Housing Finance Reform Disappoints Investors

A Treasury Department plan would recapitalize Fannie Mae and Freddie Mac and return them to private control.
Matthew HellerSeptember 9, 2019

The U.S. Treasury Department has unveiled a plan to recapitalize Fannie Mae and Freddie Mac and return them to private control but stopped short of the sweeping overhaul many investors were hoping for.

Shares in each of the mortgage giants fell more than 8% on Friday after Treasury released a 53-page report outlining its vision for Fannie and Freddie, which were placed in a government conservatorship during the 2008 financial crisis.

The plan would make the companies privately owned again, with their profits no longer going to the Treasury but toward building up their capital bases as a cushion against possible future losses.

“The Trump administration is committed to promoting much needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home,” Treasury Secretary Steven Mnuchin said in a news release.

But according to Reuters, “Many investors had had high hopes that the plan … would recommend swift and bold actions to recapitalize Fannie and Freddie, remove them from conservatorship and start delivering returns for private shareholders.”

Officials haven’t given a concrete timeline for ending the conservatorships. Mark Calabria, director of the Federal Housing Finance Agency, indicated recently that it wouldn’t be any time soon, and likely after 2020.

Though an important first step on the long road to overhauling Fannie and Freddie, the report “delivered less than what some investors hoped for,” said Isaac Boltansky, director of policy research at Washington-based Compass Point Research & Trading.

The firms guarantee more than half of all U.S. mortgages and are known as government-sponsored entities. President Trump in March asked Treasury to quickly develop a plan for overhauling them as part of an effort to jump-start housing finance reform.

Investors were disappointed, in particular, that Treasury recommended only that the government “consider permitting” Fannie and Freddie to retain more than the $3 billion in capital currently allowed, adding that any capital plan will have to be carefully negotiated with the FHFA.

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