Congress chartered Fannie Mae and Freddie Mac as for-profit, shareholder-owned corporations in 1968 and 1989, respectively. They share a primary mission, which is to enhance the liquidity, stability, and affordability of mortgage credit. To accomplish this goal, the enterprises purchase conventional mortgages that meet their underwriting standards, known as conforming mortgages, from primary mortgage lenders such as banks or savings associations. Mortgage lenders sell mortgages to transfer risk (especially interest rate risk in the case of fixed-rate mortgages) or increase liquidity. They can use the proceeds from selling mortgages to the enterprises to originate additional mortgages, or they may exchange a pool of mortgages for enterprise-backed MBS, which they can keep or sell. The enterprises package mortgages they purchase into MBS, which are sold to investors in the secondary mortgage market. In exchange for a fee (the guarantee fee), the enterprises guarantee the timely payment of interest and principal on MBS that they issue. These fees are typically incorporated into the interest rates charged to borrowers. The charter requirements for providing assistance to the secondary mortgage markets specify that those markets are to include mortgages on residences for low- and moderate-income families and require the enterprises to support mortgage financing in underserved areas. HERA established FHFA as an independent agency responsible for the safety and soundness and housing mission oversight of the enterprises. FHFA took over the oversight of the enterprises from the Office of Federal Housing Enterprise Oversight, formerly an independent entity within the Department of Housing and Urban Development (HUD). FHFA has a statutory responsibility to ensure that the enterprises operate in a safe and sound manner and that the operations and activities of each regulated entity foster liquid, efficient, competitive, and resilient national housing finance markets. Additionally, the Emergency Economic Stabilization Act of 2008 directed FHFA and other agencies to implement plans seeking to maximize assistance for homeowners and encourage mortgage servicers to take advantage of available programs to minimize foreclosures. HERA authorized the Director of FHFA to appoint FHFA as conservator or receiver for the enterprises for the purpose of reorganizing, rehabilitating, or winding up their affairs. As conservator, FHFA was authorized to take such action as may be necessary to put the regulated entity in a sound and solvent condition, as well as such action as may be appropriate to carry on the business of the regulated entity and to preserve and conserve the assets and property of the regulated entity. Upon placing the enterprises into conservatorships, FHFA succeeded by operation of law to the authority of the enterprises’ management, boards of directors, and shareholders during the period of the conservatorships. However, according to FHFA, it does not manage every aspect of the enterprises’ operations. Instead, FHFA reconstituted the enterprises’ boards of directors in 2008 and charged them with overseeing management’s day-to-day operation of the enterprises, subject to FHFA review and approval on certain matters. Fannie Mae and Freddie Mac retain their government charters and continue to operate legally as business corporations. FHFA initially outlined its understanding of its conservatorship obligations and how it planned to fulfill those obligations in a 2010 letter to Congress. In February 2012, FHFA sent Congress a strategic plan that set three strategic goals for conservatorship and elaborated on how FHFA planned to meet its conservatorship obligations. Most recently, under the current Director, whose term began in January 2014, FHFA issued an updated strategic plan in May 2014 that reformulated its three strategic goals. Using its authority provided in HERA, Treasury provides capital support to the enterprises while in conservatorships through senior preferred stock purchase agreements. Under these agreements, Treasury committed to provide up to $445.6 billion in assistance to the enterprises, of which the enterprises have drawn $187.5 billion to date. In exchange, the enterprises pay quarterly dividends to Treasury. Under the current terms of the agreements as amended, Fannie Mae and Freddie Mac must pay to Treasury as dividends all of their quarterly positive net worth amount (if any) over a specified capital reserve amount upon declaration of dividends. However, the agreements reduce this capital reserve amount to zero in January 2018. From 2008 through 2013, the federal government directly or indirectly supported over three-quarters of the value of new mortgage originations in the single-family housing market. Mortgages with federal support include those backed by the enterprises as well as mortgages insured by the Federal Housing Administration (FHA), which has experienced substantial growth in its insurance portfolio and significant financial difficulties. In light of developments concerning the enterprises and FHA, in 2013 we identified the role played by the federal government in the housing finance system as a high-risk area for the government. Subsequently, Congress considered a number of legislative proposals to make significant changes to the housing finance system. Three proposals—the Housing Finance Reform and