Administration Nears Plan To Return Fannie, Freddie To Private Ownership (#GotBitcoin?)
Effort would put them on sounder footing, then release them from government control. Administration Nears Plan To Return Fannie, Freddie To Private Ownership (#GotBitcoin?)
Trump administration officials are putting the finishing touches on a plan to return mortgage-finance giants Fannie Mae and Freddie Mac to private-shareholder ownership, people familiar with the matter said.
The proposal, coming more than a decade after the government seized the firms to save them from collapse, would seek to put the companies on a sounder financial footing and then release them from government control, if Congress doesn’t enact a more fundamental overhaul, these people said.
The plan is being developed by the Treasury Department in consultation with a regulator of the companies, the Federal Housing Finance Agency. It could change as it advances through the Trump administration, works its way through the White House and ultimately is submitted to the president for his approval as early as June, the people said.
The proposal is expected to include a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump and thus avoid needing another taxpayer-backed bailout.
If carried out, the companies could return to a status similar to how they operated before the financial crisis. Still, administration officials would prefer that Congress act on a more sweeping remake of housing finance, and their plan would also make a series of recommendations for lawmakers to consider.
Former officials of the companies and housing experts say the moves could be daunting.
Shoring up Fannie’s and Freddie’s finances could entail raising more than $125 billion for the firms, the companies’ regulator has estimated—in part by selling new shares in an initial public offering.
In comparison, the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014.
“It will be a pretty heavy lift to the get the capital, especially in the ranges that people are talking about,” said Dan Berger, president and chief executive of the National Association of Federally-Insured Credit Unions.
Fannie and Freddie are central players in the mortgage market, buying mortgages from lenders and packaging them for issuance as securities.
The companies got into trouble before the crisis by taking on more risk without having to hold more capital. They amassed huge investment portfolios to profit from the difference between their lower cost of capital—a benefit of an implied federal guarantee because Congress created the firms—and the rates they could earn on mortgages.
The government seized the companies through a process known as conservatorship in 2008, during the George W. Bush administration, and agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.
As part of the draft plan to return Fannie and Freddie to private hands, an existing Treasury backstop for the companies could remain in place. But the firms could begin paying a periodic “commitment” fee for the federal line of credit, the people said.
The Treasury’s in-house process for drafting the plan is near completion, with signoff expected soon from Treasury Secretary Steven Mnuchin, the people said. That approval is likely to come before Craig Phillips, a counselor to Mr. Mnuchin and the Treasury’s point man on the project, leaves the government sometime next month.
Still, the document is unlikely to be released to the public until after a review by other parts of the administration, led by National Economic Council Director Larry Kudlow and involving Mark Calabria, the head of the FHFA. The timing of that review is unclear.
Mr. Calabria, a former aide to Vice President Mike Pence, has long said he wants to put the firms on the road toward returning to private hands. Earlier this month, he said an IPO could come as soon as next year.
People familiar with the Treasury document cautioned it would likely include substantial changes to the business models of the companies, including steps to reduce over time their footprints in housing finance.
Those steps, which could include limits on the types of loans Fannie and Freddie may purchase, could reduce their capital needs and avoid a return to the pre-crisis landscape. But such constraints could turn off potential investors in their shares.
A Treasury spokesman didn’t immediately comment on Thursday.
For more than a decade, lawmakers have tried to overhaul Fannie and Freddie. The Trump administration has said it wants to work with lawmakers to return the companies to private hands, but the power split in Congress limits the chance of a legislative solution, despite significant interest among lawmakers of both parties. That impasse in turn provides an opportunity for the Trump administration to take steps on its own.
Any move to recapitalize and then release the firms would be a victory for hedge funds and other investors that have been betting on Fannie and Freddie’s privatization for years. Still, it remained unclear how existing shareholders, including mutual-fund giant Capital Group Cos. and hedge funds such as Paulson & Co., would be treated in any capital-raising by the companies. One possible outcome is that the existing shareholders would see their stakes diluted in any new offering.
