EXECUTIVE SUMMARY

Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) — collectively the Government-Sponsored Enterprises (GSEs) — remain under federal conservatorship, a temporary emergency status established not in the wake of their original congressional charters, but as a crisis response during the 2008 financial collapse. That emergency posture, now nearly two decades old, has outlived its justification and created structural distortions in U.S. housing finance.

This brief recommends a structured, bifurcated privatization: retain the single-family, townhouse, and owner-occupied condominium mission (the primary residence portfolio) within a reformed, government-backstopped entity, while publicly divesting the multifamily and commercial (non-primary residence) portfolio as a fully independent, market-priced, guarantee-free enterprise. This approach advances affordability and homeownership goals while eliminating the implicit taxpayer subsidy currently benefiting sophisticated institutional investors who hold subordinated equity positions.

⚠ INVESTOR ALERT: A cohort of high-risk subordinated equity holders is actively promoting claims of excessive guaranteed returns on the commercial/multifamily book. These claims do not withstand basic peer review and, left unaddressed, risk distorting the legislative and regulatory record. This brief addresses those claims directly.

I. BACKGROUND AND HISTORY OF GSE CONSERVATORSHIP

The GSEs were created by Congress to fulfill a specific public purpose: expand the secondary mortgage market, promote liquidity, and advance homeownership across income levels. They are not, and were never intended to be, vehicles for maximizing private investor returns.

A. The 2008 Crisis and Federal Takeover

The GSEs were placed into conservatorship by the Federal Housing Finance Agency (FHFA) on September 7, 2008 — at the peak of the financial crisis — after incurring catastrophic losses from high-risk mortgage-backed securities. The U.S. Treasury committed up to $200 billion in preferred stock purchase agreements to stabilize the entities. This was an emergency rescue, not a permanent governance model.

Conservatorship Start

September 7, 2008

Treasury Commitment

Up to $200B per GSE (preferred stock)

Combined Portfolio (2025 est.)

~$7.5 trillion in guaranteed MBS

Single-Family Share

~75% of combined guarantee volume

Multifamily / Commercial Share

~25% of combined guarantee volume

Current FHFA Status

Conservatorship — no defined exit timeline

B. Why Conservatorship Must End

Indefinite conservatorship produces the worst of both worlds: private profits socialized through implicit taxpayer guarantees, with no accountability to shareholders or full market discipline. The status quo:

▪ Distorts mortgage pricing by compressing spreads through government backstops

▪ Suppresses private capital formation in the secondary market

▪ Creates moral hazard for multifamily and commercial lenders who price government guarantees they do not deserve at market rates

▪ Enriches a narrow class of subordinated equity holders — many of whom acquired positions at steep discounts post-crisis — at the expense of taxpayers and homebuyers

II. PROPOSED BIFURCATED RESTRUCTURING FRAMEWORK

A. The Core Principle: Split the Mission from the Market

Not all GSE activity warrants government support. The foundational policy question is: what mission justifies a federal backstop? The answer is unambiguous — primary residence homeownership for American families. It does not extend to investor-held multifamily properties, commercial real estate, or speculative rental portfolios.

POLICY PRINCIPLE: Government guarantees exist to serve homeowners, not yield-seeking investors. The restructuring framework draws a bright line between these purposes.

B. Portfolio I — The Homeownership Mission Entity (HME)

Scope: All single-family mortgages, owner-occupied townhouses, and owner-occupied condominiums constituting a primary residence.

▪ Retains explicit, legislatively authorized government guarantee on qualifying mortgage-backed securities

▪ Governed by a reconstituted board with strict affordable housing mandates, including Duty to Serve obligations for low-to-moderate income borrowers

▪ Capitalized to private standards over a defined 5–7 year glide path under FHFA supervision

▪ Subject to full congressional oversight, FHFA examination, and Treasury approval for guarantee fees (g-fees)

▪ Public equity sale possible after full capitalization; government retains warrant/preferred stake for taxpayer recovery

◦ Treasury warrants representing up to 79.9% equity stakes must be retired or converted in any IPO structure

◦ Affordable Housing Goals (AHG) performance metrics must be embedded in charter as condition of guarantee

C. Portfolio II — The Commercial & Multifamily Market Entity (CMME)

Scope: All non-primary-residence mortgages — multifamily apartment buildings (5+ units), commercial real estate, investor-held properties, and second/vacation homes.