Taxpayer Protection Act of 2014, S. 1217; the FHA Solvency Act of 2013, S. 1376; and the Protecting American Taxpayers and Homeowners Act, H.R. 2767—were reported out of committee during the 113th Congress (January 2013– January 2015), but no further action was taken. From 2003 to 2006, the enterprises saw the share of total first-lien mortgage originations they securitized into MBS decline from 51 percent to 32 percent (see fig. 1). This decrease coincided with the rapid expansion of nonprime lending and private-label MBS. However, there have been very few new issuances of private-label MBS since 2007. As that segment of the market virtually disappeared, the enterprises’ market share increased to a high of 65 percent of total originations in 2008 (even as the dollar volume of originations they securitized decreased from 2007) and remained nearly at that level for several years. Meanwhile, the share of first-lien mortgage originations that banks held in their portfolios generally decreased, from 34 percent in 2002 to a low of 12 percent in 2009. However, the percentage of loans held in banks’ portfolios increased from less than 20 percent in 2013 to more than 30 percent in 2014, where it remained through the first half of 2016. Simultaneously, the percentage of loan originations that the enterprises packaged into MBS and guaranteed dropped from 62 percent in 2013 to less than 50 percent in 2014, and fell further to 43 percent during the first half of 2016. While the three goals FHFA outlined in its 2014 strategic plan for the conservatorships are similar to those in the previous 2012 plan in a number of ways, there are key differences that reflect a shift in priorities for the conservatorships and changing market conditions. Whereas in the 2012 plan FHFA stated that its goals were aimed at establishing a foundation for a new housing finance system in the future, FHFA stated that the 2014 plan and goals emphasize overseeing and managing the enterprises in their current state in accordance with statutory mandates. This shift in priorities is evident in the goals’ relative importance as indicated by the weight given to each goal, as well as changes to the wording of the three goals between the 2012 and 2014 strategic plans (see table 1) and the actions FHFA is taking to further these goals. In addition, the previous strategic plan was produced while the enterprises were generating losses and the outlook for future losses was highly uncertain, according to FHFA, but the 2014 plan was issued after a string of profitable quarters for both enterprises. In the 2014 plan, FHFA indicated it was placing greater emphasis on its goal for maintaining credit availability and foreclosure prevention options (Maintain goal). FHFA increased the weight given to this goal in its annual scorecards for the enterprises, from 20 percent in 2012 and 2013 to 40 percent in 2014 through 2016. Additionally, FHFA changed the wording of the Maintain goal from “maintain foreclosure prevention activities and credit availability for new and refinanced mortgages” to “maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets.” The new wording more closely aligns the goal with FHFA’s responsibilities outlined in statute and Congress’s stated purpose for the enterprises. Many of the activities that were identified in the 2012 plan under the Maintain goal continue to be stressed in the 2014 plan. These activities include the following: Representations and warranties framework. FHFA and the enterprises undertook a multiyear effort to develop a new framework governing representations and warranties—the assurances lenders provide that mortgage loans sold to the enterprises comply with the standards outlined in the enterprises’ selling and servicing guides, including underwriting and documentation. The objective of the framework is to enhance transparency and certainty for lenders by clarifying when a mortgage loan may be subject to repurchase. This clarity may give lenders more confidence to lend, which helps maintain borrowers’ access to credit. For example, currently lenders are eligible for relief from certain representations and warranties when borrowers make 36 consecutive payments with no more than two delinquencies of 30 days or less. The enterprises categorized loan origination and servicing defects and the appropriate remedies available to address them in the framework and established an independent dispute resolution program to resolve contested loan- level disputes about repurchase requests. The final piece of the framework was put in place in February 2016. Loss mitigation and foreclosure prevention. In an effort to help borrowers avoid foreclosure, FHFA worked with the enterprises to align their servicing policies and develop loss mitigation tools that included loan modifications, streamlined refinance options, and foreclosure prevention actions including short sales and deeds-in-lieu of foreclosure. FHFA and the enterprises also made enhancements to requirements related to foreclosure alternatives, unemployment forbearance, and rate-reset notifications. For example, the enterprises announced in June 2014 that mortgage servicers could approve eligible borrowers for extended unemployment forbearance without obtaining prior written authorization from the enterprises. Finally, the enterprises have used sales of nonperforming loans to transfer pools of severely