It’s coming Amigos :::::
By Andrew Ackerman
Updated May 30, 2019 10:00 pm ET
WASHINGTON—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.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
AI
