The Federal Housing Finance Agency (FHFA) is determined to continue its mission of shrinking the balance sheets of Fannie Mae and Freddie Mac and plans only to add product when the two need to buy delinquent mortgages out of delinquent MBS pools.

According to a new update to Congress on FHFA's 'Strategic Plan' for GSE conservatorships, the agency predicts that private sector investors will buy newly issued GSE MBS when the Federal Reserve “gradually withdraws its purchase activity.”

In a letter to the heads of the House and Senate Banking Committees, FHFA director Edward DeMarco stressed his role as conservator, but concludes that “operating in conservatorship” is not a long-term solution for Fannie and Freddie.

Fannie and Freddie supply roughly 78% of liquidity to the U.S. mortgage market compared to 73% in 2008 (the year in which they were placed in conservatorship), and 54% in 2006, when subprime originations peaked.

Since the fall of 2008 Fannie Mae has lost $111 billion, Freddie Mac $63 billion. Treasury has pumped almost $60 billion of cash into Fannie Mae, and $51 billion into Freddie.

The White House would like to wind down the GSEs but has yet to put forth legislation that might win broad support in Congress. Few in the mortgage industry and on Capitol Hill believe any type of GSE restructuring will pass this year given the fall elections.

DeMarco also points out in his letter the huge turnover in the executive ranks of the GSEs. At Fannie Mae, he said, eight of the 11 highest paid executives (pre-conservatorship) are no longer with the company.

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