Fannie, Freddie revamp
plan unlikely this year, dividends in focus
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[March 22, 2017]
By Amanda Becker
WASHINGTON
(Reuters) - An overhaul of Fannie Mae and Freddie Mac is highly unlikely
to make it into this year's legislative calendar, Congressional staffers
say, possibly shifting the new administration's immediate focus to
allowing the mortgage financing institutions' to rebuild depleted
capital.
Fannie and Freddie stocks soared late last year when President Donald
Trump's pick for Treasury Secretary Steve Mnuchin said the companies
that have been in government conservatorship since the 2008 financial
crisis should be privatized.
Hedge funds and other investors have been lobbying for the removal of
government controls over the mortgage giants' profits, which since 2012
have been transferred to the Treasury, and their eventual privatization.
The shares dipped when Mnuchin seemed to backpedal on the privatization
pledge during his January confirmation hearing and suffered another
setback last month when a court rejected investors' suit against the
dividend transfers.
Congressional staffers say the Senate Banking Committee has begun weekly
bipartisan staff briefings on Freddie and Fannie reforms, but it is
starting from scratch. The House Financial Services Committee is focused
on other legislation, such as renewing the flood insurance program and
rolling back parts of the Dodd-Frank financial reform, pushing the
mortgage giants' revamp down the to-do list, they say.
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Instead, investors' focus is shifting to how Mnuchin and Federal Housing
Finance Agency Director Mel Watt, an Obama Administration holdover, will
manage the dividends transfers.
Analysts expect the two institutions to make a full $10 billion dividend
payment for the fourth quarter on March 31. But investors will be
looking for any indication from Watt or Mnuchin about whether they plan
to allow the mortgage firms to retain profits later on and begin the
slow recapitalization process.
Though rebuilding an adequate capital buffer would take years - as long
as two to three presidential administrations, according to one analyst -
it would eventually allow Fannie and Freddie to leave government
conservatorship, returning value to their investors.
Watt has warned the mortgage giants have a dangerously thin capital
buffer. Mnuchin said during his confirmation hearing he favored finding
a "bipartisan fix."
The two will likely wait for congressional inaction to become a de facto
impasse before letting Freddie and Fannie hold on to their profits,
analysts said, estimating a decision could be made two or three quarters
out.
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![](../images/032217pics/busine53.jpg)
The headquarters of mortgage lender Freddie Mac is seen in Mclean,
Virginia, near Washington, in this September 8, 2008 file photo.
REUTERS/Jason Reed/Files
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“Mnuchin has been out there talking about a bipartisan agreement,” Heights
Securities analyst Edwin Groshans told Reuters. “That process will have to play
out until it in essence fails. When that process fails, that would open the
opportunity for Mnuchin and Watts to act.”
Tim
Pagliara, an investor who founded Investors Unite, a coalition of more than
1,000 Fannie and Freddie investors, told Reuters he did not expect an imminent
legislative fix and called the situation in Congress "fluid."
“The focus is going to continue to be on the court cases and what the
administration is going to do – and what they’ve said they’re going to do,”
Pagliara added.
President Donald Trump's administration generally supports transferring
government programs to the private sector. Trump donor John Paulson runs three
hedge funds in which the president has invested and which held stakes in the
mortgage institutions. Mnuchin, under the terms of a government ethics
agreement, divested between $1 million and $2 million he had in Paulson's funds.
Fannie and Freddie provide stability to the U.S. housing market by buying
mortgages and bundling them into government-backed securities. During the
financial crisis, they received $187 billion in government aid and by now have
repaid $265 billion via dividend payments to the Treasury.
FHFA’s Watt has warned the payments have depleted the companies' capital buffer
and that by January 2018 they will have “no ability to weather quarterly
losses.”
Fannie was required by law to keep a minimum capital reserve of about $33
billion and Freddie $29 billion headed into the 2008 bailout, which suspended
those requirements.
Industry analysts, shareholders and advocacy groups - both conservative and
liberal - all believe that the same 2008 bailout law gives Watt the authority to
allow the companies to begin rebuilding capital, without waiting for Congress.
(Reporting By Amanda Becker; Editing by Linda Stern and Tomasz Janowski)
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