Could the Biden administration bring back the GSE net worth sweep?

The Supreme Court's decision this week on the Federal Housing Finance Agency could end up restoring the net worth sweep that those backing the lawsuit sought to reverse, a Fitch Ratings report said.

This ruling means near-term strategic shifts for Fannie Mae and Freddie Mac could come via administrative actions from the executive branch, rather than a protected regulator. It eases the path for further changes to the Preferred Stock Purchase Agreements.

"The Treasury and FHFA have the ability to amend the PSPAs bilaterally, and following the SCOTUS decision, leadership at both Treasury and FHFA serve at the President's will," the Fitch research note said. "In particular, reversal of the net worth sweep could strengthen the government's control over the GSEs by cutting off their ability to grow capital organically, which could create challenges for future administrations to release the GSEs from conservatorship."

The goal in the suit brought by Fannie Mae and Freddie Mac investors was to have the prior FHFA management structure declared to be unconstitutional and thus any actions it took, including the net worth sweep, to be invalid and thus reversed. It was a pyrrhic victory; the Supreme Court agreed with the first point, but other than sending the case back to the lower courts to discuss possible damages, the justices let prior FHFA activities stand.

In the waning days of the Trump administration, the agreements between the FHFA and Treasury were modified to end the net worth sweep and allow Fannie Mae and Freddie Mac to retain all of their profits. When the PSPAs were first agreed to, all net earnings were upstreamed to the Treasury in consideration for a line of credit it provided to both companies to draw upon for capital support following financial losses.

The agreements were first amended in October 2019 to allow each company to retain $3 billion per quarter, up to a total of $25 billion for Fannie Mae and $20 billion for Freddie Mac.

Already some segments of the housing industry are calling for the January agreements to be modified.

Given that GSE reform coming from Congress remains highly unlikely in the current political environment, volatility over the roles the agencies play becomes probable.

"The president's increased authority over the FHFA and, as a result, the GSE's role in the U.S. housing finance system, may result in more policy shifts in how the GSEs provide liquidity, stability and affordability to the housing finance industry," Fitch pointed out. "Administrative actions achieved by the FHFA instead of more permanent legislative action may be more easily amended by future administrations, which may have differing policies and agendas of how the GSEs' missions may best be achieved."

So far, the Biden administration hasn't articulated its plans for the GSEs, but after the election, observers said expanding access to affordable housing was a priority. And when now-Vice President Kamala Harris was seeking the top job, she proposed a $100 billion program for Black families and individuals to purchase homes. Fannie Mae and Freddie Mac could be utilized to achieve those broader policy aims.

"While potentially negative for the GSEs from an underwriting and credit loss standpoint, this could enhance their policy role, which could be credit positive for Fitch's view of U.S. government support and senior unsecured creditors," the report said.