Donald Layton Wants to Reform Capital Requirements Inside Conservatorship

March 25, 2026 — Yesterday, Donald Layton — former CEO of Freddie Mac, now a Senior Visiting Fellow at NYU's Furman Center — published an article arguing that Trump's March 13 executive order on mortgage credit "paves the way" for the FHFA to reform and reduce the Enterprise Regulatory Capital Framework (ERCF).

He's right about the ERCF being broken. He's been right about that since 2019. The ERCF requires $312 billion in capital when stress tests say $120-135 billion is sufficient. It's a framework designed by Mark Calabria — a Cato Institute ideologue — to shrink the GSEs, not to ensure their safety.

But here's what Layton won't say: capital requirements don't matter inside conservatorship.

Not a little. Not "they matter less." They literally do not matter. And the fact that one of the most prolific GSE commentators in America — a man who has published 20+ articles on this topic since leaving Freddie Mac — can write 3,000 words about capital reform without once calling for the conservatorships to end tells you everything about where he's coming from.

The Argument Layton Makes

Layton's article is well-written and technically correct. His three criticisms of the ERCF are spot-on:

1. The required capital level is too high. The ERCF demands $312 billion. The FHFA's own stress tests say $120-135 billion is sufficient. That's a $185 billion gap of pure overcapitalization — a number Layton himself calculated in August 2022.

2. The incentives are too distorting. The ERCF's non-risk-based buffers and minimums cause the GSEs to make bad decisions about which risks to take and which to transfer. Credit risk transfer (CRT) transactions that should be economically attractive get rejected. The result: more risk concentrated on the taxpayer's balance sheet, not less.

3. The framework is too complex. Six different definitions of capital for two companies that are essentially monolines. It's absurd.

All true. All documented. Layton has been saying this for six years now.

But then he pivots to the punchline: Trump's executive order "effectively paves the way for — and implicitly calls for — the FHFA to finally significantly reform" the capital rule.

And he suggests that FHFA could, "as conservator," direct Fannie and Freddie to use a proposed new capital system immediately — before the full regulatory process is even complete — to lower guarantee fees.

This is where I part ways with Layton. Not because he's wrong about the mechanics, but because he's solving the wrong problem.

Why Capital Requirements Don't Matter Inside Conservatorship

I've been writing about this since 2016. I wrote 9 books on it. I hold 26 series of junior preferred shares across both companies. Let me explain why this entire capital requirement debate is a sideshow.

1. The Treasury Backstop IS the Capital

Inside conservatorship, the Treasury's Preferred Stock Purchase Agreements (PSPAs) provide an explicit taxpayer backstop of up to $200 billion per company. This backstop exists regardless of how much capital Fannie and Freddie hold internally.

The GSEs have operated safely for 17 years with effectively zero regulatory capital. They survived the worst housing crisis in American history, paid back $301 billion to Treasury on a $191 billion draw, and are now generating $25 billion per year in net income.

If the backstop makes them safe with zero capital, it makes them equally safe with $120 billion, $179 billion, or $312 billion. The capital number inside conservatorship is decorative.

2. The GSEs Can't Raise Private Capital

While in conservatorship, Fannie and Freddie cannot issue new equity. They can only build capital through retained earnings — approximately $25 billion per year. At the ERCF's $312+ billion requirement, that's 6-7 more years of retained earnings before they could even theoretically exit.

But here's the trap: every dollar retained also increases Treasury's liquidation preference, which sat at $341 billion as of year-end 2024. That senior preferred doesn't count as regulatory capital under the ERCF. So the companies are running on a hamster wheel — building capital that simultaneously strengthens the government's claim on them.

3. G-Fees Are a Tax on Homeowners That Funds Nothing

When the Biden administration "implemented" the ERCF by directing higher guarantee fees starting in 2022, the average G-fee rose from ~0.45% to ~0.55%. That's real money — roughly 0.07 to 0.10% added to every mortgage rate touching Fannie or Freddie.

