Fix for Mortgage Giants Fannie Mae, Freddie Mac Remains on Back Burner

By Andrew Ackerman and Juliet Chung Features Dow Jones Newswires

Mortgage-finance giants Fannie Mae and Freddie Mac, which have been under government control since the financial crisis, don't appear to be getting a new life as quickly as some had hoped might happen under a Trump presidency.

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Overhauling the two companies remains a back-burner issue for the Trump administration and Congress, crowded out by matters such as taxes, immigration and flood insurance. Moreover, prospects that the Senate will eventually pass a broad revamp of the companies also have dimmed, according to people familiar with the matter.

The delays leave in limbo hedge funds and distressed-debt investors which have bought up shares in the companies in the hopes they could score a large windfall. The funds are effectively betting that Washington is unable to come up with a plan that eliminates Fannie and Freddie. They instead want the government to allow the companies to build up capital and return to private control.

In the Senate Banking Committee Chairman Mike Crapo (R., Idaho) and Sen. Sherrod Brown of Ohio, the panel's ranking Democrat, have held months of closed-door talks, yet their efforts to develop bipartisan legislation remain far from bearing fruit, these people said.

"It doesn't feel like Brown and Crapo [negotiations] will come to a conclusion," said a Republican official familiar with the discussions.

At a private meeting in July, Mr. Brown remarked to Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) that he wanted to "put a wedge" between the pair as they developed a bipartisan plan with other members of the banking panel, according to a person in the room. Though the comments were said in jest, they were interpreted by some Senate staffers as a sign Mr. Brown may not be willing to commit to reshape the companies at this time, the person said.

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Messrs. Brown and Crapo, who are said to have a good personal relationship, have been bogged down by other issues, such as how to renew a federal flood-insurance program currently set to expire in December.

A spokeswoman for Mr. Brown said he and Mr. Crapo "are interested in results, and hope the Banking Committee can reach agreement on housing finance reform during this Congress." Mr. Crapo said in a separate statement that he is working with Mr. Brown "to explore a number of options to fix the flawed system."

The Trump administration, for its part, has its eyes on other issues -- such as a tax overhaul -- and has yet to outline its goals for a revamp of Fannie and Freddie. Treasury Secretary Steven Mnuchin on Thursday said the administration would focus on overhaul to the mortgage-finance system next year.

"Realistically this is a 2018 issue, but we're going to fix it and when we fix it we want to make sure we never put the taxpayers at risk," Mr. Mnuchin said, speaking at a conference hosted by Politico in Washington.

Fannie and Freddie shares jumped more than 16% Wednesday after Mr. Brown and a group of five other Democrats urged Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mel Watt to allow the companies to retain some of their earnings to protect against a short-term loss.

While such a move would benefit the hedge funds urging the government to allow the companies to begin to recapitalize, it conflicts sharply with a group of moderate lawmakers, led by Messrs. Corker and Warner, who oppose unilateral steps by the FHFA to allow the companies to retain their earnings.

The delays are a setback for some hedge funds and other investors that bought up the companies' common and preferred shares over the past few years, some of which have seen the timeline for their investments in the mortgage firms extend.

Richard Perry's Perry Capital was an early hedge-fund holder of Fannie and Freddie shares. It told its clients in September 2016 it was closing down, citing "industry and market headwinds." The firm has returned 80% of clients' money since then as it has wound down its hedge fund, according to people familiar with the matter, but it continues to hold shares of Fannie and Freddie.

William Ackman's Pershing Square Capital Management LP, which had roughly $12 billion in assets under management when it disclosed nearly 10% stakes in Fannie and Freddie's common shares in late 2013, has seen its size fall to $9.7 billion since. It is down more than 35% from its high water mark, or the point at which investment losses make up for gains, at the end of 2014, though the losses are due largely to Pershing Square's bet on drugmaker Valeant Pharmaceuticals International Inc.

Still, Pershing Square is up on its investment so far.

The firm told investors in an April presentation that the share price of Fannie's and Freddie's common stock were up 4% and 7% from Pershing Square's average buying cost; the share prices have increased since then. Mr. Ackman said at an investment conference in 2014 the companies' common stock could increase 10-fold over several years.

Fannie and Freddie play critical roles maintaining the plumbing of the U.S. mortgage market. They purchase loans from lenders and repackage them as securities that are insured if the loans default. The firms' regulator seized the companies through a process known as conservatorship during the George W. Bush administration, and the Treasury Department agreed to inject vast sums to support some $5 trillion in debt securities issued by the companies.

The companies have thin capital reserves under the terms of their 2008 government-backstop agreements, but they have access to a combined $258 billion in Treasury assistance. They are required to send most of their profits to Treasury in exchange for that support.

Write to Andrew Ackerman at andrew.ackerman@wsj.com and Juliet Chung at juliet.chung@wsj.com

(END) Dow Jones Newswires

September 15, 2017 16:58 ET (20:58 GMT)