Federal Housing Finance Agency

Based on Wikipedia: Federal Housing Finance Agency

On September 7, 2008, the United States government did something extraordinary. It seized control of two private companies that together owned or guaranteed roughly half of all American mortgages—about five trillion dollars worth of home loans. This wasn't a merger or an acquisition. It was a government takeover of two corporations that most Americans had barely heard of, executed over a single weekend as global financial markets teetered on the edge of collapse.

The agency that pulled the trigger had existed for barely six weeks.

A New Sheriff Born from Crisis

The Federal Housing Finance Agency, known by its acronym FHFA, came into existence on July 30, 2008, when President George W. Bush signed the Housing and Economic Recovery Act. The timing wasn't coincidental. The American housing market was in freefall, and the existing patchwork of regulators lacked the authority to do much about it.

Before FHFA, oversight of America's housing finance system was split among multiple agencies. The Federal Housing Finance Board watched over the Federal Home Loan Banks. The Office of Federal Housing Enterprise Oversight—an unwieldy name shortened to OFHEO—supervised Fannie Mae and Freddie Mac. And the Department of Housing and Urban Development had its own team monitoring these government-sponsored enterprises, or GSEs.

None of them had real teeth.

OFHEO, for instance, could issue warnings and conduct examinations, but it couldn't actually do much when things went wrong. It was like a security guard with a notepad but no handcuffs. When the housing bubble inflated throughout the early 2000s, these regulators watched from the sidelines, lacking the legal authority to intervene meaningfully.

FHFA changed that equation. The new agency absorbed all these regulatory functions and gained something its predecessors never had: the power to place Fannie Mae and Freddie Mac into conservatorship or receivership. In plain terms, FHFA could take over these companies if it determined they were failing or operating unsafely.

The Strange Creatures Called GSEs

To understand why FHFA matters, you need to understand the peculiar entities it regulates. Government-sponsored enterprises occupy an unusual position in American capitalism—they're private companies with shareholders and stock prices, but they were created by Congress to serve public purposes, and everyone assumes the government will bail them out if they fail.

This ambiguity proved toxic.

Fannie Mae—officially the Federal National Mortgage Association—was created in 1938 as part of the New Deal. Its job was to buy mortgages from banks, freeing up capital so those banks could make more home loans. Think of it as a recycling system for debt. A local bank lends money to a homebuyer, then sells that mortgage to Fannie Mae, then uses the proceeds to make another loan to another homebuyer.

Freddie Mac—the Federal Home Loan Mortgage Corporation—came along in 1970 to provide competition and expand the market further. Together, these two entities created what's called the secondary mortgage market, and their existence fundamentally changed how Americans buy homes.

Here's the critical detail: Fannie and Freddie don't actually lend money to homebuyers. They buy loans that banks have already made, or they guarantee those loans against default. When you get a mortgage from your local bank, there's a good chance that loan will eventually end up owned or guaranteed by one of these GSEs.

By the mid-2000s, Fannie Mae and Freddie Mac touched roughly half of all outstanding mortgages in America. They had become what financial regulators call "systemically important"—institutions whose failure would cascade throughout the entire economy.

The Third Pillar: Federal Home Loan Banks

FHFA also regulates a less famous but equally important system: the eleven Federal Home Loan Banks, often called the FHLBank System or simply FHLBanks.

These aren't banks in the sense that you or I would use one. You can't open a checking account at a Federal Home Loan Bank or apply for a car loan there. Instead, they serve as a kind of wholesale funding source for other financial institutions—community banks, credit unions, insurance companies, and thrifts that want access to stable, low-cost funding.

The Federal Home Loan Banks were created in 1932, six years before Fannie Mae, as one of the earliest New Deal responses to the Great Depression. President Herbert Hoover, actually—this was before Franklin Roosevelt took office—signed the Federal Home Loan Bank Act to create a system that would provide liquidity to mortgage lenders and keep credit flowing to homebuyers.

The system still operates today, structured as eleven regional banks spread across the country. Each one is cooperatively owned by its member institutions. They raise money by issuing bonds, then lend those funds to their members at favorable rates. It's a less glamorous corner of the housing finance system than Fannie and Freddie, but the FHLBanks collectively hold over a trillion dollars in assets.

What FHFA Is Not

A common point of confusion: the Federal Housing Finance Agency is entirely separate from the Federal Housing Administration, despite the similar names.

