Latest take from TH: "There is no question that the next milestone in the journey to release Fannie and Freddie from conservatorship and allow them to get their capital structures in order is a decision by SCOTUS in the Collins case, but I’m surprised how little attention commentators and observers seem to be paying to the condition Calabria and Mnuchin put on that release, even under a consent decree, in the January 14 letter agreement–that each company must have common equity tier 1 capital equal to 3 percent of its adjusted total assets. For Fannie, that requirement as of December 31, 2020 was $139 billion.
At December 31, 2020 Fannie’s core capital (common equity tier 1 capital, plus $19.1 billion in junior preferred stock) was a negative $95.7 billion. Even were Treasury’s senior preferred to be eliminated or cancelled, Fannie’s CET1 capital would only be $6.2 billion–its total stockholders equity of $25.3 billion less its $19.1 billion in junior preferred. It could get back up to $25.3 billion in CET1 capital by converting its junior preferred to common, but that still would leave it $114 billion below its release point. I estimate Fannie’s basic earning power to be about $11 billion per year, after-tax. (As I’ve noted before, Fannie’s earnings between 2016 and 2019 were boosted by almost $3 billion per year by drawdowns from its loss reserve; that source of earnings now effectively has ceased, and soon will revert to consistently being a negative provision for loan loss). At this earnings rate, it would take Fannie more than 10 years to achieve 3 percent CET1 capital through retained earnings, absent shrinkage in its business (or a credit to federal income taxes for overpayments to Treasury in the net worth sweep, which could be as much as $15 billion). Business growth in line with likely home price appreciation would add further to that timeline.
Something, then, will need to give in order to resolve Fannie and Freddie’s conservatorships over any reasonable time frame. That “something” is the Calabria capital requirement, and the associated condition that no release under a consent decree (permitting external capital raises) can occur before the companies achieve 3 percent CET1 capital through retained earnings or business shrinkage. It’s more than a little surprising that this issue is getting so little attention from those with investments in the companies’ shares."