Trump Administration Criticizes New Fannie Mae, Freddie Mac Mortgage Fee
White House official said new fee would harm consumers.
The Trump administration criticized a move by mortgage-finance companies Fannie Mae and Freddie Mac to charge a new fee on certain mortgages, saying it would harm consumers.
“The White House has serious concerns with this action, and is reviewing it,” a senior White House official said in a written statement late Thursday. “It appears only to help Fannie and Freddie and not the American consumer.”
At issue is a 0.5% surcharge that the government-controlled mortgage giants said they would begin to impose on most mortgages that are refinanced at lower interest rates.
The decision by the companies, which said the fee was meant to address heightened credit risks in the mortgage market, was met with quick opposition from the industry.
Earlier on Thursday, a coalition of 20 industry groups, including the Mortgage Bankers Association and the National Association of Realtors, urged the companies and their regulator, the Federal Housing Finance Agency, to rescind the fee.
The FHFA operates independent of the White House and technically the administration can’t force it to require Fannie and Freddie to rescind the fee.
Fannie and Freddie, which back nearly half of the $11 trillion U.S. mortgage market, said Wednesday that they would begin charging lenders the added fee next month. It will apply to most loans they buy that borrowers have refinanced to lock in a lower interest rate.
Some mortgage lenders have reported record earnings amid a refinancing boom, and the fee could damp their future profits. It is equal to 50 basis points, or half a percentage point, on each loan Fannie and Freddie guarantees, or roughly $1,400 on the average mortgage backed by the companies, according to industry estimates.
Industry officials said the fee isn’t correlated with the risk of refinanced loans and would simply be passed on to consumers, increasing their costs when the Federal Reserve was acting aggressively to support lower interest rates. Borrowers would likely see only a modest increase in their monthly costs, since the fee would be paid over the life of their loan.
Fannie and Freddie buy mortgages from lenders, package them into securities that are sold to investors and provide guarantees to make the investors whole if the loan defaults. They don’t lend to homeowners.
The fees could help bolster the finances of Fannie and Freddie as they prepare to raise capital and potentially exit from their 11-year tenure under government control.
Fannie, Freddie Should Hold $280 Billion In Capital, FHFA Says
The decision is a key step in efforts to return the two companies to private ownership.
Mortgage giants Fannie Mae and Freddie Mac will have to hold hundreds of billions of dollars of capital to absorb possible losses, their federal regulator decided on Wednesday.
The decision by the Federal Housing Finance Agency is a key step in efforts to return the two companies to private ownership. They were taken over by the government during the 2008 financial crisis in a process known as conservatorship.
“The final rule is another milestone necessary for responsibly ending the conservatorships,” FHFA Director Mark Calabria said in a statement. “FHFA is confident that the final rule puts Fannie Mae and Freddie Mac on a path toward a sound capital footing.”
But the decision sets a high hurdle for the companies. Based on their combined size earlier this year, Fannie and Freddie would have to hold about $283 billion. At present, they hold roughly $35 billion and would need to make up the difference through a combination of retained earnings and possible future stock sales.
The FHFA is seeking to put the companies—which guarantee about half the $11 trillion mortgage market—on a sound financial footing before returning them to private ownership. It is unclear if there is enough time to carry out those plans ahead of the Jan. 20 inauguration of President-elect Joe Biden, who is considered unlikely to continue the effort.
Another step could see the FHFA and the Treasury Department amend the terms of the companies’ federal bailouts to allow them to retain their earnings, an FHFA official said.
Last year, FHFA and the Treasury temporarily stopped requiring that the firms turn over most of their profits to the government. That relief, which allows the firms to build up their capital, is set to expire in early 2021.
Fannie, Freddie Slump After Mnuchin Rules Out Freeing Companies
Fannie Mae and Freddie Mac plunged Tuesday after Treasury Secretary Steven Mnuchin said he’s all but ruled out letting them exit U.S. control before he steps down, leaving it to the Biden administration to decide the fates of the mortgage giants.
