Legal Limbo: The Case Against Unilateral Privatization of Fannie and Freddie
When we argued last week that the Trump administration is unlikely to attempt a unilateral privatization of Fannie Mae and Freddie Mac, we were surprised that there were so many questions about our point that the legal framework established by the Housing and Economic Recovery Act of 2008 (HERA) makes it unclear that the Federal Housing Finance Agency could release them from conservatorship unilaterally. Today, we explain this argument in further detail and add what we learned from an important Trump administration official over the weekend.
HERA, enacted in the midst of the 2008 financial crisis, gave the FHFA authority to place Fannie and Freddie into conservatorship to stabilize their operations. However, the law is notably vague about how such conservatorships should end. Unlike the Federal Deposit Insurance Act (FDIA), which governs the resolution of failed banks, HERA does not provide explicit conditions or procedures for transitioning Fannie and Freddie out of conservatorship.
The FDIA, for example, explicitly empowers the Federal Deposit Insurance Corporation (FDIC) to terminate a conservatorship and return a bank to private management when it becomes “sound and solvent.” FIRREA, the statute governing the resolution of thrifts and savings and loans, similarly outlines clear pathways for ending conservatorships. These statutes provide procedural clarity, ensuring that stakeholders understand the conditions under which a financial institution can resume normal operations or be resolved entirely.
In contrast, HERA’s silence on these matters has left Fannie and Freddie in a state of legal and financial limbo. While the FHFA is empowered to act as a conservator or receiver, the statute lacks a clear mandate for how or when conservatorship should end. The only circumstance explicitly contemplated as ending the conservatorship is the entrance into receivership.
Conservatorship vs. Receivership
Under the FDIA, receivership is the default mechanism for dealing with failed banks, with conservatorship occasionally serving as a temporary measure. The receivership process is designed to either liquidate the institution’s assets or restructure it, with clear provisions for distributing value to creditors and shareholders. Even when the FDIC places a bank into conservatorship—a rare choice—it is typically a bridge toward receivership or an acquisition by a healthier bank.
HERA includes provisions for both receivership and conservatorship, although there is a lot more detail on the receivership process in the law. In interviews with officials involved with the drafting of the law, we learned that at the time the assumption was that the conservatorship powers were unlikely to ever be invoked; and, therefore, very little time or thought was put into drafting them in the law. Indeed, there are former housing officials who believe that the conservatorship was a mistake and that the law actually required Fannie and Freddie to go into receivership in 2009.
But Fannie and Freddie were placed into conservatorship instead. This decision—intended as a temporary measure—has now lasted over 15 years. Critics argue that the failure to use receivership in 2008 created a legal and financial quagmire. Receivership would have provided a clearer resolution pathway, potentially allowing Fannie and Freddie to return to private ownership or be wound down in an orderly manner. Instead, the use of conservatorship has left stakeholders—from shareholders to policymakers—debating how and when the enterprises might exit their current status.
Post-Chevron Legal Landscape
Adding to the complexity is the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference doctrine. Previously, federal agencies like the FHFA could rely on judicial deference to their reasonable interpretations of ambiguous statutes. With the Chevron deference no longer applicable, courts are now required to independently interpret statutes, rather than deferring to agency interpretations.
This shift places greater scrutiny on the FHFA’s actions. If the agency were to attempt a unilateral release of Fannie and Freddie from conservatorship, courts would closely examine HERA’s text to determine whether such authority exists. Given HERA’s silence on the matter, courts are unlikely to infer that FHFA has the unilateral power to end conservatorships, especially given the systemic importance of Fannie and Freddie to the housing market.
The lack of explicit language in HERA about ending conservatorships underscores the need for congressional involvement. Fannie and Freddie are not just any financial institutions; they are linchpins of the U.S. housing finance system, backing trillions of dollars in mortgages. Unilaterally releasing them without a robust legislative framework would risk market instability and political backlash.
Congressional action could clarify the future of Fannie and Freddie, whether through privatization, restructuring, or continued government oversight. Without such legislation, any unilateral move by the FHFA would likely face significant legal challenges and would likely give rise to market uncertainty.
Why the Trump Administration Will Not Act Alone
Given the legal ambiguities of HERA, the post-Chevron legal environment, and the systemic importance of Fannie and Freddie, the Trump administration is unlikely to pursue unilateral privatization.
The Mortgage Bankers Association is also skeptical of the idea that a quick, unilateral exit is desirable.
Housing Wire reports:
Against the backdrop of a new presidential administration and a new Congress, Mortgage Bankers Association President and CEO Bob Broeksmit laid out the trade group’s priorities during the opening session of the MBA’s IMB25 conference Monday. First on the list? A smooth exit from conservatorship for Fannie Mae and Freddie Mac.
“We can’t let the best housing finance system in the world be damaged by a hasty exit that doesn’t thoroughly think through all the consequences,” Broeksmit said during the session. “That does not make MBA anti-exit-from-conservatorship.”
So are at least some former Trump officials. We did a radio interview with Larry Kudlow on Saturday. Kudlow, who was the chief economics adviser to President Trump in the first administration and is now host of Kudlow on the Fox Business Network, said he agreed with our analysis that the Trump administration is unlikely to release Fannie and Freddie on its own.
“Mr. Trump never had any particular enthusiasm for getting involved—other than maybe boosting the balance sheets, putting more capital into them. But in terms of re-arranging their capital structures and privatizing them like commercial banks, I don’t see it. I don’t hear it,” Kudlow said.
Instead, the administration’s efforts with respect to Fannie and Freddie are likely years away. And when they do develop, these efforts will be focused on working with Congress to develop a comprehensive plan for the future of Fannie and Freddie. This approach would provide the legal and political legitimacy needed to resolve the enterprises’ conservatorships and ensure the stability of the housing finance system.
The stakes are too high, the legal footing too shaky, and the risks of unilateral action too great. The Trump administration understands that only Congress can resolve the limbo of Fannie and Freddie and ensure the stability of America’s housing market.