Has Trump II decided to make GSE conservatorship exit a policy priority for 2025? 
2. Is the not-yet-nominated director of the Federal Housing Finance Agency (FHFA) the key to conservatorship exit? 
3. When might we learn what Trump II has actually decided about its position on GSE conservatorship exit?
4. Will GSE reform, including conservatorship exit, be accomplished through congressional legislation?
5. What do those calling for conservatorship exit propose as the post-exit business model of the two GSEs? 
6. Will Trump II aim, in developing a post-exit business model, to primarily satisfy the members of its political coalition who are small-government conservatives? 
7. What will be the means and extent of government support to the GSEs post-exit?
8. When conservatorship ends, does this also mean the end of government control over the two GSEs?
9. Will Trump II cancel a large portion of Treasury’s ownership interest in the two GSEs as part of a conservatorship exit? 
10. Can the two GSEs accelerate their capital building, which is now being done exclusively by retaining earnings, through the issuance of large amounts of new shares to the public?

Question #1: Has Trump II decided to make GSE conservatorship exit a policy priority for 2025?         

Answer:  It is premature to conclude that such a decision has been made.

Although some groups and individuals – including some associated with Trump II’s campaign and transition team – are advocating for ending the GSE conservatorships, there is no direct evidence that this issue has been formally made a part of the administration’s policy agenda. For example, conservatorship exit was not one of the many campaign promises made by the president-elect.  Also, GSE conservatorship exit is a highly technical issue that does not particularly resonate with the general public. It is, therefore, unclear whether it is even being seriously considered as a top policy priority at this time.[4] It’s worth noting that during Trump’s first term (Trump I), GSE reform did not become a policy priority until two years after inauguration.

Question #2:  Is the not-yet-nominated director of the Federal Housing Finance Agency (FHFA) the key to conservatorship exit? 

Answer:  No, this is an outdated and incorrect notion.  The two most important individuals in the policymaking process will be the director of the National Economic Council (NEC) and the Secretary of the Treasury.

When the conservatorships were established in 2008, exiting them required approval from both the presidential administration, acting through Treasury, and the then-independent FHFA, led by a single director.  However, a June 2021 Supreme Court ruling changed this structure by making the FHFA subject to the control of the presidential administration, i.e., ending its independence. Since then, the FHFA has been managed via the National Economic Council (NEC) in the White House. That means that the presidential administration is now solely responsible for deciding if, when, and how to pursue exiting conservatorship, acting through both Treasury and the FHFA. This shift marks a substantial change since Trump I. It also means the two most important people in this policymaking process – other than the president himself – are the director of the NEC (for which Kevin Hassett has been nominated) and the Treasury secretary (for which Scott Bessent has been nominated).  The FHFA director, while not as senior as these two officials, will nevertheless likely play an influential role, especially if personally an expert on mortgages and the GSEs. 

Question #3:  When might we learn what Trump II has actually decided about its position on GSE conservatorship exit?

Answer: The first time we might learn about what Trump II’s GSE conservatorship exit policy, and its priority, actually is – rather than just speculation or prediction about it – will be at the separate confirmation hearings of Mr. Hassett to lead the NEC and Mr. Bessent to lead Treasury.  These hearings likely will occur in January 2025.[5]

The confirmation hearings for Messrs. Hassett and Bessent will be the first opportunity for Trump II to provide some public indication of whether GSE conservatorship exit will be a top policy priority in 2025 and what the nature of that exit would be. That’s because, during these hearings, the nominees may be questioned by one or more senators about their position on this issue. Their responses – or lack thereof – could reveal much about the administration’s stance.  First, they might comment on the priority or timing of conservatorship exit as an issue, or alternatively, they could deflect the topic.  Second, they can indicate what they would like to accomplish via a conservatorship exit: shrink the GSEs, maintain the flow of the 30-year fixed rate mortgage to the typical American family, or some nuanced combination of the two perhaps.  Finally, the nominees might not get questioned on the topic at all, a reminder that GSE reform is very much a technical and specialized issue and that broader issues – like taxes and tariffs, for example – may totally dominate the policy agenda in 2025. 

Question #4:  Will GSE reform, including conservatorship exit, be accomplished through congressional legislation?

Answer:  That is highly unlikely; utilizing administrative means[6] is much more likely. 

The Mortgage Bankers Association, a major industry association, recently issued a letter about GSE conservatorship exit[7] addressed to both Congress and the incoming Trump II administration, seeking at least one major change that can only be achieved by legislation. This was a surprise, as Congress has not focused on GSE reform in general, or conservatorship exit in particular, more than minimally for about a decade.  No senior congressional leaders have declared plans to champion such an effort in the new Congress.[8]  Instead, since 2019, proponents of conservatorship exit have shifted their focus almost exclusively to doing so by administrative means as the most practical method. This is despite its drawbacks: it is less permanent than a legislative solution and must operate within the constraints of existing legislation.