In a Wall Street Journal interview, Mnuchin said he’s not going to pursue any actions that put taxpayers at risk or limit consumers’ access to home loans. His decision prevents a major policy change in the last days of the Trump administration that risked disrupting the $10 trillion mortgage market.
Because of the stakes involved, freeing Fannie and Freddie before President-elect Joseph Biden’s Jan. 20 inauguration has long been considered a long shot. But it’s an approach that Federal Housing Finance Agency Director Mark Calabria, the companies’ regulator, has been pushing for behind the scenes.
The agreements that provide the companies with government support prevent them from leaving federal control without the Treasury Department’s sign-off.
Fannie fell 15% to $2.33 at 9:37 am in New York trading, while Freddie also slipped 15% to $2.29. Fannie has slumped 25% this year and Freddie has declined 24%.
Mnuchin’s decision means he will fall short of a goal he pledged to accomplish relatively quickly just days after President Donald Trump’s 2016 election win. But fully privatizing Fannie and Freddie proved more complicated than the Treasury secretary might have assumed.
It also got sidetracked by more pressing issues, like pushing Trump’s tax cut through Congress and responding to the Covid-19 fueled economic downturn.
Speaking to reporters last week, Mnuchin described Fannie and Freddie as “the one area I feel like we didn’t make enough progress.”
In recent weeks, Mnuchin has told government officials that he plans to agree to at least some sort of changes to Fannie and Freddie’s bailout agreements, as well as to create a blueprint for what he thinks should happen with the housing-finance system after he leaves.
He indicated in the Wall Street Journal interview that he would likely permit the companies to hold more capital, without stating a specific amount.
Fannie and Freddie don’t make mortgages. They buy them from lenders, wrap them into securities and guarantee to investors the payment of principal and interest — essentially backstopping roughly $5 trillion of home loans. The government took them over during the 2008 financial crisis, putting them under the FHFA in conservatorships.
Private shareholders of Fannie and Freddie shares, which include major hedge funds, have clamored for the companies to be released, which would potentially allow them to start collecting profits again.
The option that Calabria had advocated for would allow Fannie and Freddie to leave conservatorship with close to their current levels of capital. The companies would operate under a consent order that limits their dividends and other business activities until they reach the hundreds of billions of dollars in capital that the FHFA says they need to operate safely.
Mnuchin, speaking at a House Financial Services Committee hearing earlier this month, acknowledged that a consent order could be one path to the companies’ release but suggested they had not yet accumulated enough capital to make it workable.
“There could be a scenario where at some point between basically the zero capital they have and the full capital requirement, there would be a consent order and they would be release subject to a consent order,” Mnuchin said. “There’s got to be significant capital for them, in my opinion, to be released.”
Even though Mnuchin doesn’t plan to go so far as to release the companies, the Treasury Department and FHFA could still agree to provisions that would make such an outcome more likely, such as by reducing or otherwise modifying the government’s $222 billion “senior” preferred stake in Fannie and Freddie.
In his comments to reporters last week, Mnuchin said he was likely to agree to a modification of the bailout agreements “to set them on the right direction.”
Biden Administration Removes Fannie, Freddie Overseer After Court Ruling
Supreme Court decision on Wednesday is a blow to investors who bet the mortgage giants would be returned to private hands from government control.
The Biden administration ousted the head of the Federal Housing Finance Agency after the Supreme Court ruled it was structured unconstitutionally, dealing the latest blow to investors betting that mortgage giants Fannie Mae and Freddie Mac would be returned to private hands after more than 12 years of government control.
The White House decision to replace Mark Calabria as head of the FHFA paves the way for President Biden to install his own appointee to oversee Fannie and Freddie, which are regulated by the agency and back roughly half of the $11 trillion mortgage market. The Biden administration has signaled it won’t be in a hurry to privatize the companies.
