Let the re-capping begin.
The Treasury and the Federal Housing Finance Agency (FHFA) have agreed on how much capital government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac should retain as they prepare to be transitioned out of conservatorship and back to the private sector.
As per the “capital agreements” signed with the Treasury and FHFA, Fannie Mae must retain $25 billion and Freddie Mac must retain $20 billion – at least initially, as steps are taken to transition the companies out of conservatorship.
The agreements in effect modify the existing Preferred Stock Purchase Agreements (PSPAs) that the GSEs have had in place with the federal government since their takeover in 2008.
In essence, PSPAs have been modified to permit Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion per company in capital reserves currently permitted.
“These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the federal government in the housing finance system and protect taxpayers against future bailouts,” says U.S. Treasury Secretary Steven T. Mnuchin, in a statement.
The re-capitalization of the companies is a major first step of the Trump Administration’s plan to transition the companies out of conservatorship. In March, President Trump signed a presidential memorandum directing the Treasury and U.S. Department of Housing and Urban Development, along with other government agencies including the FHFA, to enact housing finance reform.
The Treasury and HUD released their respective plans earlier this month. The Treasury Housing Reform Plan primarily addresses Fannie Mae and Freddie Mac’s transition out of conservatorship, while the HUD Reform Plan spells out reforms for the Federal Housing Administration (FHA) and Ginnie Mae.
Two weeks after the release of the plans, Mnuchin said during an interview on CNBC’s Squawk Box that the Treasury may end its net-sweep of Fannie Mae and Freddie Mac’s profits before the end of September.
“We’re actively negotiating an amendment to try to get it done by the end of the month,” Mnuchin said during the interview.
Ending the net sweep is a key provision of the Treasury’s plan, which outlines both administrative and legislative actions that can be taken in order to accomplish comprehensive housing finance reform.
“The [GSEs] are leveraged nearly 1,000-to-one, ensuring they would fail during an economic downturn – exposing taxpayers once again,” says Mark Calabria, director of the FHFA, in a statement. “This letter agreement between Treasury and FHFA, which allows the [GSEs] to retain capital of up to $45 billion combined, is an important milestone on the path to reform.”
Calabria adds that the FHFA will be working with the Treasury in the coming months “to amend the share agreements and further advance broader housing finance reform.”
“These reform goals include limiting the government’s role in housing finance, increasing marketplace competition, focusing on affordable housing, and sustainable homeownership,” Calabria says. “The status quo is not an option. Now is the time to act.”
Although the GSEs have now been directed to raise combined capital reserves of $45 billion that number could be increased as additional steps are taken to move them out of conservatorship.
During a recent interview with Bloomberg News, Calabria said although the GSEs will be capitalized at “a much higher number,” than the current $3 billion, “We will still be limited – but we’re looking at a number that will get us through the next year and half, or two years… In the interim, after that we will reach an agreement on changes to the underlying share agreements, which will allow us to chart a path out of conservatorship.”
Calabria, however, declined to give a definitive timeline for recapitalization, saying it is “process driven” not “calendar driven.”
When asked if he anticipates the GSEs being out of government control within a year, Calabria says, “It really depends on how quickly they raise capital.
“What we want to do – to some extent – is put their destiny back in their own hands,” he says. “They’re going to be responsible for raising capital – and they’re the ones who are going to have to hit the goalposts.”
Calabria adds that whether or not shareholders of the two companies benefit from the government’s plan to re-privatize them has no bearing on his focus as a regulator.
“If shareholders benefit or they don’t benefit, that’s incidental,” Calabria says during the interview. “I’m tasked with getting them to a safe and sound condition.”
Calabria adds that the companies could raise capital via an IPO “but a lot of things need to be done before we get to that point.”
He says the companies would likely need to raise capital for a year or two and would need to hit the government’s capital requirements before an IPO could happen.
Calabria points out during the interview that new charters for the companies would require an act of Congress. He adds that he would like to see Congress enact legislation allowing for new charters and allowing for new competitors to enter the market.
The Fannie Mae Capital Agreement can be accessed here.
The Freddie Mac Capital Agreement can be accessed here.