June 2, 2020


analysis business finance

Fannie-Freddie Capital Plan Seeks Buffers Above $200 Billion

(Bloomberg) — Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage giants be required to hold hundreds of billions of dollars in capital to guard against losses, a step that could have an impact on mortgage interest rates and on the Trump administration’s efforts to free the companies from U.S. control.

The Federal Housing Finance Agency rule proposal released Wednesday outlines how much capital Fannie and Freddie would have to retain against their total assets as fully private companies. Based on their September 2019 asset totals, the companies would have to have a combined total of about $240 billion.

“We must chart a course for the Enterprises toward a sound capital footing so they can help all Americans in times of stress,” FHFA Director Mark Calabria said in a statement. “More capital means a stronger foundation on which to weather crises. The time to act is now.”

The proposal is the latest sign of progress toward Calabria’s goal of freeing Fannie and Freddie from nearly 12 years in federal conservatorship. Private shareholders, including hedge funds and other investment firms, could make billions of dollars when the companies are released, and the public stock offerings would likely be among the largest ever.

A senior FHFA official said the ultimate goal of the rule is to ensure that the companies are never leveraged more than 25 to 1, or 4%. As of September 2019, that would have meant they needed about $243 billion in capital, according to the FHFA. As with other financial firms, Fannie and Freddie would face different requirements depending on market conditions and their books of business, the agency said.

If Fannie and Freddie had been subject to the proposed requirement before the 2008 financial crisis, neither company would have been at risk of going under, the senior official said.

Fannie and Freddie received more than $187 billion in taxpayer money after they were seized by regulators during the 2008 financial crisis. They have since returned more than that in dividends to the U.S. Treasury in fulfilling the terms of their bailout agreements.

The companies have maintained thin levels of capital while under U.S. control. In 2012, the government amended the bailout terms in a way that effectively eliminated their capital buffers. The terms were changed again last year to let the companies keep as much as $45 billion in earnings combined. As of March, Fannie’s net worth was about $13.9 billion while Freddie’s was $9.5 billion.

Investor Expectations

FHFA officials have said it could take years and more than one public offering for Fannie and Freddie to reach the capital levels they’d need to function outside of conservatorship. The capital levels and investors’ return expectations would affect the fees Fannie and Freddie charge to back mortgages and, by extension, the rates charged to borrowers.

The public will have 60 days to comment on the proposed rule after it’s published in the Federal Register, which itself could take a month. A senior FHFA official said the agency hopes to finalize the rule by the end of the year.

Calabria said at an online Mortgage Bankers Association event on Tuesday that the coronavirus pandemic had delayed the FHFA’s timeline to capitalize Fannie and Freddie by three to four months, but that it could take even longer if the economy worsens.

The senior FHFA official said the agency still expects Fannie and Freddie to begin raising capital from the public markets sometime next year. He said it could take years for them to reach the capital goal.

“Appropriate capitalization of the GSEs will be critical to protecting taxpayers, fostering market discipline, promoting stability in the housing finance system, and ensuring durable consumer access to mortgage credit,” Treasury Secretary Steven Mnuchin said in a statement.

Earlier Version

An earlier version of capital rule proposal, released under former FHFA director Mel Watt in 2018, would have required Fannie and Freddie to have a minimum of $180 billion in capital in September 2017, the agency said. That proposal was criticized because it could have made capital minimums rise in a downturn. That would have likely led Fannie and Freddie to keep far more than $180 billion in capital, even in good times, to avoid breaching the minimum.

The new proposal attempts to avoid that outcome, the senior FHFA official said Wednesday.

Even as the Trump administration moves forward on releasing Fannie and Freddie, it might be running low on time. While Calabria’s term runs for about four more years, he might run into difficulty if Trump fails to win re-election and a Democratic administration doesn’t want to release the companies.

A different senior FHFA official said the agency is operating with the expectation that Calabria will have the remainder of his term to either release the companies from conservatorship or at least cement his plans. He said that Fannie and Freddie could be released before reaching the capital minimums under some sort of consent order, but that no decisions surrounding that had been made.

(Updates with Mnuchin comment in the 13th paragraph. An earlier version corrects date for achieving minimum capital level in the 14th paragraph.)

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