Is Treasury, FHFA operating out of time to approve GSE's capital increase?

WASHINGTON – With less than two weeks left in the Trump administration, the Federal Housing Finance Agency and Treasury Department are nearing the deadline for Fannie Mae and Freddie Mac to keep more or all of their earnings.

Mark Calabria, director of FHFA, has identified the lifting of the cap on Fannie and Freddie's capital as an important step in re-privatizing the mortgage giants. Officials estimate that companies will need roughly $ 275 billion of capital – much more than they are allowed to hold – to exit the conservatory.

Raising or removing the cap on retained earnings would require a change to the share agreements that govern the FHFA and Treasury's oversight of government sponsored companies. But with Calabria's job security on shaky ground and Treasury Secretary Steven Mnuchin due to leave when President-elect Joe Biden is sworn in, the window could close.

It is also not clear that Calabria and Mnuchin are in full agreement on how to revise the agreements.

"Director Calabria is in a difficult position because there is nothing he can do unilaterally," said Ted Tozer, senior fellow at the Milken Institute and past president of Ginnie Mae.

Treasury Secretary Steven Mnuchin said he supports changing the terms of government ownership of companies so they can hold more capital. However, it remains to be seen whether he will finally sign the change in the final days of the Trump administration.

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The Preferred Stock Purchase Agreements [PSPAs] establish government ownership of the two GSEs. They were last changed in 2019 to allow the mortgage giants to hold capital totaling $ 45 billion. However, that is a far cry from the amount companies will have to hold on privatization.

Mnuchin has said he supports changing the terms of government ownership of companies so that they can hold more capital. However, it remains to be seen whether he will finally sign the change in the final days of the Trump administration. It's also unclear whether Biden's election for Treasury Secretary – former Federal Reserve Chair Janet Yellen – would be willing to sign an agreement that would allow the GSEs to keep their revenues.

"The PSPA must be changed by both sides," said Tozer. "I would think if nothing comes out in the next few days, it will go to the Biden administration to see what to do."

After the FHFA enacted a final ruling in November requiring higher capital requirements for Fannie and Freddie to take effect once the companies leave their federal conservatories, senior agency officials said the next step would be to change the PSPAs to accommodate the GSEs can work towards building the capital that would be required to meet these requirements.

Many still believe the Treasury and FHFA will likely reach an agreement before January 20 that would allow Fannie and Freddie to hold more capital, but doubt it will be as comprehensive as some originally thought.

“It remains likely that something will happen. Nobody really knows what it is and the expectation that it would be something monumental was probably exaggerated, ”said Ed Mills, a political analyst with Raymond James. "It's probably less effective than originally hoped for by those who wanted big action."

The Trump administration's draft real estate finance reform published last year contained recommendations to amend the PSPAs. For example, the plan is to maintain a regular commitment fee that Fannie and Freddie pay the government for their support.

Calabria also once expressed its support for changing the PSPAs to codify some of the regulatory and regulatory changes made to the GSEs during the Conservatory.

However, experts say that there may not be enough time to negotiate material changes to the agreements before the change in administration.

“The problem with Treasury right now is they do 800 things with just a handful of people. I don't know how to get these people to prioritize this as any change will in some way impact the secondary market – and it could be negatively received, ”said Tim Rood, Head of Industry Relations at SitusAMC. "So I think it will be the wider strokes."

Mills agreed. He said while Mnuchin and Calabria are likely to come to an agreement, he is skeptical any deal would settle the payments Fannie and Freddie have made to the Treasury for years to repay the government for the 2008 bailout.

"The most likely change is to recognize the fact that a capital rule has been completed and align the PSPA with the updated capital rule to keep more capital and find a way to meet those capital requirements," said Mills.

A revision of the PSPAs could also be delayed on determining the amount of dividends that Fannie and Freddie, as main investors, will pay to the Treasury Department, Tozer said.

"Now that they're profitable, I think these are all things we need to talk about: stopping the sweep so they can build capital, but then also highly reimbursing the US taxpayer for their investment, and I hope so is it what it is Now it goes on, ”he said.

Tozer added that he didn't believe the Treasury Department and FHFA could allow GSEs to maintain broader buffers of capital without answering the dividend question.

"It will be difficult because at this point I would think there might be some legal challenge," he said. "I would think that there could be a lot of legal challenges in saying that the taxpayer basically fell short."

Some speculate that a standstill in changing PSPAs could be due to Mnuchin's busy schedule. He traveled to the Middle East this week and was the prime man in charge of the Trump administration in negotiating the latest Congressional stimulus package.

"Mnuchin's portfolio is the largest, most diverse portfolio of any Treasury Secretary in modern times, perhaps ever, and it's being pulled in many different directions," said Mills. "Due to the diversity of his portfolio, he has only a limited bandwidth that goes well beyond the most immediately urgent element."

The finance department did not respond to a request for comment.

Although the government has made its goal of a major real estate finance reform clear, the revision of the GSEs has been less urgent than other agenda items on Mnuchin's plate over the past four years.

Mnuchin even told reporters in December that he felt that GSE reform was "the only area that I think we haven't made enough progress on."

"I am currently concerned that Secretary Mnuchin is completely overwhelmed with this COVID package and is dealing with all of these issues. So I wonder if this is why" a PSPA agreement "is taking a back seat," Tozer said.

With Biden's future administration likely to set different priorities for Fannie and Freddie, Calabria and Mnuchin now urgently need to reach an agreement in the next two weeks, Rood said.

"I don't think Calabria or Mnuchin happen to want to leave the PSPAs to the new government, but it depends what they are willing to risk for this insurance," he said.

While Yellen is likely to focus on more domestic issues than Mnuchin and may have "significant housing-related policy discussions," Mills said, her focus will likely be on mortgage credit availability rather than the privatization of the GSES.

"What I would see from a Yellen perspective is that I think she would certainly be very open to proceeding with a lawsuit but would not be viewed as someone who would move aggressively to recap and release," he said . "I would see them as … firstly, not harming the larger real estate market."

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