Question #5:  What do those calling for conservatorship exit propose as the post-exit business model of the two GSEs? 

Answer:  Strangely, the calls for conservatorship exit are not being accompanied by a clearly stated recommended business model. This omission creates an incomplete policy position, as it is essential to specify a business model in advance. Doing so allows for the design of exit terms to produce that model as a result. 

There has long been bipartisan agreement that the pre-conservatorship business model of the GSEs had so many defects, as amply demonstrated back in 2008, that it needed to be changed post-conservatorship. The business model will be defined by how various aspects of the GSEs’ operations are structured.  A few examples of this would be:

• Would the GSEs pay a fee to Treasury for taxpayer support?  Or would there be any such support at all?
• Would the FHFA set GSE guarantee fees (G-fees) going forward (known as the “utility model”) or not?  If so, on what basis would they determine the level?  What protection would there be against political pressure to set G-fees inordinately low?
• Would there continue to be a limit on the size of the GSE investment portfolios?

Among Republicans, there has long been agreement that conservatorship exit would be a good thing to achieve; the disagreement has entirely been about what the ongoing business model should be. Thus, its absence is a major flaw in calls for conservatorship exit. 

Question #6:  Will Trump II aim, in developing a post-exit business model, to primarily satisfy the members of its political coalition who are small-government conservatives? 

Answer:  No, it will also need to consider the interests and views of two other key groups in its political coalition, and the three groups do not necessarily agree.

First, the most vocal advocates for conservatorship exit are indeed the small-government conservatives who favor more private-sector provision of housing finance by shrinking the “footprint”[9] of the GSEs.  (At its extreme, this turns into calls for all government support for the GSEs to be withdrawn, a controversial position discussed in more detail below.)  However, as is conventional for a Republican administration, we can expect that Trump II will also look to support the business community.  In this case, the housing and mortgage industries almost entirely favor the flow of easy mortgage credit that the GSEs provide, since that helps maximize the revenues and profits of companies in those industries; this argues against any material shrinkage of the GSE footprint.[10]  Making things even more complex, it is clear from the recent election campaign that Trump II will also look to support what is perhaps its biggest voting bloc: non-college-educated households, which argues against changes that may reduce the GSE’s role in providing subsidized, borrower-friendly mortgages to those households.  It is, therefore, not an easy matter to please all three of these interest groups at the same time as Trump II develops a post-exit GSE business model. 

Question #7:  What will be the means and extent of government support to the GSEs post-exit?

Answer:  This will be the subject of much controversy within the Trump II coalition. While some small-government conservatives will call for ending any government support, it will likely continue – probably by extending the Preferred Stock Purchase Agreement (PSPA), today’s existing support agreement, into the future. 

The biggest policy challenge Trump II will have in designing a post-exit GSE business model will be the degree of government support that the two companies are to enjoy. Over the past decade, as discussions on GSE reform have taken place, I have observed that the prevailing opinion among Republican officials in Washington, D.C. can be roughly summarized as follows: 

• the GSEs are indeed critical to making the 30-year fixed-rate mortgage available to all qualified borrowers, rather than just some;
• government support is integral to the securitization of mortgage loans by the GSEs and therefore must continue;
• but the resulting taxpayer exposure to loss has historically been too large and needs to be significantly reduced by requiring much higher GSE capital requirements[11] than existed prior to 2008;
• and such taxpayer exposure needs to be further reduced by shrinking the GSE footprint, which will also enable a greater amount of private sector funding for mortgages. 

However, a small but influential minority – known as libertarians in mortgage-related policy discussions – believe that ideally all government support should be withdrawn from the GSEs[12] as that minority also believes that the private sector can readily replace the lost volume at no noticeable increase in mortgage cost.[13]  It is this strongly held libertarian view that has long made it very difficult to gain Republican consensus on the outlines of a post-conservatorship exit business model.  Thus, Trump II has no choice but to develop a compromise that can gain broad – even if well short of unanimous – support among Republican officials and its political coalition, something which Trump I began to do in 2019 via the Treasury’s Housing Reform Plan[14] but never completed.

Question #8:  When conservatorship ends, does this also mean the end of government control over the two GSEs?

            Answer:  No.

As the situation currently stands, the end of conservatorship will indeed end FHFA control over the two companies,[15] but Treasury will then take on that control by being the majority shareholder of each company through its warrants on 79.9 percent of the shares (plus potentially more).[16]  That leaves the presidential administration still in charge of the GSEs, just via Treasury rather than via the FHFA.  Treasury can cede or sell off that control – but without plans to that effect being implemented, its control over the two GSEs will potentially continue for many years beyond the end of conservatorship.[17] 

Question #9: Will Trump II cancel a large portion of Treasury’s ownership interest in the two GSEs as part of a conservatorship exit? 

