News

The Fannie And Freddie Plan

The Trump administration is preparing to release as early as the first part of September its long-awaited plan to return Fannie Mae and Freddie Mac to private-shareholder ownership, according to people familiar with the matter.

The proposal comes more than a decade after the government seized the mortgage-finance firms to save them from collapse. It would likely seek to put the companies on a sounder financial footing and then release them from government control if Congress doesn’t enact a more fundamental overhaul in the meantime, these people said.

The Plan

The plan, which could be floated shortly after the Labor Day holiday, is expected to envision a version of what has been called “recap and release,” which would ensure the firms have adequate capital to absorb loan losses in a future housing slump. Its provisions aren’t expected to give details for initial public offerings for the firms, the people said.

If the proposal is carried out, the firms could ultimately return to the way they operated before the financial crisis. While administration officials would prefer that Congress act on a more sweeping overhaul of housing finance, Republican control of the Senate and Democratic control of the House leaves lawmakers unlikely to act. The firms are unlikely to face new competition because only Congress can create a more-level playing field that could break up the firms’ effective duopoly.

Any move to recapitalize and then release the firms would be a victory for hedge funds and other investors that have been betting on Fannie and Freddie’s return to privatization for years. Privatizing them would likely take several years and would involve allowing the firms to retain earnings and raise tens of billions of dollars from investors.

The plan, a priority for the Treasury Department, has been in the works for months and was expected earlier this summer. Its completion was delayed in part by revisions from the Department of Housing and Urban Development, the people said. Craig Phillips, a former top Treasury official who had been leading that department’s work on the proposal, left in June.

Fannie and Freddie

Fannie and Freddie don’t make loans but instead buy them from banks and other lenders. They package them into securities that are sold to other investors and provide guarantees in the event of default.

The firms got into trouble during the financial crisis by taking on more risk without having to hold more capital. They amassed huge investment portfolios to profit from the difference between their lower cost of capital—a benefit of an implied federal guarantee—and the rates they could earn on mortgages.

The government seized the companies through a process known as conservatorship in 2008, during the George W. Bush administration, and agreed to inject an amount to support some $5 trillion in debt securities issued by the companies.

As part of the plan to return Fannie and Freddie to private hands, a Treasury backstop could remain. But the firms could begin paying a periodic commitment fee for the federal line of credit, The Wall Street Journal previously reported.