delinquent loans to new buyers and servicers with the goal of providing more favorable outcomes for borrowers while also reducing losses to the enterprises and, therefore, to taxpayers. In addition, FHFA identified a number of new activities, some of which the enterprises have begun implementing, that serve to expand its efforts to maintain credit availability and foreclosure prevention as market conditions improve, including lowering the minimum down payment from 5 percent to 3 percent; providing for principal forgiveness for an estimated 30,000 borrowers in default; issuing proposed rules outlining the enterprises’ duty to serve certain underserved segments of the market; and transferring funds to a statutory housing trust fund that will be distributed through grants made to the states. FHFA also reframed the enterprises’ actions in multifamily production to focus on maintaining credit availability rather than on reducing their market share. Beginning in 2013, FHFA imposed a production cap on the enterprises’ multifamily business. However, since 2014 FHFA has allowed the enterprises to exclude from the caps affordable housing loans, loans to small multifamily properties, and loans to manufactured housing rental communities. In addition, FHFA increased the 2016 multifamily lending caps for the enterprises from $31 billion to $36.5 billion. The adjustment for 2016 was based on increased estimates of the overall size of the 2016 multifamily finance market due to continued high levels of property acquisitions and deliveries of newly constructed apartment units, as well as record levels of maturing loans that required refinancing. FHFA’s second goal in the 2014 plan, like the corresponding goal in the 2012 plan, is aimed at transferring risk from the enterprises (and taxpayers) to private investors. However, the two goals are worded differently due to different approaches to decreasing risk. In 2012, the goal was to “gradually contract the enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations” (Contract goal). The 2014 plan rephrases the goal as to “reduce taxpayer risk through increasing the role of private capital in the mortgage market” (Reduce goal) and shifts away from decreasing the enterprises’ role in the housing market. In addition, FHFA reduced the weight that activities under the second goal were given in FHFA’s annual scorecards, from 50 percent in 2013 to 30 percent in 2014 through 2016. As FHFA noted in the 2014 strategic plan, its statutory responsibilities as conservator do not include making policy decisions on the future of housing finance reform. FHFA officials told us that the current Director did not believe that shrinking the enterprises’ dominant presence in the market was FHFA’s decision to make because Congress had not yet acted on housing finance reform. Additionally, FHFA noted that it was concerned about the effects of shrinking the enterprises’ operations on mortgage market liquidity and the availability of mortgage credit, which it was seeking to support through its Maintain goal. In other words, there may have been tension between the Contract goal and the Maintain goal in the 2012 plan, and shifting risk from taxpayers to private market participants without contracting the enterprises’ presence in the market helped eliminate this tension. As a result, one of the actions outlined in the 2012 plan related to efforts to contract the enterprises’ role—continued gradual increases in the enterprises’ guarantee fee pricing—was eliminated. Another action was reframed: the multifamily production activities that in the 2014 plan focus on maintaining access to credit and are therefore included in the Maintain goal, as discussed previously. In its efforts to support the new focus of the Reduce goal, FHFA has taken several actions, including the following: Credit risk transfers. FHFA directed the enterprises to transfer a portion of the credit risk they face on the mortgages they securitize to private investors. These transfers of risk can occur either before (“front-end”) or after (“back-end”) the enterprises purchase mortgages. The enterprises primarily employed back-end risk transfers in the first 3 years of the initiative (2013–2015), but recently they have been trying various structures, including some front-end transfers. Under the debt issuance structure for credit risk transfers (the structure the enterprises have used most), the enterprises sell debt to investors and receive payment up front at the time of the sale. The enterprises repay the debt based on the performance of a reference pool of mortgages, in which the investor earns a higher return if the mortgages perform well and a lower return should they perform poorly. From 2013 through 2015, the enterprises completed 70 transactions that transferred credit risk totaling $30.6 billion on single- family mortgages with an unpaid principal balance of about $838 billion. In June 2016, FHFA issued a request for input on proposals for the enterprises to adopt a number of front-end credit risk transfer structures. Private mortgage insurance standards. FHFA and the enterprises updated eligibility requirements for private mortgage insurers seeking to insure loans that are eligible for purchase by the enterprises. These requirements help to ensure the stability of mortgage insurance companies that are counterparties of the enterprises, reducing