▪ No federal guarantee — explicit statutory prohibition on any Treasury backstop, FHFA conservatorship protection, or implicit sovereign support

▪ Publicly sold via IPO or structured auction to institutional and retail investors at full market pricing

▪ Operates as a purely private financial institution, subject only to standard bank/financial regulatory oversight (OCC, Federal Reserve, SEC as applicable)

▪ Subordinated equity holders participate only in CMME value — claims on HME's government-backed book are extinguished

▪ Pricing of CMME securities will reflect true credit risk, market spreads, and absence of government support — a reset from distorted conservatorship pricing

INVESTOR NOTICE: The valuation of CMME equity will be established by market price discovery, not by legacy conservatorship structures or extrapolations from HME guarantee economics. Claims that subordinated equity holders in the combined entity are entitled to returns priced off the government guarantee are legally unfounded and analytically unsupportable.

III. AFFORDABILITY AND HOMEOWNERSHIP PROTECTIONS

A. Strengthening the Primary Residence Mission

Bifurcation strengthens, rather than weakens, the affordable housing mission by concentrating government support exclusively where it achieves the greatest social return: first-time homebuyers, low-to-moderate income families, rural borrowers, and underserved communities.

▪ Guarantee fee (g-fee) structure reoriented to cross-subsidize affordable lending, rather than subsidizing commercial investors

▪ Mandatory minimum allocations to Duty to Serve programs — rural housing, manufactured housing, and affordable housing preservation

▪ Housing Trust Fund and Capital Magnet Fund contributions maintained and potentially expanded as condition of HME charter

▪ 30-year fixed-rate mortgage availability protected as core product mandate

B. Rent and Multifamily Considerations

Some stakeholders argue that removing federal guarantees from multifamily lending will reduce rental housing supply and increase rents. This concern, while raised in good faith, conflates cause and effect. The evidence suggests:

▪ Private multifamily finance functioned robustly before GSE dominance in that sector; life insurers, CMBS markets, and bank portfolios can absorb volume

▪ FHA/HUD multifamily programs retain a government-backed channel for genuinely affordable rental developments (Section 8, LIHTC-supported projects)

▪ GSE multifamily guarantees disproportionately benefit market-rate and luxury apartment development — not workforce or affordable housing

▪ True price discovery in multifamily finance may improve capital allocation and reduce excess supply of luxury units crowding out affordable development

IV. SUBORDINATED EQUITY CLAIMS — A PEER REVIEW

A. The Speculative Equity Position

During and after the conservatorship, a group of hedge funds and distressed asset investors acquired Fannie Mae and Freddie Mac junior investment positions at deeply discounted prices, sometimes for pennies on the dollar. These investors have since engaged in sustained lobbying, litigation, and public advocacy to position themselves for large payouts tied to a GSE release from conservatorship.

B. Claims That Do Not Survive Peer Review

The following specific claims made by subordinated equity advocates are analytically unsound:

CLAIM

REBUTTAL

GSEs have fully repaid Treasury; shareholders are entitled to remaining value

The net worth sweep structure, affirmed in litigation, was a valid exercise of conservatorship authority. Preferred dividends ≠ principal repayment. Retained earnings under conservatorship are not distributable equity.

Release without restructuring would create enormous shareholder value

Value depends entirely on guarantee fee economics, which are a regulatory determination — not a market outcome. Post-restructuring CMME pricing will reflect true market risk.

Multifamily guarantee removal will trigger systemic instability

Multifamily represents well-capitalized, income-producing collateral. Unlike 2008 single-family, multifamily delinquency rates remain structurally low. Market capacity exists.