The Federal Housing Administration, or FHA, is part of the Department of Housing and Urban Development. It provides mortgage insurance, protecting lenders against losses if borrowers default. When you hear about an "FHA loan," that's a mortgage insured by this agency.

FHFA, by contrast, doesn't insure anything. It regulates other entities. The distinction matters because these two agencies operate in different parts of the housing system. FHA deals directly with homebuyers and lenders through its insurance programs. FHFA operates at a higher altitude, overseeing the giant institutions that make the whole market function.

The Weekend That Changed Everything

James Lockhart had spent two years running OFHEO, the underpowered predecessor to FHFA. When the new agency launched, he became its first director. Six weeks later, he made the decision that would define his tenure.

By early September 2008, Fannie Mae and Freddie Mac were hemorrhaging money. The housing bubble had burst, defaults were spiking, and these two GSEs—which had grown fat on fees from the mortgage boom—suddenly faced catastrophic losses. Their stock prices had collapsed by more than ninety percent from their peaks.

On Sunday, September 7, 2008, Lockhart announced that FHFA was placing both Fannie Mae and Freddie Mac into conservatorship. This meant the government was taking control of the companies, replacing their management, and committing taxpayer money to keep them solvent.

Treasury Secretary Henry Paulson stood beside Lockhart at the press conference. His statement was blunt about the underlying problem: "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure."

What Paulson meant was that Fannie and Freddie had always operated with a fatal contradiction. They were supposed to be private companies pursuing profits for shareholders, but everyone knew the government would rescue them if they got into trouble. This implicit guarantee let them borrow money at artificially low rates—nearly as cheaply as the government itself—and take risks they never would have taken if they truly faced the consequences of failure.

The conservatorship was described at the time as "one of the most sweeping government interventions in private financial markets in decades." It was supposed to be temporary, a bridge to either recovery or an orderly wind-down.

More than fifteen years later, Fannie Mae and Freddie Mac remain in conservatorship.

The Constitutional Question

FHFA's structure raised an unusual legal issue that took more than a decade to resolve.

The agency was designed with a single director serving a five-year term. Crucially, the president could only remove this director "for cause"—meaning incompetence or malfeasance—rather than at will. This was meant to insulate FHFA from political pressure, ensuring that decisions about housing finance wouldn't be driven by electoral considerations.

But does the Constitution allow such arrangements?

The question cuts to the heart of executive power. Article II of the Constitution vests "the executive power" in the president. Does that mean the president must be able to fire any executive branch official at any time for any reason? Or can Congress create independent agencies whose leaders enjoy some protection from presidential removal?

In September 2019, the Fifth Circuit Court of Appeals ruled that FHFA's structure violated the constitutional separation of powers. Because the director couldn't be removed at the president's discretion, the court reasoned, the agency operated outside proper presidential control.

The case eventually reached the Supreme Court as Collins v. Yellen, decided in June 2021. The Court agreed that the removal restriction was unconstitutional, following its earlier ruling in Seila Law v. Consumer Financial Protection Bureau, which had struck down a similar provision protecting the director of the CFPB.

But the Court didn't abolish FHFA or unwind its past decisions. It simply declared that going forward, the president could fire the FHFA director at will. The agency's authority and its ongoing conservatorship of Fannie and Freddie remained intact.

The day after the ruling, President Biden replaced Mark Calabria—who had been appointed by President Trump—with Sandra Thompson as acting director. The seamless transition demonstrated both the ruling's practical effect and its limitations: FHFA's independence was diminished, but its power remained substantial.

The Lawsuits Nobody Remembers

While the conservatorship of Fannie and Freddie dominated headlines, FHFA pursued another significant undertaking that received far less public attention: suing the banks that had created the crisis in the first place.

In 2011, FHFA filed lawsuits against eighteen major financial institutions, including UBS, Bank of America, JPMorgan Chase, Goldman Sachs, and Deutsche Bank. The allegations were damning: these banks had sold roughly two hundred billion dollars in mortgage-backed securities to Fannie Mae and Freddie Mac while misrepresenting the quality of the underlying loans.

Mortgage-backed securities are financial instruments that bundle together thousands of individual home loans, slice them into pieces, and sell those pieces to investors. During the housing boom, Wall Street created these securities at industrial scale, packaging mortgages that were often made to borrowers who couldn't afford them.