counterparty risk to the enterprises and, by extension, risk to taxpayers. Among other things, the requirements establish financial standards for private mortgage insurers to demonstrate adequate resources to pay claims and operational standards relating to quality control processes and performance metrics. The enterprises began implementing the requirements in the second half of 2015, and all the revised requirements were effective December 31, 2015. FHFA narrowed the focus of its goal of building a securitization infrastructure (Build goal) from creating a new secondary mortgage market infrastructure to primarily addressing the enterprises’ current operational needs. But FHFA kept the weight assigned to this goal in the annual scorecards it issued for the enterprises at 30 percent (which is the weight it was given each year from 2012 through 2016). The reduction in scope is evident in the changed wording of the goal, from “build a new infrastructure for the secondary mortgage market” to “build a new single- family securitization infrastructure for use by the enterprises and adaptable for use by other participants in the secondary market in the future.” One example of refining the goal’s scope was discontinuing the effort to develop a model contractual and disclosure framework. Since 2012, the enterprises had been working to develop the framework to align the contracts and data disclosures that supported fully guaranteed MBS issued by the enterprises and craft a set of uniform contractual terms and standards for transparency for MBS that carried no or only a partial federal guarantee and that could be broadly accepted by issuers and investors. To develop this framework, FHFA was incorporating input it received in 2012 on a proposal for a standardized pooling and servicing agreement. According to FHFA, by the end of 2013 the enterprises had made progress toward developing preliminary recommendations for the framework. However, the 2014 strategic plan did not mention the framework. FHFA officials said that the effort to develop the framework was distracting FHFA from focusing on addressing the enterprises’ securitization infrastructure needs, particularly those related to the implementation of a Single Security (discussed later). They said discontinuing the work on the framework was part of a strategy to mitigate risk through managing the scope of the infrastructure they were building. Additionally, the officials said that private industry groups commented to FHFA that such an effort should be left to the private sector. Despite the change in goal’s scope in the 2014 plan, FHFA is continuing efforts begun earlier to create a new securitization infrastructure—most notably, a common securitization platform. The common securitization platform is a technology and operational platform that will perform many of the enterprises’ current securitization functions for single-family mortgages on behalf of the enterprises. FHFA directed the enterprises to develop a common platform to replace the information technology platforms at each enterprise that support their securitization activities. While the common platform is designed to meet the current securitization activities of the enterprises, it is being built using open architecture and industry standard software, systems, and data requirements with the goal of being adaptable for use by other market participants in the future. According to FHFA officials, focusing first on meeting the known requirements of the enterprises made the most sense for defining the scope of the work and managing the project. Nonetheless, they said the ultimate goal of building an infrastructure that can be used by other market participants remains an important part of the Build goal and has informed many decisions FHFA has made. FHFA expects the platform to be implemented in two releases: Implementation of the first release is scheduled to occur before the end of 2016 and should allow Freddie Mac to use the platform to issue its current single-class securities. In preparation for the first release, Freddie Mac and Common Securitization Solutions, LLC, a joint venture of the enterprises that was formed to operate the platform, successfully completed system-to-system and end-to-end testing of the functionality of the platform in early 2016. The second release is scheduled for 2018, when both enterprises plan to use the platform to issue a Single Security, which FHFA is developing to replace the different MBS they currently offer. Unlike the enterprises’ current products, the new securities will have the same features, and the goal is for the market to treat them as fungible irrespective of the enterprise that issued them. In addition, the enterprises will be able to commingle first-level and second-level securities from either enterprise in the second-level securities they issue. As of July 2016, FHFA had finalized the features of the Single Security after soliciting and incorporating input from the public. FHFA also updated loan-level disclosures and announced that the enterprises will begin issuing these securities in 2018. To support the Build goal, FHFA and the enterprises continue to develop mortgage data standards for the single family loans they purchase through the Uniform Mortgage Data Program. This program has provided lenders with common and consistent definitions and specification for various mortgage