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.”
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