FHFA's suits alleged that the banks knew these mortgages were risky—that the borrowers had inflated their incomes, that the homes had been appraised at inflated values, that underwriting standards had collapsed—but sold the securities to Fannie and Freddie anyway, collecting huge fees while passing the risk along.

The lawsuits painted what one observer called "a damning portrait of the excesses of the housing bubble." Some named individual bankers as defendants. All sought substantial damages.

Over the following years, the banks settled one by one. UBS paid $1.435 billion. Wells Fargo paid $335 million. Bank of America, JPMorgan, and the others paid billions more. The total recoveries exceeded twenty-five billion dollars—money that went to offsetting the losses Fannie and Freddie had suffered and, by extension, reducing the cost to taxpayers of the conservatorship.

These settlements were among the largest recoveries from the financial crisis, yet they received a fraction of the attention devoted to regulatory reforms or criminal investigations. FHFA, operating quietly through its legal team, extracted more money from Wall Street than most of the more prominent enforcement efforts.

The Directors and Their Visions

Since its creation, FHFA has had only a handful of directors, but each has brought distinct priorities to the role.

James Lockhart, the founding director, managed the crisis itself—executing the conservatorship and stabilizing the two GSEs as financial markets melted down around them. When he departed in August 2009, Edward DeMarco took over as acting director.

DeMarco served in an acting capacity for more than four years, far longer than such arrangements typically last. His tenure was marked by controversy over principal reduction—the idea of forgiving portions of underwater mortgages to help struggling homeowners. DeMarco resisted pressure from the Obama administration to allow principal reductions, arguing that they could encourage strategic defaults and would cost taxpayers more money than they saved.

Consumer advocates were furious. They saw DeMarco as prioritizing Fannie and Freddie's balance sheets over struggling homeowners, millions of whom owed more than their homes were worth after the crash. The debate illustrated the fundamental tension in FHFA's mission: is the agency's primary duty to protect taxpayers from losses, or to use Fannie and Freddie's power to help homeowners in distress?

In December 2013, after Democrats eliminated the filibuster for executive branch nominations, the Senate confirmed Mel Watt as FHFA director. Watt had served in Congress for over twenty years, representing a North Carolina district. His confirmation was contentious—Republicans had blocked his nomination for seven months—and his tenure reflected different priorities than DeMarco's.

When Watt's term expired in January 2019, President Trump designated Joseph Otting, the Comptroller of the Currency, as acting director. A few months later, Mark Calabria was confirmed to a full five-year term.

Calabria was a free-market economist who had long argued that Fannie and Freddie should be privatized or at least released from conservatorship. At his confirmation hearing, he committed to working toward ending the government's control of the two companies—a goal that previous directors had discussed but never seriously pursued.

The Supreme Court's ruling in Collins v. Yellen arrived two years into Calabria's term. President Biden's immediate decision to replace him demonstrated that whatever theoretical independence FHFA directors once enjoyed was now clearly gone. Sandra Thompson, who had been the agency's deputy director, took over and was later confirmed to a full term.

Thompson's approach reversed Calabria's trajectory. Rather than pushing to end the conservatorship, she focused on affordable housing initiatives and maintaining stability—essentially accepting that Fannie and Freddie would remain under government control for the foreseeable future.

The Endless Conservatorship

When the government took over Fannie Mae and Freddie Mac in September 2008, officials described conservatorship as a temporary measure. Sixteen years later, it continues.

No other conservatorship in American history has lasted anything close to this long. The term itself—borrowed from the world of personal guardianship—implies a period of rehabilitation, after which the conserved entity returns to independence. That hasn't happened.

Part of the reason is sheer complexity. Fannie and Freddie are so deeply embedded in the American housing system that extracting them from government control would require restructuring how millions of people get mortgages. Another part is political: nobody wants to be responsible for whatever might go wrong if these entities are released.

And there's a financial dimension. During the early years of conservatorship, the Treasury Department invested nearly two hundred billion dollars to keep Fannie and Freddie afloat. But as the housing market recovered, the two companies became spectacularly profitable. By some accounting methods, they have paid back more than the government invested—though the precise calculation depends on contentious questions about dividend agreements and capital structure.

