Bipartisan Group Of Senators Working On Fannie And Freddie Behind The Scenes

On Thursday, director of the Federal Housing Finance Agency Mel Watt reportedly testified in front of the Senate Banking Committee calling for Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Association FMCC to begin retaining their earnings rather than turning them over to the U.S. Treasury. According to the Wall Street Journal, Watt told the bipartisan group of senators the government “cannot risk the loss of investor confidence.”

Both Sides Of The Aisle Take On Freddie And Fannie

During the mortgage crisis, Fannie Mae and Freddie Mac got caught with $1.5 trillion in mortgage debt on their books and required a $185 billion bailout from the government. As part of the bailout deal, the GSEs were placed under conservatorship.

Fannie and Freddie finally returned to profitability in 2012, but have since been forced to pay 100 percent of their net income to the Treasury in what was called a “net-worth sweep,” leaving the two GSEs’ common shares essentially worthless.

In the first quarter, Fannie Mae reported a net income of $2.77 billion. Shareholders claim they have a right to those profits and that Fannie and Freddie should be recapitalized and released back to investors.

President Donald Trump and Treasury Secretary Steven Mnuchin have both expressed a desire to address the issue of Fannie and Freddie but have given no details on a potential plan or timetable for its implication. Still, there appears to be support for reform on both sides of the aisle in Washington.

Analyst's Take

“Unlike some other issues that are on Congress’ plate right now, this topic has a relatively robust recent history of bipartisan work,” former Obama housing advisor Jim Parrot said.

“Our view is that housing finance reform does not occur before the 2018 election,” Height Securities analyst Edwin Groshans recently said.

Groshans estimated the long process of recapitalizing Fannie and Freddie to safe levels could take between five and 21 years to complete.

After initially jumping post-Trump’s election victory, Fannie and Freddie shares are down roughly 30 percent so far in 2017.