Tim P.
Forging a path for Fannie and Freddie out of Conservatorship.

Dr. Rossi
Six years later and the housing market still in financial limbo. Congressional inaction has forestalled any serios plan for either of the agencies to be brought out of conservatorship. Comprehensive GSE reform (by Congress) is not possible in the near-term.

The right outcome for GSE reform would be legislation, but a solution that occur would bring private capital back into the housing market. Quite feasible under HERA, FHFA has the authority to bring the GSEs out of conservatorship.

Core issues of reform have been addressed, other than strong capital requirements. This includes strengthening underwriting standards.

Designing an exit from conservatorship would need to be carefully crafted to avoid market disruption. Keys to unwinding the conservatorship
development of a recapitalization plan. Declare the Sr. Preferred stock as paid back. Value from the cancellation would then flow up to the common stock, benefiting the Treasury as owners of the stock. Stringent risk-based capital could be phased in over time. Accelerated wind-down of the GSEs portfolios.

Matt Seu
Struggled to find a model that was better than the GSEs.
Couple of things need to stay the same regardless of the GSEs.
First of all, why are the GSEs in place now? Clearly to provide funds to the primary markets by providing solid MBS to the capital markets. Cannot disrupt this market.

A lot of standardization put into the market through the GSEs by FHFA. The reality is that the primary markets are used to doing business with the GSEs and taking them out of the market would be extremely disruptive.

There has been a lot of turnover in key leadership at the GSEs. A lot of changing directions and no end-game in place causes uncertainty. This creates a lack of continuity in the talent at the organizations.

Both companies have operations and technology that is old and aging. It’s tricky to modernize. The stake in the ground is the securitization company. After this company comes online, things will move forward and we will see business as usual.

How can the GSEs rebuild capital?

Cancel the senior preferred and declare it paid back. Recharacterizing the payments as principal and interest. Make the Treasury more than whole on their investment while putting the GSEs back into a position to move forward.

Strong capital requirements, no more than 5%, and the GSEs would have survived the financial crisis.

Rational behind the Lamberth ruling, broad powers exist for FHFA to act.

Great call. Appreciate Matt and Dr. Rossi sharing thier insights.

As a citizen, taxpayer, shareholder, I think FHFA can create a win win win for the US government, taxpayers and shareholders.