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M REPORT | 63 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T The Road Out of Conservatorship No matter which candidate wins the White House, GSE reform remains very uncertain, according to Freddie Mac's former CEO. I n September 2019, Presi- dent Donald Trump and his administration initiated a process whereby Fannie Mae and Freddie Mac would exit conservatorship. Former Freddie Mac CEO Don Layton, now a Senior Industry Fellow at Har- vard's Joint Center for Housing Studies, says the White House waited too long to start and finish the entire process, which should involve keeping key re- forms developed over the course of conservatorship (since 2008) in place. Thus, should Trump not serve another term, procedures would have to resume under a new administration. As the current administration launched the process with little more than a year left in its term, "it will not be able to complete many of the key requirements for conservatorship exit, and full re-capitalization until a possible second term, which is far from a certainty based on today's elec- tion polls." Layton went on to outline three possible scenarios, should former VP Joe Biden be elected in November, in his paper en- titled "The Path of GSE Reform: Still Very Uncertain, and Not Just Because of the Elections." Inside the paper, Layton out- lined three alternative approaches a Biden administration might adopt: 1. "The first, and lowest risk, alternative is no change, i.e., to leave the companies in conser- vatorship for the time being." 2. "The second, a medium-to-low risk alternative, is to end the conservatorships through a patient 'administrative means' implementation of what is known as the utility model, where the safety-and-sound- ness regulator of the GSEs, the Federal Housing Finance Agency (FHFA), also becomes like a public service commis- sion to regulate their guarantee fees, much as utilities have their rates set by such com- missions at the state level." 3. "The last, and highest risk alternative recommended is a strong progressive program to convert the two GSEs into a single, government-owned corporation, which would require legislation as well as many years for that single corporation to become fully capitalized." He also explains that, due to a case currently in the Supreme Court that would allow a new president to immediately replace the FHFA, appointed by Trump, rather than waiting until 2024 for the current director's five-year term to end. That means "a Biden administration will have more ability to control GSE reform, under any scenario it chooses," he said. Of the three alternatives, Layton recommends on a practi- cal basis avoiding the govern- ment corporation alternative for two reasons: "First, as it requires so much change, it runs a high implemen- tation risk, which can only work against a Biden administration because of its one-way nature. If the implementation goes well, the homeowning public will hardly notice; but if it goes poorly, the mortgage market disruption could generate major negative political ramifications," he said. "Second, the government corporation alternative requires legislation. This would run up against the track record of Congress failing for more than a decade to put in the time needed to develop, and then make the compromises needed to reach agreement about, specific GSE reform legislation. This is especially true in the incredibly complex housing finance field where constructing well-designed legislation is a very heavy lift. Even if the Democrats control both houses of Congress, agree- ment is far from assured as there are definitely competing views among elected officials from that party about the right way to proceed." Layton offers up suggestions for a possible second Trump administration. He thinks No. 3 is risky in any case. "There are many key deci- sions still to be made that can significantly impact [the GSEs'] business model—which in turn can materially change their future business prospects in terms of revenues, expenses, and return-on-equity, the single most important measure of success for a large financial institution ... it is still quite uncertain how it will go or what could emerge at the other end." Layton sees a long road ahead, no matter the outcome of the presidential election: "Unfortunately, at this time, we really still have little idea of how long it will take for the GSEs, in any form, to exit the conservatorship and be able to operate normally (however that is defined at the time)," he wrote in his paper. "It's true regardless of whether President Trump or Former Vice President Biden is sitting in the White House. All we can hope for then is that GSE reform design and imple- mentation is done well in the future during the next four-year presidential administration, regardless of who leads it, to hopefully, at last, put this all to bed."