Answer:  This is a hotly disputed topic, but my personal estimate is that the answer is likely to be ‘no.’

This is probably going to be the second most difficult conservatorship exit decision, and it is not about ideology or policy, but simply about one specific – and very large – pot of money:  should Treasury’s ownership interest in the GSEs be heavily written off? The operation of the PSPA agreement[18] since 2008 has given Treasury a very large ownership interest in the GSEs consisting of two parts:  (1) a warrant on 79.9 percent of the shares of each GSE, and (2) senior preferred shares in the two GSEs with a current face value of $334 billion.[19]  If one tracks the cash put into the GSEs by Treasury and the cash paid by the GSEs back to Treasury, it shows that Treasury has so far received far more cash dividends than it directly invested into the two companies:  $301 billion received versus $194 billion invested.  This has resulted in calls for Treasury to write off its senior preferred position as, the logic goes, Treasury has already been paid back.  This would primarily benefit the owners of the historic publicly traded common and junior preferred shares. These owners are widely believed to be primarily institutional investors such as hedge funds or private equity firms. These investors claim that the PSPA has operated unfairly,  putting them at a disadvantage.[20]  During Trump I, Treasury Secretary Mnuchin specifically disagreed with the viewpoint that any of Treasury’s ownership interest should be written off (as did many members of Congress when it was discussed at the time), instead looking for the taxpayer to fully benefit from the value of its rescue of the two companies.[21]  Trump II will have to fend off the lobbying on this issue, which is likely to be intense.

Question #10:  Can the two GSEs accelerate their capital building, which is now being done exclusively by retaining earnings, through the issuance of large amounts of new shares to the public?

            Answer:  This is very unlikely for at least the next several years.

In theory, the GSEs might issue equity to cover their capital shortfall, an amount that could easily exceed $100 to $150 billion. However, there is a long list of practical barriers that will limit the ability to raise funds by issuing more shares, unless those shares would be offered at an unacceptably large discount. Here are five reasons for this conclusion:  (1) the size of the offering would be extraordinary –  literally multiples of the largest IPO ever done;[22]  (2) the legal nature of conservatorship strips public shareholders of their voting rights – so no issuance at a reasonable price would be possible until after conservatorship ends; (3) public shareholders purchasing equity would, for possibly many years, be partially disenfranchised by being minority shareholders, with Treasury’s majority voting interest controlling the two companies; (4) potential shareholders won’t be able to project the earnings of the two companies to value their shares until it is decided whether, and how much, a fee will be paid to Treasury for credit support; (5) if the FHFA is to set G-fees under the “utility model,” shareholders will also be unable to  forecast earnings until the G-fee level is determined, and they will also need to understand what mechanisms have been chosen to resist future political pressure to reduce G-fees subsequent to their investment.  This unusual list of uncertainties would necessitate that the shares be issued at a steep price discount, but that in itself is highly problematic, as it will lead to a significant increase in G-fees, a major public policy challenge.[23]      

Conclusion

GSE reform, including conservatorship exit and selecting and implementing a post-exit business model, has justifiably developed the reputation for being exceedingly complex. Its success will require many politically sensitive decisions along the way, as well as an inordinate commitment of policymaker time and resources.  The ten questions above are, in some ways, just a starting point for anyone seeking to develop a comprehensive plan for the GSEs to exit conservatorship.

Looked at unemotionally, while the GSEs’ exit from conservatorship is undoubtedly an important issue to address, it is not an urgent one, as the mortgage markets have long worked well with the conservatorships in place. Additionally, the issue is highly technical and largely invisible to the public, meaning it does not directly resonate with voters or homeowners.       

The current media focus on conservatorship exit, therefore, seems to be driven more by advocacy than by coldly-calculated prediction of what Trump II’s policy priorities will be in 2025.  Furthermore, even if conservatorship exit is announced as a leading priority, its implementation is likely to take many years, potentially longer than the four years Trump II will have in office.        

The above questions and answers provide important context that will help policymakers to      understand and assess what conservatorship exit steps the Trump II administration may take, and whether those steps are likely to be sufficient to get a properly-designed exit over the finish line. 

Footnotes:

[1] I will adopt industry parlance and refer to Freddie Mac and Fannie Mae as “the” GSEs, even though there are others (most notably the eleven Federal Home Loan Banks). 

[2] The charters of the GSEs also allow them to purchase multifamily (i.e., more than 5 units) loans. The public policy focus is almost always heavily focused on single-family mortgages as it is so much larger a market, but the GSE role in financing multifamily loans is significant.  For example, in 2023, of new multifamily mortgages, the GSEs financed 42 percent.  (See https://www.mba.org/news-and-research/newsroom/news/2024/08/15/multifamily-lending-declined-49-percent-to-246-billion-in-2023). 

