The Improbability of GSEs Exiting Conservatorship: A Structural and Political Analysis

The prospect of Fannie Mae and Freddie Mac (the GSEs) being released from U.S. government conservatorship and restored to their former quasi-public status has been a recurring debate since their collapse during the financial crisis of 2008. While the notion occasionally resurfaces, such as during political transitions or economic shifts, the structural and political barriers to this outcome remain formidable. The GSEs, integral to the U.S. housing finance system, operate under a complex regulatory framework designed to ensure market stability, a framework that inherently limits their independence. Coupled with the political advantages of retaining control over these entities, these barriers suggest that a return to their pre-crisis status is unlikely in the foreseeable future.

A significant structural impediment lies in the Single Security Initiative (SSI) and the Universal Mortgage-Backed Securities (UMBS) framework, which necessitate close operational alignment between the GSEs. The UMBS requires the two entities to synchronize prepayment speeds and maintain cohesive business practices to ensure market fungibility. Under current rules, both entities must align their programs, policies, and management decisions under the oversight of the Federal Housing Finance Agency (FHFA). This alignment is crucial to sustaining market confidence in UMBS, but it also effectively precludes the GSEs from functioning independently. The regulatory requirement for synchronization, even post-conservatorship, raises fundamental questions about the feasibility and purpose of releasing the entities as distinct competitors. Additionally, transitioning them to a single entity would pose significant challenges, including potential risks related to investor concentration and systemic financial stability.

The political landscape further diminishes the likelihood of ending conservatorship. Control over the GSEs provides policymakers with significant influence over the housing market, enabling initiatives that promote equitable access and other politically advantageous goals. For example, the FHFA’s annual Scorecard emphasizes diversity, equity, and inclusion as strategic priorities, reflecting the deeply entrenched political interests in shaping the GSEs’ operations. Both major political parties, regardless of their broader ideological differences, have vested interests in maintaining this influence, as it grants them leverage over a critical sector of the economy. As demonstrated by past policy stances, such as those outlined in Democratic platforms, there is resistance to privatizing the GSEs due to concerns over potential increases in mortgage costs for American families.

In summary, the intertwined structural and political dynamics make it improbable that Fannie Mae and Freddie Mac will be released from conservatorship. The operational constraints imposed by the UMBS framework and the political benefits of retaining control argue against such a move, regardless of which party holds power. Between the necessity of maintaining market stability and the allure of wielding influence over the housing sector, the status quo of government oversight appears firmly entrenched.