Trump Seeks To End Conservatorship Of Fannie And Freddie In Housing Finance System Overhaul

The White House announced on Wednesday that, after years of waiting, Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC will finally be free of their government conservatorship.

What Happened

President Trump is expected to sign a memorandum initiating housing finance reform on Wednesday. Among the goals of the project will be to remove Fannie Mae and Freddie Mac from government control and “promote competition in the housing finance market and create a system that encourages sustainable homeownership and protects taxpayers against bailouts.”

Trump has instructed the U.S. Treasury to put together a plan for reforming Fannie and Freddie.

Why It’s Important

Fannie Mae and Freddie Mac have been under government conservatorship since they were bailed out during the housing market collapse back in 2008. Fannie and Freddie received $191 billion in bailouts following the crisis and have paid an estimated $292 billion in dividends to the Treasury in recent years as part of a government “net worth sweep” that Fannie and Freddy investors have challenged in court.

The government-sponsored enterprises’ share price took off following Trump’s election back in November 2016 on hopes that he would finally tackle housing finance reform. Fannie and Freddie common shares spiked more than 2 percent following news that the conservatorship is ending.

Ed DeMarco, the former director of the Federal Housing Finance Agency, testified this week in front of Congress that there is still investor demand for Fannie and Freddie's securities.

"They’re charging plenty, if we reform them, and have a reformed system and take them out of conservatorship and put them in a multiple guarantor system as Chairman Crapo has proposed, at current pricing ... this would be a viable system," DeMarco said at a hearing.

In 2017, Height Capital Markets analyst Edwin Groshans estimated it would take Fannie and Freddie five or six years to reach minimum Tier 1 Common Equity requirements once they are able to start rebuilding capital levels by retaining 100 percent of their profits.

What’s Next

Investors will be watching for further details on Trump’s plan and the approach that Federal Housing Financing Agency head nominee Mark Calabria will take to recapitalizing and reforming Fannie Mae and Freddie Mac.

In February, Odeon Capital Group analyst Dick Bove said Calabria will “probably seek little” for Fannie and Freddie common shareholders.

“He is now advocating turning Fannie and Freddie into traditional banking organizations that have no support from the U.S. government. He continues to believe that the mortgage securitization model is a threat to the financial system,” Bove wrote.

Given the initial market reaction, investors seem to be optimistic that an end to conservatorship will ultimately create value for common shareholders.

Related Links:

Dick Bove: Calabria Will 'Probably Seek Little' For Fannie And Freddie Common Shareholders

C-Suite Shakeups Could Change The Course Of Fannie And Freddie's Conservatorship