Shareholders who held Fannie and Freddie stock before the conservatorship—including hedge funds that bought shares at distressed prices hoping for a recovery—have sued repeatedly, arguing that the government's terms were unfair and that they deserve compensation. The Collins v. Yellen case itself originated from such a lawsuit. The Supreme Court rejected most of the shareholders' claims, but litigation continues on various fronts.

Meanwhile, every year that passes entrenches the status quo further. Mortgage lenders have adapted their systems to work with a conservatored Fannie and Freddie. Homebuyers expect the government-backed thirty-year fixed-rate mortgage that these GSEs make possible. The housing finance system has been rebuilt around an arrangement that was supposed to last months, maybe a few years at most.

Why Any of This Matters

The Federal Housing Finance Agency operates far from public view. Most Americans will never interact with it directly, never visit its website, never think about its existence. But its decisions shape one of the most important financial choices most people ever make: buying a home.

When FHFA sets standards for the loans that Fannie and Freddie can purchase, those standards ripple through the entire mortgage market. If FHFA says Fannie Mae can only buy loans with certain down payment requirements, or certain debt-to-income ratios, lenders across the country adjust their practices accordingly. The agency's rules effectively determine who can get a mortgage and on what terms.

When FHFA sets the "conforming loan limit"—the maximum size mortgage that Fannie and Freddie can buy—it affects home prices in expensive markets. Loans above this limit, called "jumbo mortgages," typically carry higher interest rates because they can't be sold to the GSEs. As home prices have risen faster than the conforming limit, more buyers in high-cost cities have found themselves in this more expensive category.

And when FHFA makes decisions about affordable housing goals, those decisions influence how many mortgages flow to lower-income borrowers and underserved communities. The agency must balance expanding homeownership—a goal with deep bipartisan support—against the risk of encouraging loans to borrowers who might default, which is precisely what contributed to the crisis that created FHFA in the first place.

It's a difficult balance, and reasonable people disagree about where to strike it. But the decisions get made regardless, by officials most voters couldn't name, at an agency most voters don't know exists.

The Oversight of the Overseers

FHFA itself is subject to oversight. Like many federal agencies, it has an inspector general—an independent watchdog responsible for investigating waste, fraud, and abuse within the agency.

The Office of Inspector General for FHFA was established along with the agency itself. Three Senate-confirmed inspectors general have served in the role. The most recent, Brian Tomney, was sworn in during March 2022 after being nominated by President Biden.

His predecessor, Laura Wertheimer, departed under unusual circumstances. She had served since 2015, nominated by President Obama. In the spring of 2021, Republican Senators Chuck Grassley and Ron Johnson called for her removal, and a critical report from the Council of the Inspectors General on Integrity and Efficiency raised concerns about her office's operations. She announced her departure in June 2021.

The episode illustrated that even the watchdogs face scrutiny—and that the politics surrounding FHFA extend to every corner of its operations. In a city where oversight has become increasingly partisan, no aspect of housing finance policy escapes the broader battles.

An Agency Shaped by Crisis, Defined by Inertia

The Federal Housing Finance Agency was born from failure. The regulatory patchwork that preceded it had proven inadequate to the task of overseeing America's housing finance system. FHFA was supposed to be different—more powerful, more unified, better equipped to prevent the next crisis or at least respond effectively when it arrived.

In some ways, that vision has been realized. FHFA successfully managed the conservatorship through the worst financial crisis since the Great Depression. It extracted billions from the banks that had fueled the bubble. It has maintained stability in the housing finance system for over fifteen years, even as political winds shifted and leadership changed hands.

But in other ways, FHFA has become a monument to unfinished business. The conservatorship that was meant to be temporary has become permanent in all but name. The fundamental questions about what Fannie Mae and Freddie Mac should be—public utilities, private companies, something in between, or nothing at all—remain unresolved. Each administration brings new priorities, but the basic structure persists.

Perhaps that's the nature of housing policy in America. The thirty-year fixed-rate mortgage, the subsidies embedded in the tax code, the GSEs themselves—all of these are historical accidents that became permanent fixtures because nobody could agree on alternatives. FHFA now stands as the caretaker of a system that almost nobody designed but almost everybody depends upon.

For the typical American trying to buy a home—facing prices that have risen much faster than incomes, competing with cash buyers and investors, navigating a mortgage process that remains bewilderingly complex—FHFA is invisible. But it's there nonetheless, setting the rules, managing the institutions, and perpetuating a housing finance system that emerged from crisis and has yet to find its final form.