US sets $ 200 billion fundraising goal for Fannie and Freddie

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The Trump administration has attempted to revive the privatization plans of Fannie Mae and Freddie Mac, the American mortgage giant bailed out by the taxpayer in 2008, saying they should raise about $ 200 billion to return to private control.

Wednesday’s proposal, presented as the next step towards what could be the largest public offering in history, comes against the backdrop of falling profits for the two companies, which guarantee more than half of all American mortgages.

Millions of Americans skip payments during the coronavirus recession as part of a forbearance program promoted by Fannie and Freddie, which has reduced companies’ ability to rebuild their balance sheets by themselves.

“We need to chart a course for businesses towards a solid financial foundation so that they can help all Americans in times of stress,” said Mark Calabria, director of the Federal Housing Finance Agency, which regulates businesses. “More capital means a more solid base on which to deal with crises. It’s time to act. “

The new minimum capital proposals would require Fannie and Freddie to hold a combined total of $ 240 billion – more than expected under an earlier plan in 2018 that was unsuccessful.

Fannie and Freddie have been under guardianship – which means they are under government control, but without their assets on the balance sheet – since 2008, when their previous capital buffers proved insufficient to weather the financial crisis.

Last year Steven Mnuchin, the secretary of the Treasury, suspended the rule that the two entities must return most of their profits to the Treasury each year.

Since then, the two have increased their capital from $ 3 billion to $ 23.5 billion. Calabria’s plan released Wednesday does not deal with future payments to the treasury, but companies are likely to be allowed to keep their profits for another year before increasing the rest of what they expect from private investors.

The reprivatization of Fannie and Freddie remains a complex and politically heavy prospect, given the central place of the pair in the American real estate market. The 30-year fixed-rate mortgages used by most borrowers are made possible in large part by guarantees from Fannie and Freddie, and the bailout of businesses has caused a firestorm.

It is unclear what approach a Democratic administration could take if Donald Trump loses the November presidential election.

Fundraising required could easily be around $ 200 billion, Trump administration officials said, which would likely overshadow any other initial public offering in history, even if part of the money came from. ‘bonds or other instruments rather than stocks.

Saudi state energy giant Saudi Aramco recently organized the largest public offering ever, raising just under $ 30 billion.

The amount required will also depend on how Fannie and Freddie can build up capital given the pandemic. Calabria told the Financial Times earlier this year that Fannie and Freddie could demand a capital injection just to survive the current crisis if the worst estimates of how many people default on their mortgages were to materialize.

The proportion of people requesting delays in paying off their home loans reached 7% by the end of April, Fannie Mae said this month, and officials said she seemed to level off well below the 25% feared by some. in the beginning. of the pandemic.

The new FHFA capital rules – which will not be finalized for three months after a consultation period – set the minimum of $ 240 billion based on the current level of activity of Fannie and Freddie. It includes a $ 90 billion buffer and the pair would be allowed to reduce its capital to $ 150 billion during times of stress.

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