The Trump administration has been working to move the government’s mortgage finance companies, Fannie Mae and Freddie Mac, back into privatized companies. This move should ultimately have a major impact in the U.S. housing industry.
The announcement was made official Monday by the Treasury Department and the companies’ federal regulator. For several years, Fannie Mae and Freddie Mac have been under a highly regulated arrangement that saw them basically working as government entities. The new agreement will see Fannie Mae being able to retain $25 billion in privatized profits while Freddie Mac will be able to retain $20 billion.
As you probably already know, the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) are vital players in the country’s housing market. They buy approximately half of all mortgage loans in the United States and then package them for issuance as securities. After the housing crisis earlier this century, the government took control of both companies in 2008 as a way to help stabilize the shattered housing market.
New Capital Earning Agreement
Currently, each company is allowed to about $3 billion in capital per quarter. This new agreement dramatically increases that amount and it is just the first step in privatizing the organizations. Ultimately, Fannie Mae and Freddie Mac will need to raise more than $100 billion in combined capital to become completely private (the exact number is still to be determined through continued negotiation).
Being under the government’s conservatorship means that both companies have been largely protected from profit losses, but also hindered from significant profit gains. In general, they have remained profitable since 2012. The new agreement still allows protections. If the companies report a loss under the new system, they can continue to draw government support. The difference is that they don’t have to hand over any profits until they have retained more than the $45 billion total between them ($25 billion for Fannie Mae and $20 billion for Freddie Mac as noted earlier).
The Trump administration’s goal is to recapitalize the companies through these retained earnings as well as renewed ability to raise capital from private investors. The process will likely take years to complete.
On the government side, there are aspects of the plan that continue to allow for governmental-imposed regulations on the finance companies. There will also likely be some sort of fee system created, which the companies will pay in exchange for the ongoing support they will receive from the Treasury. No matter how private they become, their business models will always depend on some sort of Treasury support.
From a consumer perspective, the administration is expecting this move to enhance taxpayer protections through an increase in the face value held in these companies until they are able to raise the requisite capital for private ownership. How this agreement will affect the mortgage industry will remain to be seen. Only time will tell how these changes will impact mortgage rates and the housing market in general.
“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 Treasury Secretary Steven Mnunchin in a released statement.
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