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Fannie, Freddie Recapitalization Rejected--Update

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navycmdr Member Level  Thursday, 03/05/15 12:05:31 PM
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Fannie, Freddie Recapitalization Rejected--Update

Last update: 05/03/2015 8:38:27 am ... By Joe Light

A top U.S. Treasury Department official suggested the White House wouldn't allow mortgage titans Fannie Mae and Freddie Mac to rebuild capital, rejecting some advocates' wishes that the companies would move past being government wards.

At the same time, in a speech delivered at a Goldman Sachs housing-finance conference in Washington, the official outlined some of the actions the administration would like to see happen in the absence of a comprehensive housing-finance overhaul.

The speech also marked the first time that the Obama administration outlined what steps it thinks the Federal Housing Finance Agency, which regulates Fannie and Freddie, should take in the absence of legislation to reform the companies, which has largely been on the back burner since last summer.

Together, the sentiments expressed in the speech amount to a tacit acknowledgment by the administration that legislation to overhaul the housing-finance system might not happen. As well, the speech threw cold water on a growing narrative--stirred by renewed bailout worries after relatively weak fourth-quarter earnings reports from Fannie and Freddie--that the administration might move to recapitalize the companies.

"Let me remind you, both recapitalization of [Fannie and Freddie] and draws against the existing Treasury backstop due to potential future losses would come at taxpayers' expense," Michael Stegman, the Treasury's counselor to the secretary for housing finance policy, said. He noted that Fannie and Freddie still have a significant remaining credit line to draw on should the companies' capital buffers run dry.

Fannie and Freddie don't make mortgages, but buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default. The companies were taken over by the government in 2008, eventually requiring nearly $188 billion in bailout money.

Mr. Stegman outlined a number of steps that the administration would like to see Fannie and Freddie take while awaiting legislation. Both companies, for example, hold large mortgage investment portfolios that they've been winding down over time. Mr. Stegman said that he would like to see those wind downs happen more quickly.

Fannie and Freddie have also devised new kinds of securities that they sell to private investors in an effort to offload some of their mortgage credit risk. Mr. Stegman said that those risk transfers should increase.

Last month, Fannie and Freddie reported sharply lower earnings for the fourth quarter. Fannie said that it earned $1.3 billion, while Freddie reported earnings of $227 million.

As part of an agreement with the Treasury Department, Fannie and Freddie must reduce their capital buffers each year. In the 2015, each company will have a buffer of $1.8 billion, and the reserves will eventually reach zero in 2018.

As the buffer falls, it becomes increasingly likely that a loss could require Fannie or Freddie to take other infusion from the U.S. Treasury.

"Ultimately, in order to administratively change [Fannie's and Freddie's] bailout terms both the FHFA and the U.S. Treasury need to sign an agreement and these comments indicate that at least one of those two is unwilling to do so currently," said Isaac Boltansky, an analyst at Compass Point Research & Trading, adding that calls for the rebuilding of capital and other administrative changes will likely continue.

Mr. Stegman's speech signaled that the administration believes that Treasury backstop will give mortgage investors enough confidence in Fannie and Freddie without the need to rebuild the companies' own capital buffers.

The companies now send nearly all of their profits to the U.S. Treasury and by this month will have paid the government about $228 billion in dividends.


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