data, including appraisal, loan delivery, mortgage loan application, and closing disclosure information. The enterprises currently collect standardized appraisal and loan delivery data, and expect to implement a data collection system for the closing disclosure dataset in the third quarter of 2017. As part of a new mortgage loan application, the enterprises released technical requirements and an associated dataset to electronically capture loan application information to the industry in the third quarter of 2016. Implementation of the new loan application and associated dataset is likely to be in the first quarter of 2019, according to FHFA. Prior to 2014, FHFA was taking explicit steps to shrink the enterprises’ role in the secondary market. These actions included gradual increases in guarantee fees and strict caps on the total amount of multifamily loans that the enterprises could purchase. As discussed earlier, these actions were stopped by the current Director and FHFA’s adoption of the 2014 strategic plan. However, other actions that serve to reduce the depth and breadth of the enterprises’ activities and that are written into the enterprises’ agreements with Treasury continue. These actions include reducing retained mortgage portfolios and reducing the enterprises’ capital bases to $0 by January 2018. FHFA stated that it changed its strategy for the conservatorships and took actions to maintain the enterprises’ current state and role in the secondary market in the absence of congressional direction on housing finance system reform. At the same time, FHFA officials told us that the strategy was intended to be neutral in terms of the enterprises’ future structure and left all reform options open. Our analysis comparing FHFA’s actions with legislative proposals to reform the enterprises’ structure found that some proposals continue or build upon actions FHFA has taken, such as the common securitization platform and credit risk transfers. However, proposals that incorporate the same future structure for the enterprises do not consistently build upon the same actions. For example, one legislative proposal that replaces the enterprises with a single federal agency builds upon FHFA’s credit risk transfer initiative, but other similar proposals do not explicitly address credit risk transfers. As a result, FHFA’s actions are not necessary to transitioning to the particular structures in any of these proposals, such as a single governmental agency or fully privatized companies. In addition, we found that the same actions were included in multiple proposals that envisioned different future structures for the enterprises. Industry stakeholders generally said that FHFA’s recent actions have not advanced or constrained any of the future structures for the enterprises outlined in legislative proposals. Representatives from two industry associations told us that FHFA’s recent actions have been neutral as to the future structure. However, other industry stakeholders who are members of a third industry association noted that FHFA had taken steps prior to 2014 to harmonize the enterprises’ policies, procedures, and products, some of which continued after the publication of the 2014 plan, such as the development of a Single Security and the common securitization platform. Taking these steps could facilitate (but would not require) merging the enterprises into a single entity. But whether that single entity would be a government agency, government corporation, or private entity was unclear to these stakeholders. Officials from another industry association said that instead the enterprises could be recapitalized as competitors to one another but that it was unclear how they would be able to balance competing against each other with working together to ensure the common securitization platform works well. As outlined in the 2012 strategic plan, FHFA set out to address a number of barriers to entry into the secondary mortgage market. By creating a common securitization platform using open architecture, a model pooling and servicing agreement (which evolved into the contractual and disclosure framework discussed previously), and standardized mortgage data, along with contracting the enterprises’ presence through increased guarantee fees, FHFA sought to make entry into the secondary market easier for private entities. However, over time most of these actions were scoped down or eliminated, resulting in a reduced emphasis on addressing barriers. Some industry stakeholders said that FHFA’s shift in direction sent mixed messages to market participants and increased uncertainty about the role private entities should be playing in the secondary mortgage market. For example, some industry stakeholders we spoke with perceived a technological barrier to entry into the secondary mortgage market. The shift in the Build goal from 2012 to 2014 related to the common securitization platform does not clearly address this barrier as it is less clear whether private entities will be able to use the platform. According to FHFA officials, many decisions remain to be made about whether, when, and for what purposes private entities will be able to use the platform, which adds to uncertainty. As another example, FHFA and the enterprises began developing a contractual and disclosure framework but decided to halt the effort in 2014. The framework had the potential to