DS News - U.S. Bank

72 U.S. Department of the Treasury to provide financial support to Fannie Mae and Freddie Mac to enable them to continue to provide liquidity and stability to the mortgage market. In that spirit, the Treasury Department has provided $189.5 billion in support. is includes an initial infusion of $1 billion into both Fannie Mae and Freddie Mac at the time of the conservatorship and an additional cumulative $187.5 billion investment from the Treasury Department. In addition, as conservator, FHFA assumed the authority of the management and boards of Fannie Mae and Freddie Mac during the period of the conservatorship. But the agency maintains that while it has broad authority over the GSEs, the focus of the conservatorship is not to manage every aspect of their operations. Brian O'Reilly, President at the Collingwood Group, a Washington, D.C.- based business advisory firm, believes that the original goals or the conservatorship could be categorized in to four parts. "e first was to support mortgage supply through the crisis, in other words to ensure there would continue to be access to mortgage credit," says O'Reilly. "e second key goal was to insure the holders of agency debt and mortgage backed securities (MBS) didn't sustain credit losses, because that would have dramatically negative impacts on the financial system potentially world-wide because of who the holders of that MBS and debt were in 2008. I think that the third goal was to ensure that the entities were returned to a state of financial health. I've heard someone use the phrase return to a level of soundness and solvency." e fourth goal was that the GSEs should be taken out of conservatorship at some point. "In other words it was never intended that you would see conservatorship in perpetuity, and I think the phrase some others have used is that it was intended as a time out while the key stake holders and government determined what an appropriate outcome was or new status was," says O'Reilly. Looking back at these past eight years of conservatorship, it is natural to wonder whether the goals originally intended have been fulfilled or if they have changed over time. O'Reilly feels that the goals of supporting mortgage supply through the crisis and insuring the holders of agency debt and MBS didn't sustain credit losses have been satisfied today. "e mortgage supply and liquidity was maintained, and the holders of agency debt and MBS didn't suffer," says O'Reilly. "As a result, the value of full faith in credit in the world was maintained." At the time of their conservatorship in September 2008, Fannie Mae's total outstanding debt stood at $843 billion and Freddie Mac' total outstanding debt stood at $814.9 billion. As of their most recent monthly volume summary report for July, Fannie Mae's total outstanding debt stands at $362.3 billion and Freddie Mac's total outstanding debt stands at $389.4 billion. Both of the GSEs have reduced their outstanding debt by over half. With regard to the aggregate unpaid principal balance for the GSEs, both Fannie Mae and Freddie Mac have seen a reduction of over half since the time of conservatorship to the most current report in July 2016. Fannie Mae sits at an aggregated UPB of $308.9 billion compared to an aggregated UPB at the time of conservatorship in September 2008 of $761.4 billion. Likewise, Freddie Mac sits at an aggregated UPB of $319.3 billion in comparison to an aggregated UPB in September 2008 of $736.9 billion. COMING UP SHORT ough some these of the goals seem have been achieved, with regard to O'Reilly's third and four perceived goals, he states that the conservatorship has done nothing but come up short. "While the entities have returned to a condition of financial stability, in that we're in a period where they are both returning money to treasury, I don't think by any measure you can argue that they've been returned to a sound and solvent footing," says O'Reilly. "In an environment where they're not permitted to retain and build capital, I have a hard time believing that if you took this example out of the context that these would be the certain set of circumstances that you would say are logical or appropriate." "I think the one thing that we've all learned from this is that it's easier to institute a conservatorship that it is to undo one or conclude one." —BRIAN O'REILLY, PRESIDENT, THE COLLINGWOOD GROUP

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