Trump Administration, Senators Put Fannie, Freddie Overhaul Back in Play

Source: Andrew Ackerman, Wall Street Journal, May 11, 2017
 
The Senate Banking Committee has begun behind-the-scenes work on the issue of how, exactly, to revamp the companies. The senators want to develop a framework to decrease the government’s outsize role backstopping the nation’s $10 trillion mortgage market. On Thursday, the panel will hear testimony from Mel Watt, the director of the Federal Housing Finance Agency, which controls Fannie and Freddie, in the first step of a process that could play out in the coming months.  It remains unclear if policy makers can overcome philosophical differences and hammer out a final deal. Conservative Republicans have called for a private market with no new federal guarantees. Some centrist Republicans and many Democrats have said a federal role is needed to preserve liquid markets for the popular 30-year fixed-rate mortgage that drives home buying. …

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Fannie, Freddie shares dive after U.S. appeals court ruling
Source: Nathan Layne and Svea Herbst-Bayliss, Reuters, February 21, 2017

Shares of Fannie Mae and Freddie Mac tumbled more than 30 percent on Tuesday after a U.S. appeals court shut down efforts by hedge funds and other investors to pursue numerous legal claims accusing the U.S. government of seizing their profits following taxpayer bailouts. By a 2-1 vote, the U.S. Circuit Court of Appeals for the District of Columbia said a lower court had correctly barred claims that the government overstepped its authority in 2012 by eliminating dividend payouts to various shareholders and requiring the companies to pay the U.S. Treasury an amount equal to their quarterly net worth. … Both stocks are still up by about two-thirds since Donald Trump won the U.S. presidential election on Nov. 8. Investors said part of that rally stemmed from comments that month by then-Treasury Secretary-nominee Steve Mnuchin that both companies should be privatized. Mnuchin, however, said in January he was against such a plan. … Both companies have since become profitable under the conservatorship of the Federal Housing Finance Agency. According to court papers, they have returned roughly $68 billion more to the government than they drew down during the financial crisis. … Analysts said the ruling was consistent with others on FHFA’s guardianship of Fannie and Freddie, making it less likely the Supreme Court would take the case. …

The Time Is Ripe: MBA Introduces GSE Reform Proposal
Source: Patrick Barnard, MortgageOrb, February 1, 2017

With government-sponsored enterprise (GSE) reform highly likely under the new administration, the Mortgage Bankers Association (MBA) is wasting no time and yesterday introduced its own proposal for what should happen to Fannie Mae and Freddie Mac. Similar to previous proposals that have been floated about during the past several years by various groups (including the association), the MBA’s plan calls for the GSEs to be “congressionally re-chartered” – in other words, re-privatized – and, importantly, calls for an “explicit guarantee” on the mortgage-backed securities they issue. The MBA’s plan, as outlined in a soon-to-be-released paper, calls for the establishment of a “new, durable foundation for the secondary mortgage market,” the MBA says in a release. … Consistent with the MBA’s previous recommendation, the paper calls for an “end-state that would encourage multiple guarantors” that “would be organized as privately owned utilities with a regulated rate of return.” …


MOODY’S: PRIVATIZING FANNIE, FREDDIE IS COST PROHIBITIVE
Source: Builder Online, December 12, 2016

Steve Mnuchin, President-elect Donald Trump’s choice for Treasury secretary, said recently that “getting Fannie and Freddie out of government ownership” is one of the Trump administration’s top 10 priorities. But according to Moody’s Investor Services, privatizing Fannie Mae and Freddie Mac is unlikely to happen in the near future and doing so would be cost prohibitive, reports HousingWire staffer Ben Lane. If the GSEs were to continue to support the mortgage market as they do today, in order for privatization to work, each would need a strong capital base that likely totals in the “hundreds of billions of dollars,” Moody’s says in its report. …

Opinion: Fixing Fannie Mae and Freddie Mac: Will Trump Give Wall Street Another Gift?
Source: Marc Joffe, Financial Times, December 12, 2016

