Multiple Reports Indicate Plans are Underway to end GSE Conservatorship

Written By: Joel Palmer, Op-Ed Writer

Multiple reports in the last week indicate that the Trump administration is close to releasing a plan to end conservatorship of Fannie Mae and Freddie Mac.

Fox Business reported that Wall Street bankers and Trump administration officials have started outlining a stock deal to finance Fannie and Freddie’s recapitalization plan.

According to the report, the stock sale will be set up as a “hybrid between a traditional initial public offering and a secondary offering of stock, or a ‘re-IPO.’” The report stated that officials hope the offering can take place sometime in 2020.

The Wall Street Journal reported that the Treasury Department is preparing a plan that could be ready in the coming weeks. Its report also indicated that an initial public offering of the two companies was being planned to raise money to “shore up the GSEs’ reserves.”

The Fox Business article quoted sources saying the level of capital could range from $100 billion to $250 billion. The Wall Street Journal report said it could cost up to $125 billion.

The Wall Street Journal article also said Treasury’s plan would include keeping a federal line of credit that the GSEs would pay for via a periodic commitment fee.

In addition, the plan includes substantial changes to their business models that would include limits on the types of loans Fannie and Freddie can purchase. This would reduce their capital needs. Specifically, officials want the GSEs to focus on guaranteeing only higher quality loans.

Another report stated that the public offerings for Fannie and Freddie could occur at different times rather than at the same time. This came from a Reuters article quoting Mark Calabria, who recently took over as director of the Federal Housing Finance Agency, which oversees the GSEs.

Calabria was quoted as saying that “it may be preferable to stagger that process due to the complexities involved in getting the government-backed firms, which have different business models, ready for private ownership.” He added that he hoped any lag between the entities would not exceed six months.

Calabria recently told attendees of the Mortgage Bankers Association’s annual National Secondary Market conference that “the path out of conservatorship…will be driven, first and foremost, by their ability to raise capital.”

Increasing capital levels has been challenging for Fannie and Freddie since they entered conservatorship because their profits have been sent to the U.S. Treasury since 2012. Through the fourth quarter of 2018, Fannie Mae has paid $175.8 billion in dividends to Treasury, while Freddie Mac has paid $116.5 billion. Calabria has said there are no immediate plans to end this arrangement.

Alex J. Pollock, a senior fellow at the R Street Institute, wrote for American Banker that the GSEs would require capital of $220 billion between the two. That is $210 billion more than their current capital base.

Freddie Mac Chief Executive Donald Layton told Reuters that his company would need $50 billion, while Fannie Mae would need $75 billion.

About the Author

As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.