But what did those higher fees fund? Not a path to exit. Not private capital formation. They funded retained earnings that sit on a balance sheet inside a conservatorship that nobody in the Biden administration had any intention of ending.

Higher G-fees inside conservatorship are a tax on homeowners to fund a government savings account. The homeowner gets nothing. The GSEs get nothing (they can't use the capital to operate independently). The only beneficiary is Treasury's balance sheet.

4. The Circular Logic Is the Quiet Part

The logic goes like this:

"We can't release Fannie and Freddie because they don't have enough capital." "We'll build capital by charging homeowners higher fees." "But we won't actually release them because we need even more capital." "So we'll keep charging higher fees."

This is the conservatorship capital trap. It's a self-reinforcing loop where the stated prerequisite for exit (adequate capital) is used to justify the continuation of the thing preventing exit (conservatorship).

Reforming the ERCF without ending the conservatorship just changes which number on the hamster wheel the companies are running toward. It doesn't get them off the wheel.

The Donald Layton Pattern

I want to be fair to Layton. He ran Freddie Mac for seven years. He championed credit risk transfers. He knows these companies better than almost anyone alive.

But his post-CEO commentary follows a consistent pattern that anyone tracking GSE policy should understand:

2019 — "GSE Reform: None or Mostly Done?" — Argued that most needed reforms had already happened within conservatorship. Translation: no urgency to leave.

2020 — Told the Biden administration that GSE reform "does not need to be totally ignored, but it does not seem to be worth pursuing in a manner that consumes major administration resources or political capital." Translation: don't bother.

2022 — "When Will Government Control End?" — Concluded it would "still take considerable additional years." Translation: relax, shareholders.

2025 — Called privatization "highly unlikely" anytime soon. Predicted the administration would "move the ball down the court" but that's as far as they'd get in four years.

August 2025 — Published a paper warning that re-privatization could "enable the return of subsidy abuse." Translation: conservatorship is actually good because it prevents the companies from benefiting their shareholders.

December 2025 — Published a two-part series arguing that credit risk concentration "is getting worse, not better." Translation: the GSEs aren't ready for release.

March 2026 — This article. Argues for ERCF reform to lower G-fees inside conservatorship, with no mention of ending conservatorship.

See the pattern? Every article builds the case for why exit is hard, risky, or premature. Every article identifies another problem that needs to be solved before release. Every article concludes that the timeline is long and the challenges are daunting.

This is what institutional inertia looks like when it writes academic papers.

What Layton Gets Right — And What He Misses

Layton correctly notes that the FHFA doesn't need to start from scratch on a new capital rule — it can use the 2018 proposal that he was familiar with as Freddie CEO. He's right that political pushback would be limited because lower mortgage costs are broadly popular. He's right that the "heavy lift" might not be so heavy.

But then comes this revealing footnote:

"Another practical consideration would be any impact such a reform of the capital rule might have on administration plans for the GSEs to exit conservatorship and/or sell shares to the public. In fact, it was already unclear if such plans were going to come to fruition in any near-term timeframe given the many challenges involved."

There it is. Even in an article about reforming capital requirements — a topic that is only meaningful in the context of conservatorship exit — Layton can't help but hedge on whether exit will actually happen.

He also drops this: "I note the White House has not mentioned them in some time, as mortgage affordability now seems to be its policy priority."

Translation: the administration has moved on from privatization. Capital reform is the consolation prize.

I disagree. Here's why.

Why I'm Still Bullish

Layton is reading the tea leaves through the lens of a career spent inside and around government-controlled housing finance. From that perspective, everything is hard, everything takes years, and the status quo has inertia on its side.

But here's what he's not accounting for:

The people in position are not status-quo people.

• Bill Pulte at FHFA — the man who fired board members at both GSEs, installed himself as chairman, and told Fox Business the companies are "definitely ready" for a secondary stock offering. FHFA's own strategic plan commits to "managing the conservatorships" and "fulfilling statutory requirements."

