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.
“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.”
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A woman toting an umbrella passes Fannie Mae headquarters in
Washington February 21, 2014. REUTERS/Kevin Lamarque
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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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