President-elect Trump’s selection of a former mortgage banker as Treasury secretary signals the incoming administration’s intention to finally settle the status of Fannie Mae and Freddie Mac, the two government-sponsored housing finance behemoths that were bailed out and brought under federal conservatorship in 2008. Secretary-designate Steve Mnuchin told Fox Business that Fannie and Freddie should be freed from government conservatorship, causing shares in the two entities to soar and enriching hedge fund managers Bill Ackman, John Paulson and other speculators betting on such an outcome. While privatization is warranted, it needs to be done in a way that serves the interests of taxpayers rather than those of well-connected hedge fund investors. … Fannie Mae and its younger sibling, Freddie Mac (officially the Federal Home Loan Mortgage Corporation, created by the federal government in 1970), bought mortgages with borrowed money, in the form of proceeds from the bonds they issued. There was always the risk that mortgages purchased by the GSEs would fail to perform. In that case, Fannie Mae and Freddie Mac — which both maintained very thin layers of capital — would default on their bonds. Because of this risk, bond investors would demand hefty interest rates on mortgage-backed bonds. But in the case of the GSEs, they assumed that the federal government would back the bonds in the event of a default. As a result, GSE bonds carried interest rates only slightly higher than Treasury securities. … If we’re going to try privatizing the GSEs again, we need to make sure that they are really private. This means that lawmakers must make clear that the entities will never receive taxpayer support under any circumstances. They should also be subject to the same stringent capital requirements that are applied to private banks in today’s post-crisis world. Without special government privileges, Fannie and Freddie may not be very profitable, but that should be a problem for their executives and owners — not the taxpayer. …

Good Luck Privatizing the American Dream
Source: Mark Whitehouse, Bloomberg, December 12, 2016

Mortgage behemoths Fannie Mae and Freddie Mac represent a big piece of unfinished business left over from the financial crisis. The companies, which purchase and guarantee home loans, used to have a business model similar to the largest U.S. banks: They generated abundant profits for shareholders thanks in large part to low borrowing costs, which in turn depended on the assumption that the government would bail them out if they got into trouble. That bailout became necessary in 2008. Unlike the banks, though, they have been wards of the state ever since. Judging from his comments, Mnuchin’s solution would be to bring in private investors and ensure they provide ample capital (or other payments) to cover any losses. Logical as that may seem, it’s more easily said than done. The government’s role in the mortgage market has been expanding ever since the late 1960s, when Fannie Mae was reorganized into a company owned by shareholders but with implicit taxpayer backing. The private subprime lending boom of the 2000s was a brief and disastrous exception. … Yet even if getting the government out is ultimately the right move, it’s important to recognize how far the U.S. has already gone in the other direction. True privatization would be a big shock, potentially leaving millions of Americans unable to buy or refinance homes. Anything short could end up merely redirecting subsidies to banks or other private investors. For all its drawbacks, the government control of Fannie and Freddie at least has the advantage of clarity: Taxpayers are on the hook for losses but also benefit from the upside. …

White House Opposes Privatizing Fannie Mae and Freddie Mac
Source: Tom Risen, U.S. News and World Report, November 21, 2013

Privatization would not fix ‘too big to fail’ entities, official says …The Obama administration rejected a corporate bid to buy insurance businesses from Fannie Mae and Freddie Mac, suggesting housing finance reform would be a better way to rebuild the housing loan market and prevent another potential economic collapse. Bad loan investment pushed those companies close to bankruptcy in 2008, after which the government decided to seize control of Fannie Mae and Freddie Mac. The mortgage-finance companies took approximately $187 billion in government aid before returning to profit in 2013. Fairholme Capital Management on Nov. 13 proposed to lead a group in a $52 billion investment to begin the shift of Fannie Mae and Freddie Mac from government-sponsored entities to private businesses that could follow the best practices of the insurance industry. …

Ackman Joins Fray to Pry Once-Worthless Fannie From U.S.
Source: Saijel Kishan & Christopher Condon, Bloomberg, November 18, 2013

Bill Ackman and Bruce Berkowitz, two of the most successful investors of the past decade, aren’t afraid to go against the grain. Ackman, a hedge-fund manager known for his detailed research, pushed U.S. mall owner General Growth Properties Inc. to file for bankruptcy, then helped orchestrate a rare victory for both bond and equity investors. Berkowitz scored big for his mutual funds by betting on American International Group Inc. at a time when the insurer’s future was in doubt. Now, as they seek to make money on their holdings of Fannie Mae and Freddie Mac, the two mortgage giants at the core of the U.S. housing market, Ackman and Berkowitz are fighting another uphill battle, this time against the White House and U.S. Congress. Taking different approaches, each is angling to salvage securities valued at more than $100 billion combined before the financial crisis and which many deemed worthless when the federal government took over the companies as markets unraveled in 2008. Few on Wall Street or in Washington see how they can win. …

Paulson Leads Hedge-Fund Lobby Push to Privatize Fannie
Source: Clea Benson and Cheyenne Hopkins, Bloomberg, April 30, 2013

Hedge funds including Paulson & Co. Inc. are pushing Congress to abandon plans to liquidate Fannie Mae (FNMA) and Freddie Mac (FMCC) as investors buy up preferred stock that has long been considered worthless, according to people with knowledge of the discussions. The improving finances of the two government-owned mortgage companies have kindled hopes among shareholders that they could be revived as private firms.