help address some of the governance issues that some industry stakeholders said were holding back the secondary mortgage market’s private-label MBS. These governance issues include a lack of alignment of interests among parties to a securitization transaction and processes for holding servicers for the underlying mortgages accountable for their performance. Some industry stakeholders we spoke to said that completing the framework, while potentially helpful in addressing some issues, would have been unlikely to fully address the barriers that continue to prevent the private-label MBS market from growing. According to FHFA officials, the private sector has worked on developing its own framework, and this effort is ongoing. Further, changes to FHFA’s Maintain goal from the 2012 plan to the 2014 plan have expanded the enterprises’ reach to put them in competition with other market participants. Rather than addressing barriers to entry for private entities, these actions may enhance rather than lessen the enterprises’ existing advantages, which serve as barriers to entry and add to market participants’ uncertainty about their role in the market relative to the enterprises. For example, allowing down payments as low as 3 percent expands the market segments the enterprises serve. According to an industry stakeholder, doing so could push other market participants out of these segments because the enterprises have built-in advantages—such as lower cost of funding and a government guarantee—that may make their products more attractive. Another stakeholder said the proposed rule on the enterprises’ duty to serve underserved markets, could also increase the enterprises’ competition with private entities, depending on future decisions. Increases in guarantee fees that occurred in the first few years of the conservatorship began to address the barrier posed by the enterprises’ pricing advantage. According to the Urban Institute, other options for lenders, such as holding certain loans in portfolio, made more financial sense as the cost of selling loans to the enterprises increased. However, not continuing the increases as envisioned in the 2012 plan under the Contract goal could make these options less attractive than selling to the enterprises, according to an industry stakeholder. As a result, lenders may focus on making loans that can be sold to the enterprises and place less emphasis on reaching segments of the population that do not qualify for those loans. On the other hand, lower guarantee fees keep mortgages affordable, which has been the aim of the Maintain goal in both the 2012 and 2014 plans. In addition, the Reduce goal includes developing new front-end credit risk transfers to increase the amount of risk borne by private entities. Some industry stakeholders expressed concern that possible options for front- end credit risk transfer transactions could increase barriers to entry for mortgage originators, depending on how the transactions are structured. FHFA officials noted that they would be reviewing comments on how to structure these front-end transactions after the close of the comment period on October 13, 2016. FHFA has taken some actions that could increase the likelihood of drawing on Treasury’s capital commitment under the agreements as well as other actions that could have the opposite effect, and the net effect of these actions is uncertain. Some of FHFA’s newer actions supporting the 2014 plan could increase credit risk and therefore the likelihood of needing further assistance from Treasury. For example, one industry stakeholder said allowing the enterprises to purchase riskier mortgages, such as those with a 3 percent down payment and expanding the enterprises’ service to certain underserved segments of the market, could increase the likelihood of a draw on Treasury under the agreements. However, the underwriting requirements for these mortgages and the fees the enterprises collect help offset the increased risk. In addition, FHFA officials noted that these actions currently represent a small portion of the enterprises’ business and therefore would have a minimal impact on the likelihood of drawing on Treasury’s funding commitment. Several actions FHFA is taking, such as credit risk transfers and the Single Security, would reduce the likelihood of needing additional Treasury support, according to FHFA. These and other actions, including private mortgage insurer standards, the representations and warranties framework, and loss mitigation and foreclosure prevention activities, reduce credit risk or counterparty risk to the enterprises. While FHFA has directed the enterprises to engage in a growing set of credit risk transfers including front-end transfers, such as deeper mortgage insurance, the enterprises (as of 2016) have mostly conducted back-end risk transfers. With back-end transfers, the enterprises hold the credit risk until they complete the credit risk transfer transactions. In front-end transactions, private entities agree to take on a portion of the credit risk before or at the same time the loans are delivered to the enterprises. FHFA has stated that the enterprises need to issue a large enough volume of transactions to ensure a liquid market for credit risk transfer products. But FHFA has also stated that the enterprises need to avoid an excess supply of any particular product to the market that, for