Taxpayer Rescue
Fannie and Freddie don’t lend themselves. They buy mortgages made by lenders and wrap them into securities that are sold to investors with guarantees against default. The two companies were seized by regulators more than a decade ago and sustained by $191.5 billion in taxpayer money. They have since returned to profitability and sent more to the Treasury in dividends than they received in bailout funds.
Here’s why capital impacts the fees that Fannie and Freddie charge lenders to backstop loans: The companies are expected by regulators and investors to earn money on their capital stockpiles. So if Fannie and Freddie have a combined $200 billion of capital and must make a 10% rate of return, then they would have to raise fees to a level that allows them to earn about $20 billion.
While under U.S. control, Fannie and Freddie are each restricted to a capital buffer of $3 billion, far less than they’d need to get through an economic downturn. Instead of retaining profits to build up capital, the companies send almost all of their earnings to the Treasury, a practice Calabria says he wants to bring to an end.
Fannie and Freddie’s old capital requirements were suspended when they were seized by the government in 2008. New rules were proposed last year by then-FHFA director Mel Watt that would have had the two companies hold anywhere from $103.5 billion to $139.5 billion combined. Calabria is expected to issue a final plan later this year.
Like Insurers
Hedge fund manager Bill Ackman, whose firm is one of the largest holders of the companies’ common stock, called the proposed higher capital levels unlikely and unnecessary on a recent earnings call.
“These are not banks,” said Ackman, who runs Pershing Square Capital Management. “They’re really insurance companies, and they’re insuring what we believe to be one of the safest assets in the world, which is the first mortgage on, kind of, middle-class homes to a credit-worthy borrower on a geographically diversified basis.”
Ackman said Fannie and Freddie will have all the capital they need at 2.5% of assets because of their “huge” cash flows.
Trump and Treasury officials have publicly said they want to work with lawmakers on an overhaul of housing-finance policy, though some within the administration are skeptical they can reach a compromise with House Democrats, said one of the people, who like others asked not to be named in discussing internal deliberations. That might prompt the administration to bypass Congress in releasing Fannie and Freddie.
Coming IPOs?
The capital levels floated by Calabria could complicate such efforts. He told Fox Business Network last month that a $250 billion capital raise is “in the ballpark” of what he thinks is appropriate. While Calabria and administration officials have said they’re evaluating an initial public offering, a stock sale of even a fraction of that value would easily be the largest in history.
Regardless, Calabria has leverage because the White House and Treasury need his backing to execute any plan to end the conservatorships, said Brandon Barford, founder of Beacon Policy Advisors.