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It has been 12 years since the U.S. government took over Fannie Mae and Freddie Mac when they were about to go bust due to the housing crisis. The government-sponsored enterprises (GSEs) announced this week they have each hired financial advisors to help them transition out of government conservatorship. Fannie Mae has hired Morgan Stanley MS and Freddie Mac has brought on board J.P. Morgan Chase, one of the country’s largest lenders for mortgages, to provide “strategic counsel…including advice and assistance on valuation analysis, consideration of potential capital structures and assessment of capital raising alternatives,” as was stated in the Freddie Mac press release.
According to a report by analyst Matthew Howlett of Instinet the two entities would have to have $234 billion on hand to meet the requirements of the new exit proposal. Howlett wrote, “The FHFA’s proposed rule puts the GSEs on track to be the strongest capitalized financial institutions in the world, which we believe should create substantial global investor demand.” He added it would also all but ensure the two organizations would become publicly traded companies saying, “There is no substitute for equity capital. The plan is a nod by the FHFA that the GSEs need to be in a position to attract and retain substantial equity capital going forward.”
Howlett also posits this will necessitate an increase of fees charged to lenders, and by extension borrowers, of up to 10 basis points so that shareholders will have improved returns. Another in-depth analysis, by Don Layton of the Joint Center For Housing Studies at Harvard, calculates the fees would need to increase by 20 to 40%, or 10 to 20 basis points. Layton also highlights the “projected return-on-equity (ROE)…will be under-market, and thus render the shares in any IPO unattractive until enough years have gone by to show that increased g-fees and other impacts of the capital rule proposal are able to generate an ROE of at least 8 to 9 percent after tax.”
In 2019 the two GSEs had a combined profit of $21.8 billion, one of their more profitable years given the strong buyer demand.
U.S. treasury secretary Steven Mnuchin issued a statement in support of the proposal saying, “Appropriate capitalization of the GSEs will be critical to protecting taxpayers, fostering market discipline, promoting stability in the housing finance system, and ensuring durable consumer access to mortgage credit.”
The timeline for the exit is estimated to be several years and not before 2024, according to Federal Housing Finance Agency Director Mark Calabria.