[3] As CEO of Freddie Mac from 2012 to 2019, I was heavily involved in GSE reform proposals as an insider of the conservatorship.  This included giving technical advice to the sponsors of various proposals, and also as a commenter on the pros and cons of others’ proposals for various audiences.  I have continued to stay involved in many aspects of GSE activities, including conservatorship exit, since 2019 by writing and speaking on housing finance policy issues. 

[4] Media reporting on the issue, when carefully read, is about conservatorship exit being advocated, predicted, expected and speculated about.  But there is no reporting that Trump II has actually decided to go ahead.

[5] The confirmation hearing of a nominated FHFA director would not occur in January, but it is likely to have been held by April 2025. This timeline would provide another opportunity for open-format questioning, by which time the Trump II administration is more likely to have clarified its policy about the GSEs exiting conservatorship. 

[6] In this case, “administrative means” refers to a conservatorship exit that only requires (1) new FHFA regulations and (2) amendments to the Preferred Stock Purchase Agreement (PSPA) for each GSE.  The PSPAs are agreements with Treasury, put into place upon the GSEs entering conservatorship in 2008 and amended several times since, whereby Treasury commits to provide financial support to them.  It was successful in restoring market confidence in the GSEs at that time and since. 

[7]See https://newslink.mba.org/mba-newslinks/2024/december/mba-newslink-tuesday-dec-3-2024/to-the-point-with-bob-mba-is-ready-to-help-shape-a-safe-and-sound-exit-plan-from-gse-conservatorship/.

[8] GSE reform has a reputation in Congress for requiring whoever leads the proposed legislation to dedicate an excessive amount of time to the task, jeopardizing the attention needed by other issues, and there is a common belief that achieving success is unlikely.  This reputation comes heavily from 2013 to 2015, when a bipartisan effort led by Senators Bob Corker (R-TN) and Mark Warner (D-VA) and a separate partisan one led by Rep. Jeb Hensarling (R-TX), then Chairman of the House Financial Services Committee, came to naught despite an extraordinarily large investment of their personal time.  Interestingly, the recently-elected incoming Chairman of the House Financial Services Committee, Rep. French Hill, has listed his top policy priorities, and they do not include the GSEs. 

[9] This is a common phrase used in GSE policymaking.  It refers to the breadth of their market share – including the types of borrowers eligible for GSE financing, how extensive the range of mortgage products they purchase is, etc.

[10] The exception is those firms engaged in the private label securitization (PLS) business, as they might gain market share if the GSEs were to securitize less. 

[11] In addition, the development of GSE credit risk transfer (CRT) transactions, which began in 2013, is another mechanism for the reduction of taxpayer exposure to loss. 

[12] The widely held view, with which I concur, is that a withdrawal of government support will result in the two GSEs going into full or near-full run-off as it is integral to their business model. 

[13] This view is not shared widely, or by me. 

[14] See https://home.treasury.gov/system/136/Treasury-Housing-Finance-Reform-Plan.pdf.  The Summary on Pages 1 to 4 is definitely worth reading.  The suggested approach under administrative reform describes the outline of just such a compromise, with much detail yet to be filled in.

[15] At that time, the FHFA would still continue to be the regulator of the GSEs, of course.

[16] It will also own over $300 billion face value of senior preferred shares, which may very well be wholly or partially converted to common shares to aid in their disposition.  (This was done, for example, in the case of the government exiting its bailout of AIG.)

[17] In addition, Mark Calabria, when director of the FHFA (2019 to 2021), also described a regulatory mechanism – known as a “consent decree” (the details of which are unimportant for this article) – to retain at least some components of FHFA’s conservatorship-level control over the GSEs. 

[18] The PSPA was amended several times, most notably in 2012 and 2019. 

[19] This is equal mainly to (1) the cash injected into the GSEs during the earliest years of the global financial crisis  to offset their large losses, and (2) the amount of earnings retained since September 2019. 

[20] The 2012 PSPA amendment produced many lawsuits about this “unfairness,” with the government prevailing in almost all of them.

[21] Treasury’s rescue of the two GSEs did not involve a loan but rather an equity investment. Secretary Mnuchin expressed the view that taxpayers should retain the gains associated with the very large risk taken, rather than merely recouping the principal. 

[22] The largest IPO in history was $25.6 billion (Saudi Aramco); the largest for an American issuer was $17.9 billion (VISA). 

[23] The largest component of what goes into setting G-fees is the cost of the capital supporting the risk taken on by the GSEs.  If shares are sold at a discount (i.e., well under book value), this will automatically increase the cost of capital and thus should directly lead to an increase of G-fees.