The Trump administration on Thursday released its plan to reform the housing finance system – including proposals to overhaul mortgage giants Fannie Mae and Freddie Mac near the 11th anniversary of their conservatorship.
“Housing finance reform represents the last unfinished business of the financial crisis,” a U.S. Department of Housing and Urban Development (HUD) official told reporters on Thursday.
The Treasury Housing Reform Plan aims to remove the government-sponsored entities (GSEs) from conservatorship – a long-time goal of the Trump administration.
The preferred method for achieving reform is through comprehensive housing finance legislation passed by Congress – but reforms “should not and need not wait on Congress,” according to the document.
The plan calls for recapitalizing the GSEs. In order to begin that process, Treasury recommends adjusting– not ending – the so-called “net worth sweep,” under which each GSE is permitted a $3 billion capital cushion. A senior Treasury official said they are considering raising the amount of earnings each firm can retain, but details regarding specific amounts and timing would need to be worked out by the Federal Housing Finance Agency (FHFA) and the Treasury.
While the plan does not specifically address an initial public offering, Treasury officials told reporters that it does direct the Treasury and the FHFA together to develop a recapitalization plan that would potentially contemplate issuing additional public stock in a public market.
The government would continue to support the GSEs after the conservatorships.
Few other specifics were included.
Trump issued a memorandum in March directing the Treasury to develop a plan to end the GSE conservatorship.
Among the other goals of the plan are protecting American taxpayers against future bailouts, preserving the 30-year fixed mortgage and helping Americans make home purchases.
It has been more than a decade since Fannie and Freddie were taken into conservatorship. They have been operating within the government since being bailed out for nearly $200 billion at the height of the financial crisis.
Treasury provides financial support to the GSEs through the Senior Preferred Stock Purchase Agreements (PSPAs).
The two government-sponsored enterprises do not originate loans – instead they purchase and guarantee them on the secondary market. They guarantee more than half of the nation’s mortgages, so overhaul plans are likely to receive a close eye from those who are concerned about a potential hike in mortgage rates and housing costs.
Privatizing the entities has been a longtime goal of U.S. Treasury Secretary Steven Mnuchin, who told FOX Business in November 2016 that the administration had to “get them out of government control.”
Taking Fannie Mae and Freddie Mac out from under government control could be a boon to shareholders – who have essentially had shares wiped out. As of 2012, profits from Fannie and Freddie have been redirected to the U.S. Treasury. Some hedge funds, however, have been betting on their return to the private sector.
Calabria told FOX Business in May that he’s considering an IPO of Fannie and Freddie as early as the first half of 2020 in order to raise capital.