example, causes investors to abandon the market because the value of their existing holdings is reduced. Some industry stakeholders we spoke with noted that the enterprises have not been particularly attuned to investor demand when determining the timing, volume, and pricing of credit risk transfer transactions. As a result, investors’ demand for credit risk transfer transactions may not meet the volume offered, and the enterprises could find themselves retaining more risk than planned. The enterprises’ results from their annual stress tests have improved each year since 2014 (see fig. 2). Although linking the changes in results to specific actions they and FHFA have taken is difficult, these results suggest that draws from Treasury due to negative economic conditions are less likely than they were several years ago. FHFA officials stated that loss mitigation actions, sales of illiquid assets from retained portfolios, and better credit quality in newer loans all contribute to the improved results, along with improved market factors such as house price appreciation. According to FHFA, credit risk transfers would also have an impact on the stress test results, even though the overall effect has been small given that the program is in the relatively early stages. However, the stress tests show that both enterprises would still need capital support from Treasury under a severely adverse economic scenario. As noted earlier, in January 2018 the enterprises’ capital reserve amount will fall to $0 as required by the agreements with Treasury, meaning any quarterly losses—including those due to market fluctuations and not necessarily to economic conditions—will require additional draws from Treasury under the agreements. In the 8 years since the enterprises were placed in conservatorships, Congress has not enacted legislation that establishes objectives for concluding the conservatorships and the future structure of the enterprises. One of the long-standing principles we have identified that should serve as a guide for providing government assistance to private market participants is setting clear objectives. In this case, clarity on issues related to comprehensive housing finance system reform is needed in order for the enterprises to exit conservatorship. According to FHFA, setting objectives for the conclusion of the conservatorships should be left to Congress. In a 2014 report, we outlined a framework consisting of nine elements that Congress could use to assess or craft proposals as it considers changes to the housing finance system. These elements are clearly defined and prioritized housing finance system goals; policies and mechanisms that are aligned with goals and other adherence to an appropriate financial regulatory framework; government entities that have capacity to manage risks; protections for mortgage borrowers and reductions in barriers to protection for mortgage securities investors; consideration of cyclical nature of housing finance and impact of housing finance on financial stability; recognition and control of fiscal exposure and mitigation of moral hazard; and emphasis on implications of the transition. As noted earlier, the 113th Congress considered a number of proposals for reforming the housing finance system, but none were enacted. Other proposals have been introduced in the 114th Congress but have not yet been passed by either the Senate or the House of Representatives (see app. I). These include the Financial Regulatory Improvement Act of 2015, S. 1484; Mortgage Finance Act of 2015, S. 495; Housing Finance Restructuring Act of 2016, H.R. 4913; and Partnership to Strengthen Homeownership Act of 2015, H.R. 1491. Given the unknown duration of the conservatorships, without Congress providing explicit direction for the future of the enterprises, a change in leadership at FHFA could again shift priorities for the conservatorships and set the enterprises on a new path with another vision for their role and future structure. Such changes in direction could send mixed messages to market participants and add to existing uncertainty. Eight years after entering conservatorship, the enterprises’ futures remain uncertain and billions of taxpayer dollars remain at risk. Although FHFA has established goals for the conservatorships, its goals have been somewhat in tension with each other. In addition, the actions taken by FHFA to implement its goals have lacked a consistent direction over time, and FHFA has not clarified how to balance different priorities. As we have previously found, the federal government should set clear goals and objectives when providing financial assistance to private market participants. However, Congress has yet to establish objectives for the future of the enterprises after conservatorship or the future federal role in housing finance. Without Congress providing explicit direction for the future of the enterprises, the conservatorships will continue. Prolonged conservatorships and a change in leadership at FHFA could again shift priorities for the conservatorships, which in turn could send mixed messages and create uncertainties for market participants and hinder the development of the broader secondary mortgage market. By setting a clear direction for the future of the housing finance system, Congress would enable FHFA to use the conservatorships of the enterprises to facilitate the transition to