The Supreme Court ruling on Wednesday also rejected most claims by a group of investors who challenged a government decision to channel the firms’ profits to the Treasury Department. The most commonly traded class of Fannie Mae preferred shares, which are widely held by hedge funds, closed at $2.52 a share Wednesday, down about 62% from its close a day earlier.
Mr. Calabria is a Trump administration holdover who pushed aggressively to end government control over the firms. His term was set to expire in 2024. Mr. Biden plans to replace Mr. Calabria “with an appointee who reflects the administration’s values,” a White House official said.
Fannie and Freddie are central players in the market for home loans, buying mortgages from lenders and packaging them for issuance as securities that are guaranteed by the firms. The arrangement allows lenders to offer the popular 30-year fixed-rate mortgage.
In the run-up to the 2008 housing crisis, Fannie and Freddie got into trouble by taking on increasing risks, primarily to compete with Wall Street firms and later because lawmakers wanted them to support a weakening housing market.
The government effectively nationalized them as mortgage defaults mounted. In return for injecting about $190 billion into the companies, the government got a new class of stock—senior preferred shares—that paid an annual 10% dividend, along with warrants to acquire nearly 80% of the firms’ common stock.
Political and legal developments have sent Fannie and Freddie shares on a wild ride since hedge-fund investors—including John Paulson, Bill Ackman’s Pershing Square Capital Management LP and Perry Capital—began buying up the stock after the financial crisis.
In 2012, the Treasury revamped its bailout agreement to require nearly all the firms’ profits be swept away to the government as dividend payments on its preferred shares, upending hedge funds’ bets. Some investors filed suit over the change, arguing in part that the head of the FHFA held too much unchecked power.
The Obama administration, in which Mr. Biden served as the vice president, believed that releasing the companies would restore a structural flaw that helped trigger the financial crisis. But broad efforts to overhaul housing finance foundered in Congress.
The Trump administration called for putting Fannie and Freddie on a more stable financial footing by returning them to private hands after imposing new limits on their business activities and raising the fees they charge lenders.
Early in the Trump administration, investors had hoped that policy makers would eventually privatize the companies, and that once that path became clear, the value of the shares in these companies would increase sharply. That never happened, and now the companies could remain in so-called conservatorship indefinitely.
“Our mortgage system is a Frankenstein monster, and it’s far from perfect,” said Isaac Boltansky, director of policy research at investment bank Compass Point Research & Trading LLC. “But Washington has neither the will nor the capacity to alter it because despite all of its faults, the system works.”
The plaintiffs in Wednesday’s case, investors in corporate shares issued by Fannie and Freddie, argued the government profit sweep constituted an illegal end-run to prevent the firms from building capital that could eventually be available to private investors.
The federal government argued the FHFA enjoyed broad legal authority to ensure the mortgage giants’ solvency and protect the U.S. investment in them. Potential problems with the agency’s structure didn’t undermine that power, the government argued.
The Supreme Court, in a Wednesday opinion by Justice Samuel Alito, unanimously ruled the profit sweep didn’t exceed the agency’s statutory authority and ordered the dismissal of shareholder claims on that issue.
The FHFA’s authority is expansive, and the agency reasonably could have concluded that its approach “was in the best interests of members of the public who rely on a stable secondary mortgage market,” Justice Alito wrote.
The ruling wipes out the potential for the type of outsize gains some hedge funds had long been banking on. One shareholder on Wednesday described his holdings in Fannie and Freddie as a long-term “call option” he planned to hold should a future administration prove more amenable to the companies’ privatization.
On the question of the FHFA’s structure, the court said Congress made the agency too insulated from the White House because the president couldn’t easily remove a director whose policies were contrary to his own. That part of the decision, which splintered the court, frees a president to fire the agency’s director at will.
