This is unfolding as expected……I still highly doubt Mnuchin will let the government’s warrants, which could be worth $50-$70B become worthless. The only way for that to happen is for the common stock to retain value.
Now that ideologues are out of the White House and the ones in Congress are leaving, common sense and pragmatism can take over……thankfully. The GSE’s can’t go anywhere. They can be modified or combined (there’s no overly compelling reason to have two of them) but they cannot be wound down or replaced without significant threat of massive disruption to the housing market.
This is only a first step. The devil will be in the details of a reform plan that will be worked on by Congress and the administration. That being said, it is a “yuge’ first step.
NYT:
WASHINGTON — Fannie Mae and Freddie Mac, the government-controlled mortgage finance giants rescued during the financial crisis, reached a deal with the Treasury Department on Thursday allowing them to keep some of their profits as they brace for losses that will be activated by the tax bill soon to be signed by President Trump.
Under the terms of the agreement, each company will be allowed to retain $3 billion from their earnings to serve as a capital cushion against future losses, including a decline in the value of their tax-deferred assets.
The arrangement is a change from the 2012 agreement that they reached with the Obama administration requiring that they send most of their profits to the Treasury as a condition for having been rescued by the Bush administration during the financial crisis. Fannie and Freddie required $187 billion of taxpayer aid in the 2008 financial crisis and were placed under government conservatorship as a result.
The firms, which buy or guarantee home loans, have been profitable for the last several years but are required to send almost all those profits to the Treasury, leaving the firms with little capital to protect against future losses. The $3 billion capital cushion is intended to help Fannie and Freddie deal with “ordinary income fluctuations” which could be exacerbated by the coming corporate tax cut. The drop in the corporate rate to 21 percent from 35 percent is expected to bring steep losses to Fannie and Freddie as they write down the value of their tax-deferred assets.
“Treasury’s first duty is to ensure that taxpayers are being protected,” said Steven Mnuchin, Treasury secretary.
Analysts have projected that Fannie and Freddie could stand to lose $10 billion to $20 billion combined as a result of the corporate tax cut. Melvin L. Watt, the director of the Federal Housing Finance Agency, which is the conservator of Fannie and Freddie, said in a statement on Thursday that he expected the additional cushion to be sufficient to cover the normal course of business, however additional funds could be necessary to address the impact of the tax cuts.
Fannie and Freddie borrowed about $187 billion from the federal government after the housing market crashed nearly a decade ago. Since then, they have more than repaid that amount and the Trump administration has been considering what to do with the firms going forward.
Jim Parrott, a housing finance expert at the Urban Institute, said that the deal that was announced on Thursday was intended to minimize the risk of rash decision-making by Congress. He thinks lawmakers would be more likely to make hasty decisions if the companies are seen as taking bailouts.
“They’ve now mitigated the political risk that a draw will trigger nervous action by Congress,” Mr. Parrott said, though he thinks that fear is overblown. “A world in which they are asked to draw or need to draw on the Treasury is a world where a lot of folks on the Hill and elsewhere yell and scream about bailouts.”
But the backlash is already in the air. Republicans swiftly criticized the deal, arguing that taxpayers should not be doing more to prop up the mortgage finance companies.
“I’m very disappointed at F.H.F.A. and Treasury’s decision to roll back these vital taxpayer protections,” said Representative Jeb Hensarling of Texas, the Republican chairman of the House Financial Services Committee and a longtime critic of the mortgage giants.
Last year, before he was confirmed as Treasury secretary, Mr. Mnuchin said “it makes no sense that these are owned by the government” and added that Fannie and Freddie would be out of government control “reasonably fast.” During his confirmation hearings earlier this year, however, Mr. Mnuchin softened his tone and said that housing finance change was necessary because the status quo was not acceptable.
On Thursday, the secretary signaled that with the tax overhaul out of the way he would renew his focus on Fannie and Freddie in 2018.
“The administration looks forward to working with Congress on comprehensive housing finance reform, a top priority in the year ahead,” Mr. Mnuchin said.
Reuters:
WASHINGTON (Reuters) – The U.S. regulator overseeing Fannie Mae (FNMA.PK) and Freddie Mac (FMCC.PK) has reinstated a $3 billion capital cushion for each of the mortgage guarantors, citing the imminent tax overhaul.
The $3 billion cushion, which comes after Fannie and Freddie were expected to eliminate their capital reserves next year, would cover “ordinary income fluctuations,” the Federal Housing Finance Agency said on Thursday. The two enterprises remain in government conservatorship after the subprime mortgage crisis and are still expected to pay out quarterly dividends to the Treasury, according to the terms of their government support.
The FHFA and the Treasury Department said Fannie and Freddie probably would also need additional government funds because of the upcoming sharp drop in the corporate tax rate.
Once U.S. President Donald Trump signs the tax bill passed by Congress, the decline in the corporate tax rate will require Fannie and Freddie to write down the value of tax-deferred assets they hold.
Fannie and Freddie, which have been directed to shrink their capital reserves under the terms of their rescue, will probably need the $3 billion capital buffer, as well as future draws of federal government funds, to cover that upfront write-down, according to the Treasury and FHFA.
WSJ:
After years of political stalemate over the future of Fannie Mae and Freddie Mac, things are beginning to move in Washington. The big news for investors is that the ultimate endgame for housing finance is starting to take shape in Congress.
In a surprise announcement on Thursday morning, the Treasury Department and the Federal Housing Finance Agency said they would allow the government-controlled housing finance giants to build up limited capital buffers of $3 billion each. This represents a shift from the existing arrangement under which both companies’ net profits are to be paid to the federal government until their capital buffers go to zero.
Nonetheless, the companies remain wards of the state and their ultimate future remains uncertain. This is underscored by the fact that both companies will be making large draws on the Treasury, likely around $14 billion between them, once the tax overhaul becomes law. The companies will have to write down the value of deferred tax assets on their books, creating an accounting loss. The circular flow of money between the companies and the Treasury will remain in place regardless of Thursday’s announcement.
Back and ForthCumulative total draws from and dividendspaid to the U.S. TreasurySource: The companiesNote: Data is from 2008 through 3Q 2017Draws from TreasuryDividends to TreasuryFannie MaeFreddie Mac$0 billion$50$100$150$200Draws from TreasuryxFreddie Macx$71.30 billionFar more significant for the long-term future of the companies—as well as for banks, homeowners and investors in mortgage-backed securities—is a plan being discussed in Congress. As The Wall Street Journal has reported, bipartisan Senate legislation that could be introduced early next year would set up private competitors to Fannie and Freddie, remove the two companies’ government backstops and replace it with an explicit government guarantee on mortgage-backed securities.
If properly designed and implemented, such a plan could ensure a continuation of affordable housing for American families, accessible securitization outlets for mortgage lenders, and a stable mortgage-backed securities market for investors. The plan keeps Fannie and Freddie intact rather them winding them down, which could mollify holders of the two companies’ shares, who fear being wiped out.
If the aim were to eliminate Fannie and Freddie, as earlier plans proposed, it would make little sense now to let them begin accumulating capital. But if the aim is to put them in competition against new private companies, Fannie and Freddie will need some capital to compete effectively.
The real significance of Thursday’s decision is that it dovetails with the direction being set in Congress. With the White House and lawmakers from both sides of the aisle seemingly on the same page, durable housing finance reform looks possible in 2018.