The Trump administration is ready to make last – minute changes to Fannie Mae and Freddie Mac said allowing the mortgage giants to hold much more capital, leaving President Joe Biden with many of the most difficult cases about releasing the companies from federal control, said four acquaintances on the case.
The reviews – which are expected to be announced as soon as Thursday – would change the terms governing Fannie and Freddie ‘s taxpayer backup. They fall far short of releasing the companies from their government reserves, something Finance Secretary Steven Mnuchin promised to accomplish after President Donald Trump’s 2016 victory.
Treasury officials have already begun briefing lawyers about the tweaks, which are the result of an agreement between Mnuchin’s group and the Federal Housing Finance Agency – Fannie and governor Freddie. Although the mutations were presented as if an agreement had been reached, they could be changed before they are released to the public.
The actions lock in a number of policies that the companies are already subject to under FHFA Director Mark Calabria, who requested not to be named to discuss the matter before the proceedings are filed. announce changes. They include ensuring that large lenders do not reap the benefits of smaller ones when doing business with Fannie and Freddie and limiting the number of higher risk mortgages it can afford. the promising companies.
More importantly, Fannie and Freddie will not have to pay their profits to the government until they have much larger capital buffers to protect the companies from losses. Currently, Fannie and Freddie together cannot hold more than $ 45 billion in capital, after which they have to pay their full net worth to the U.S. Treasury.
Controversial policy
People who received information about the plans said it was not clear what level of capital the companies will be allowed to keep but said the changes were designed to end the so-called net worth sweep, a controversial policy implemented during the Obama administration that called for their transfer to the Treasury.
However, the Treasury opposes reducing government property interest in Fannie and Freddie, a long-term goal of the companies ’private shareholders. Whether the Treasury’s main preferred interest should change is being debated at the White House, said one familiar with the matter. If the Treasury position continues, Biden will be guaranteed a strong voice in the companies’ futures. Unlike the current White House, the incoming administration is seen as in no hurry to re-privatize the companies, the people said.
A Treasury spokesman declined to comment, although an FHFA spokesman did not immediately comment.
Fannie and Freddie do not make mortgages. They buy them from lenders, wrap them in securities and promise investors a repayment of principal and interest. They were taken over by the government in 2008, when billions in loans were recalled due to the financial crisis, and they were eventually replenished with $ 187.5 billion in aid money.
Since then, two presidential administrations and Congress have tried and failed to replace Fannie and Freddie with a new housing finance system. Calabria has recently pledged to take the companies out of conservation, quickly announcing new rules for the companies on yields, capital and liquidity, while at the same time setting out preconditions for the control of the companies. leave government.
Push Calabria
In the last few months, Calabria tried to rally support for the release of Fannie and Freddie before they raised major capital issues, an effort that meant a final lock-in before Biden took the reins. That pressure ended up as a bridge too far for Mnuchin.
Calabria will not have to leave after Biden was sworn in as he is serving a term that extends into 2024. That said, Biden would be likely to try to replace the FHFA chief if ‘he will try to quickly release the companies or put them in disposal, people who are familiar with the case have said.
With the agreement, the Department of Finance and the FHFA plan to issue proposals for what needs to happen before Fannie and Freddie are released. But the proposals will not be binding for the Biden Treasury, the people said. That means the changes are effectively becoming a plan for making Fannie and Freddie companies fully privatized.
One of the most difficult issues that the Treasury intends to leave unresolved is the government’s involvement in Fannie and Freddie, a situation that now exceeds $ 220 billion in additional preferred shares. guaranteed to acquire nearly 80% of the companies ’common stock.
Fannie and Freddie’s private shareholders, including hedge funds, have been desperate to hope that the Trump administration will at least reduce its stakes. That would allow investors to regain shares or mitigate the rate of decline if the companies raise capital in the private market.
Case to come
Shareholders have also sought compensation in the courts, claiming that the 2012 decision by the Obama administration wiped out almost all of Fannie and Freddie’s illegal profits. The High Court heard that case in December and legal analysts expect them to issue a ruling this year.
The same case could determine what happens to Calabria, which is an independent governor insulated from the White House. The Supreme Court could decide that Biden Calabria should be allowed to fire at any time for any reason, jeopardizing attempts to release the companies.