Under the prior arrangement, Mr. Calabria could only be fired for cause. The ruling follows a similar decision by the court a year ago that the Consumer Financial Protection Bureau was structured unconstitutionally because its director had too much power free from White House control.
The high court sent the case back for more lower court proceedings to determine whether the litigating shareholders suffered any actual harm because the agency had been shielded from stronger White House input.
“I respect the Supreme Court’s decision and the authority of the president to remove the Federal Housing Finance Agency director,” Mr. Calabria said in a statement. “I wish my successor all the best in fixing the remaining flaws of the housing finance system.”
An attorney for the litigating shareholders didn’t respond to requests for comment.
Though Mr. Calabria pushed to return the companies to private hands, the Biden administration has signaled its approach would be different. That could mean using the companies to address key policy priorities, such as closing the racial homeownership gap.
“It would be hard to overstate how important a shift this will bring,” said Jim Parrott, an Obama administration housing adviser now working as an industry consultant. “A Biden-led FHFA will focus instead on how the GSEs can actually support the nation’s housing needs,” referring to the acronym for government-sponsored enterprises.
Fannie And Freddie Overhaul Reboot Benefits Many Mortgage Players
While shares of the mortgage giants have plunged, stocks of others in the industry may see a boost from a change in policy.
Fannie Mae and Freddie Mac may have been waylaid on their journey back to private hands. But the way things are moving, some big players in the mortgage business could end up in a better place.
The Supreme Court ruling last week that the government’s sweep of the housing giants’ profit didn’t exceed their regulator’s statutory authority and that presidents can readily replace the head regulator was a one-two blow to Fannie and Freddie’s shares, which are down more than 40% in the past week.
It means the Biden administration can now appoint a new chief overseer rather than keep the holdover from the Trump administration, who was seeking to release the companies from government conservatorship during his term.
But many stocks in the broader mortgage sector actually traded higher. For them, Fannie and Freddie’s overhaul path under the prior administration wasn’t necessarily all that great for their economics.
Preparing the government-sponsored enterprises to attract private investor capital involved steps like raising their capital requirements, yet still needing to boost their returns. To many in the sector, that was a recipe for higher fees and tighter access to guarantees. In one illustrative moment last year, news of a pandemic-related fee bump sent mortgage originators’ shares down sharply.
Under President Biden, the GSEs’ regulator may try to roll back some of those measures, or put in place other initiatives with the primary aim of making mortgages cheaper and more widely available. If GSEs were to cut fees, or expand the types of borrowers or loans they back, that could increase the market size for the firms that originate many so-called qualified mortgages—the type that the GSEs buy—such as Rocket Cos., UWM Holdings or loanDepot.
Proponents of the prior administration’s approach might say that the GSEs in their current state narrowed or distorted the market by discouraging growth of other types of mortgages. Some big banks, too, might have seen their share of the mortgage business pick up with a smaller footprint for government-guaranteed loans, though they also benefit from being able to cheaply unload credit risk.
Mortgage insurers such as MGIC Investment offer additional credit protection on GSE guarantees. They might benefit if the Biden administration puts more measures in place to help homeowners stave off default as pandemic measures wind down, though credit risk is already mitigated by the economic recovery, notes KBW analyst Bose George. More volume flowing through the system would also be a boost to insurers.
Though longer term, more expensive or constrained Fannie and Freddie guarantees might potentially have expanded the role of private mortgage insurance.
Any new direction for the GSEs isn’t likely to spark a new boom for mortgage stocks, as volumes are already historically quite large. And originators face much more immediate concerns such as rising rates, the constrained supply of homes and narrowing loan profitability.
Investors also weren’t pricing in much if any radical Fannie and Freddie overhaul to begin with, according to Jefferies analyst Ryan Carr. Plus, Mr. Biden’s full plans for the entities remain unclear.
But broadly speaking, reorienting Fannie and Freddie policy toward things that make their services cheaper or broader would be welcome for many stocks in a mortgage sector that is already dealing with quite a lot.
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