Splitting the entity destroys operational synergies

Operational synergies are real but modest compared to the distortive subsidy cost. Platform separation is achievable on a 3-5 year implementation horizon with proper data and IT transition planning.

Subordinated equity holders have contractual rights to upside

Conservatorship extinguished normal shareholder governance rights. Any residual equity claim attaches to CMME, not to the government-backed HME book.

C. Fiduciary and Policy Integrity

The Administration should be alert to the following advocacy tactics, which have appeared in congressional testimony, think tank white papers, and press coverage:

▪ Conflating total GSE enterprise value with government-guaranteed mortgage volume to inflate claimed equity worth

▪ Citing return projections derived from models that assume continued implicit government guarantee in the commercial/multifamily book

▪ Framing any restructuring that separates portfolios as 'expropriation,' when in fact it reflects the actual scope of the government's mission

▪ Using affordable housing rhetoric to protect commercial portfolio returns that have no plausible connection to homeownership access

RECOMMENDATION: Any legislative or regulatory proposal that provides subordinated equity holders returns substantially above their distressed acquisition cost — based on government guarantee economics they did not underwrite — should be subjected to independent economic peer review before advancing. The burden of proof lies with those making extraordinary value claims.

V. IMPLEMENTATION ROADMAP

Phase 1: Legislative Foundation (Year 1)

▪ Introduce Housing Finance Reform Act establishing HME and CMME as distinct statutory entities

▪ Define scope of government guarantee, affordable housing mandates, and capital requirements for HME

▪ Explicitly prohibit Treasury backstop for CMME by statute

▪ Direct FHFA to prepare asset bifurcation and transition plan

Phase 2: Capitalization and Separation (Years 2–3)

▪ FHFA implements operational separation of single-family and multifamily/commercial books

▪ HME begins building capital to private standards under regulatory glide path

▪ CMME incorporated as independent entity; leadership, board, and capital structure established

▪ Treasury and FHFA conduct joint valuation of CMME for public offering

Phase 3: Public Market Transactions (Years 3–5)

▪ CMME IPO or structured sale; Treasury warrants converted or sold

▪ HME equity offered to public after full capitalization milestone achieved

▪ Government retains residual preferred stake in HME; guarantee fees set to cover actuarial risk

▪ Ongoing FHFA supervision of HME; CMME regulated as private financial institution

VI. PRESIDENTIAL RECOMMENDATIONS

The President is asked to authorize the following actions:

1. Direct the National Economic Council and FHFA to prepare a detailed bifurcated restructuring plan within 90 days, including portfolio valuation, statutory requirements, and transition cost estimates.

2. Commission an independent economic peer review of all subordinated equity valuation claims being advanced in congressional testimony or regulatory comment processes, with public findings.

3. Instruct Treasury and FHFA to begin the statutory and operational groundwork for CMME separation, with a target CMME public market transaction within 48 months.

4. Reaffirm the Administration's commitment to affordable homeownership by embedding strengthened Duty to Serve obligations and affordability benchmarks as non-negotiable conditions of HME's government charter.

5. Engage Congress on bipartisan housing finance reform legislation that codifies the bifurcated framework, ending conservatorship on a defined timeline while protecting the primary residence mission.

VII. CONCLUSION

The conservatorship of Fannie Mae and Freddie Mac was the right emergency response to a catastrophic crisis. Nearly two decades later, it is neither emergency nor temporary. The present structure subsidizes private risk-taking at public expense and has allowed a narrow class of speculative investors to construct return narratives that do not survive analytical scrutiny.

The bifurcated privatization framework advanced in this brief offers a principled resolution: government support flows to the Americans it was designed to serve — primary residence homeowners — while commercial and multifamily markets are returned to full private discipline. This is not a radical proposal. It is the application of first principles to a problem that has waited too long for resolution.

The window for action is open.

The Administration should move decisively.