a new structure. To reduce uncertainty and provide FHFA sufficient direction for carrying out its responsibilities as conservator of the enterprises, Congress should consider legislation that establishes objectives for the future federal role in housing finance, including the structure of the enterprises, and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. We requested comments on a draft of this product from FHFA, Treasury, and the previous FHFA Acting Director. The Acting Deputy Director of the Division of Conservatorship provided us with oral comments, stating that FHFA agreed with our overall findings. He also provided some technical clarifications, which we incorporated as appropriate. The previous FHFA Acting Director also provided us with technical comments in an e-mail, which we incorporated as appropriate. Treasury did not provide comments. We are sending copies of this report to the appropriate congressional committees, the Director of FHFA, and the Secretary of the Treasury. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. This appendix discusses the legislative proposals that were introduced in the United States Senate and the House of Representatives between March 2013 and July 2016 that addressed the future structure of Fannie Mae and Freddie Mac and the secondary mortgage market. In addition to the contact named above, Karen Tremba (Assistant Director), Don Brown (Analyst-in-Charge), Giselle Cubillos-Moraga, Rachel DeMarcus, Davis Judson, Risto Laboski, Marc Molino, Jennifer Schwartz, Mathew Scirè (retired), Tyler Spunaugle, and Jessica Walker made significant contributions to this report.

Summary: In 2008, FHFA used its authority under the Housing and Economic Recovery Act to place Fannie Mae and Freddie Mac into conservatorships out of concern that their deteriorating financial condition threatened the stability of the financial market. Eight years later, the enterprises remain in conservatorships. However, FHFA says the conservatorships were not intended to be permanent. FHFA has issued two strategic plans for its conservatorship of the enterprises, one in 2012 and another in 2014. GAO was asked to examine FHFA's actions as conservator. This report addresses (1) the extent to which FHFA's goals for the conservatorships have changed and (2) the implications of FHFA's actions for the future of the enterprises and the broader secondary mortgage market. GAO analyzed and reviewed FHFA's actions as conservator and supporting documents; legislative proposals for housing finance reform; the enterprises' senior preferred stock agreements with Treasury; and GAO, Congressional Budget Office, and FHFA inspector general reports. GAO also interviewed FHFA and Treasury officials and industry stakeholders. The Federal Housing Finance Agency (FHFA) issued a new strategic plan for the conservatorships of Fannie Mae and Freddie Mac (the enterprises) in 2014 with reformulated goals and supporting actions that reflect a shift in priorities and changing market conditions. While the three goals in the 2014 strategic plan are broadly similar to those in the previous plan issued in 2012, FHFA changed the weight and wording of the goals (see table) to align the plan more closely with FHFA's statutory responsibilities. Specifically, compared with the 2012 plan FHFA (1) increased its emphasis on maintaining credit availability and foreclosure prevention options; (2) shifted away from shrinking the enterprises as a way to reduce taxpayer risk (focusing instead on transferring credit risk to private investors, for example); and (3) reduced the scope of the securitization infrastructure being built, such as a new technology platform for securitizing mortgages, to focus on meeting the enterprises' current needs. In the absence of congressional direction, FHFA's shift in priorities has altered market participants' perceptions and expectations about the enterprises' ongoing role and added to uncertainty about the future structure of the housing finance system. In particular, FHFA halted several actions aimed at reducing the scope of enterprise activities and is seeking to maintain the enterprises in their current state. However, other actions (such as reducing their capital bases to $0 by January 2018) are written into agreements for capital support with the Department of the Treasury (Treasury) and continue to be implemented. In addition, the change in scope for the technology platform for securitization puts less emphasis on reducing barriers facing private entities than previously envisioned, and new initiatives to expand mortgage availability could crowd out market participants. Furthermore, some actions, such as transferring credit risk to private investors, could decrease the likelihood of drawing on Treasury's funding commitment, but others, such as reducing minimum down payments, could increase it. GAO has identified setting clear objectives as a key principle for providing government assistance to private market participants. Because Congress has not established objectives for the future of the enterprises after conservatorships or the federal role in housing finance, FHFA's ability to shift priorities may continue to contribute to market uncertainty. Congress should consider legislation that would establish clear objectives and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. FHFA agreed with our overall findings.