U.S. Treasury Secretary Steven Mnuchin responded recently to a December letter from the Democratic members of the Senate Banking, Housing and Urban Affairs Committee. The Senators were seeking details on the plan to free two government-sponsored entities (GSEs) from a decade or so of conservatorship following the financial crisis of 2008.

The agencies, Fannie Mae (FNMA) and Freddie Mac (FMCC), received bailout funding totaling $190 billion from the federal government. Since being placed into conservatorship, the two agencies have returned more than $300 billion to the U.S. Treasury. Political disagreements, however, have stalled efforts to chart a course that would remove their conservatorship.

In the letter to Mnuchin and Federal Housing Finance Agency (FHFA) director Mark Calabria, Democrats on the Senate committee asked for responses to 23 specific questions. The Senators wanted details related to the future role for the agencies and what plans the administration had for lifting conservatorship.

Some Level of Support for Fannie, Freddie to Remain

According to a report at Bloomberg News, Secretary Mnuchin said that “Treasury expects that it will be necessary to maintain limited and tailored government support” for Fannie and Freddie. That provides assurance that the two agencies will meet their obligations. Further, he noted, “Stability in the housing finance system is crucial, and there should be no disruption to the market as a result of Treasury’s recommended administrative reforms.”

An explicit guarantee that the U.S. Treasury stands behind Fannie and Freddie is the single thing that can dispel completely fears of disruption in the housing finance market. As we noted in our earlier story on Fannie Mae, these two GSEs combined hold about one-third of the nation’s $16 trillion mortgage debt. Failure is not an option.

Explicit Backing of Fannie and Freddie

Secretary Mnuchin made clear that the administration planned to provide a financial backstop for the agencies until Congress passes legislation to enshrine backing for Fannie and Freddie in federal law.

That is easier said than done. There is one big reason that the GSEs remain under the Treasury’s thumb nearly 12 years after being put there. Only Congress can create an explicit government guarantee for Fannie Mae and Freddie Mac bonds.

For that to happen, the Senate and the House need to agree on what role the GSEs play in the U.S. housing market. Senate Democrats made clear what they are seeking:

As housing finance reform discussions continue we believe that it is critical to maintain a system that provides certainty for borrowers, renters, investors, and lenders; that can be sustained in all economic conditions; and that continues to support working families as they buy and rent homes and build wealth. Any contemplated reforms should be thoughtful and focused on maintaining access to credit for creditworthy home buyers and renters in every community.

Republicans, who control the Senate, generally resist affordable housing policies. A minority want the federal government out of the mortgage market altogether.

Details Scarce on Recapitalization, Public Stock Offering

The plan for exiting the GSEs’ conservatorships has three basic parts. First, return Fannie and Freddie to private control after recapitalizing them. Second, create an explicit federal guarantee of the mortgage-backed securities issued by the two GSEs. Third, create more private companies to compete with Fannie and Freddie for mortgage purchases.

The Senate Democrats asked Mnuchin and Calabria, “What capital levels do you believe would be necessary for purposes of releasing the GSEs from conservatorship?” In their response to the Senate Democrats, Mnuchin and Calabria acknowledge that a recapitalization is necessary. However, they offer no details on how they would go about raising that capital.

What capital levels, the senators asked, “would be necessary for the purposes of releasing the GSEs from conservatorship?” The question went unanswered, but a capital raise of some $200 billion to $300 billion is likely to be required.

Before an initial public offering (IPO) can even be considered, FHFA will need to contract with investment banks willing to underwrite the share offering. For a sale of this size, it’s not far-fetched to assume that a gaggle of banks will be lined up.

The Senators also asked for a timeline to implement Fannie’s and Freddie’s release from conservatorship. FHFA Director Calabria suggested last November that an IPO of stock in Fannie Mae could be completed in 2021 or 2022.

FHFA has hired Houlihan Lokey Capital to help develop and implement a roadmap to end the conservatorships of the two mortgage giants. Mnuchin and Calabria, in their letter, floated the possibility of a gradual exit from conservatorship. That would involve a consent decree severing the GSEs’ ties to the FHFA. By itself, however, that would not necessarily speed up the timeline for ending the conservatorships.

Other Questions That Went Begging

The Senate Democrats wanted to know the legal basis for using a consent agreement to speed up the GSEs’ exit from conservatorship. Additionally, what reforms or restrictions would the administration would propose for consideration. Could the consent agreement be modified?

Questions about what the administration sees as the future role for Fannie and Freddie sought specific responses that were not forthcoming.

For example, does the administration “plan to reduce the GSEs’ footprint”? Is there statutory authority for such a plan? What would be the impact on homeowners and renters? How would such a reduction affect the “cost and availability of credit across mortgage products”?

The most important issue on the Senators’ minds was the availability of mortgage services to all potential borrowers. If their footprint is reduced, can the GSEs provide the same access to mortgages in both the single-family and multifamily markets?

Has the administration analyzed what specific effects the changes to GSEs’ product offerings? For example, will potential first-time buyers and borrowers of color have access to mortgages? If the Trump administration has not conducted such an analysis, how can it make plans to move ahead?

What About Existing Shareholders?

Several large investors in Fannie Mae are going to want to be compensated for their investments. For example, investment management firm Capital Group owns more than 11% of the outstanding shares. At a share price of $3.50, Capital Group’s stake is worth around $420 million. A recent analyst call set an even higher price target on Fannie Mae stock.

From a high of around $35 in March of 2008, Fannie’s per-share price fell to less than $1.00 a share by September of that year. Over the next five years, the value of Fannie Mae stock fell to as little as $0.20 a share. Shares didn’t reach $1.00 until May of 2013.

Absent an IPO, Fannie and Freddie could recapitalize themselves, but that could take another decade at the rate of around $20 billion or so per year. Doing so keeps the GSEs under federal conservatorship for much longer than the administration is willing to wait. The existing shareholders are surely aware of this and are likely to hold out for a handsome payday. It’s that or wasting more years in legal wrangling.

Once all this has been settled, then comes the question of letting private companies participate in the secondary market. Can they compete without an explicit guarantee? How will the federal government provide the same guarantee provided to Fannie and Freddie?

All things considered, the timeline proposed by FHFA director Calabria appears to have little chance of being met.

In the meantime, Fannie Mae’s own recent outlook for the U.S. housing market was generally upbeat. The agency projects that 1 million new homes will be built in 2020.

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