• Luke Pettit at Treasury — Senator Hagerty's former senior advisor on the Senate Banking Committee, now Assistant Secretary for Financial Institutions. The guy who absorbed three years of pro-recap-and-release thinking is now shaping GSE policy.

• Jonathan McKernan — confirmed Under Secretary of Domestic Finance — the position that directly oversees the PSPAs.

• Howard Lutnick — Commerce Secretary who has described a Fannie/Freddie IPO as potentially "the largest IPO in history."

• Bill Ackman — publicly advocating a three-step plan: acknowledge the $191B bailout has been repaid, exercise Treasury's warrants, and relist on the NYSE.

And yes — Trump's March 13 executive order that Layton cites. The one that names FHFA directly and tells them to ease mortgage credit regulations. Layton reads this as a signal for capital reform. I read it as a signal for something much bigger.

The Only Thing That Matters

Let me be direct:

Reforming the ERCF is good. Lowering G-fees is good. Making the capital framework less complex is good.

But none of it matters unless the conservatorships end.

Inside conservatorship, capital requirements are a theoretical exercise. G-fees are a tax. Retained earnings are government property. The companies are wards of the state generating $25 billion a year in profit that they have no authority to deploy independently.

The three things that actually matter:

1. Treasury consent to exit — The fifth amendment to the PSPAs (January 2025) restored Treasury's right to approve any release. Secretary Bessent has a veto. This is a political decision.

2. PSPA restructuring — The $341 billion liquidation preference must be addressed. No private investor will buy into a company where the government's claim exceeds the company's total net worth.

3. ERCF replacement — Not reform. Replacement. With a framework calibrated to actual risk, not ideological footprint-shrinking. This is what Layton is partially advocating — but it only matters in the context of exit.

Do all three and you unlock what Tim Pagliara and Investors Unite have been fighting for since 2014: the end of the longest, most profitable, and most unjust government conservatorship in American history.

Reform the ERCF without doing the other two and you've changed a number on a spreadsheet inside a cage.

What Layton's Article Actually Tells Us

Here's the bullish read — and it's not what Layton intended:

Even Donald Layton is now aligning with the administration's direction.

A man who told the Biden administration not to bother with GSE reform. A man who has called privatization "highly unlikely." A man who warned that re-privatization risks "subsidy abuse." That man is now writing articles about how FHFA should quickly reform capital requirements using a shortcut from 2018, and how the political environment is favorable for it.

When the skeptics start positioning themselves in the direction of reform, that tells you something about which way the wind is blowing. Layton may not be calling for conservatorship exit, but he's no longer building the case against it. He's building the case for the prerequisite to it.

That's progress. Slow, institutional, Layton-speed progress. But progress.

Tim Pagliara has been saying it for years: just getting warmed up.

I've been waiting 10 years. I can read the pattern. And the pattern says we're closer than we've ever been.

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Deep Dives

• Donald Layton's Complete GSE Commentary Timeline — Every article, every prediction, every hedge. The full record of the most prolific post-conservatorship GSE commentator in America.
• ERCF Capital Requirements vs. Stress Tests: The $185 Billion Gap — The numbers that prove the capital framework is designed to prevent exit, not ensure safety.
• The Conservatorship Capital Trap Explained — How the PSPA structure, G-fee taxation, and circular logic keep Fannie and Freddie imprisoned.

Related

• Executive Order: Promoting Access to Mortgage Credit
• FHFA's 2026/27 Strategic Goals
• Tim Pagliara — The Man Fighting for Shareholders
• Luke Pettit — Treasury Gatekeeper
• The Full Fanniegate Story
• How to Invest in Fannie Mae
• Fannie Mae Privatization Guide
• Glen's Positions
• Fannie Mae Recap 2026

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Disclosure: I hold Fannie Mae and Freddie Mac junior preferred shares across 26 series and have a direct financial interest in these companies. This is not financial advice. Do your own research and consult qualified professionals before making investment decisions.