Treasury Plan for Fannie Mae & Freddie Mac near complete

The Treasury Department is putting the final touches on its plan to reform Fannie Mae and Freddie Mac, a potential major step in the Trump Administration’s effort to release the mortgage giants from more than a decade of government control, the FOX Business Network has learned.

The Treasury Department is expected to have its reform plan in place and ready for public release sometime by September or October, according to people with direct knowledge of the matter.  Treasury has submitted a draft reform plan to the White House that includes suggestions to end the government control of the mortgage companies, known as Government Sponsored Enterprises (GSEs), sources say. The White House is expected to provide input as soon as this week, these people add.

Once the White House has signed off on Treasury’s plan, it could kick into high gear the long-awaited and promised reform effort by the Trump Administration to release both mortgage entities from government control. Also, the plan would also feature a recapitalization of both companies which would likely include the end of the government extracting all of the GSEs profits, and possibly a public stock offering to bolster Fannie and Freddie’s balance sheets.

The exact details of the Treasury’s plan are unclear, as is the timing of any proposal to release the companies from the government’s grip given the tricky politics involved in any reform effort. Both Fannie (in 1938) and Freddie (in 1970) were created by acts of Congress and regulated by the federal government to promote homeownership, even as they operated as private companies with publicly traded stocks. The GSEs were placed under federal conservatorship in 2008 during the financial crisis.

Both entities are considered lynchpins of the economically important housing market in that they allow banks to issue 30-year mortgages to homeowners. Without Fannie and Freddie buying those mortgages and repackaging them into bonds, banks would be hard-pressed to make long-term mortgage loans to many working-class Americans.

Meanwhile, Trump Administration officials are said to be mindful that any radical change to the GSEs could shake the housing market during an election year, and negatively impact economic growth. The Treasury reform plan is expected to address those concerns by not calling for an immediate radical overhaul of the companies.

But the plan is expected to reflect the administration’s thinking that the GSE’s need to become more independent from the federal government and that U.S. taxpayers need to be protected from the type of risk-taking that led to the government takeover. The Treasury plan is expected to suggest that the GSEs need to reduce their “footprint” in the housing market, according to these sources. At the moment, Fannie and Freddie control nearly $5 trillion of the nation’s mortgage business.

A Treasury spokesman didn’t respond to an email for comment. A spokeswoman for the Federal Housing Finance Agency (FHFA), which is in charge of carrying out the White House plans to reform Fannie and Freddie, declined comment.

On Wednesday, shares of Fannie Mae and Freddie Mac spiked sharply following the FOX Business report on the progress Treasury is making in producing its report. Investors had been selling shares of Fannie and Freddie in recent weeks following news reports that any reform effort may be delayed until the end of the year or even indefinitely.

Investors will pay close attention to the Treasury’s proposal to “recap and release” the companies from government control. A recapitalization of the company’s balance sheet could be positive news to shareholders who have held the stock since the government takeover. Since then both companies have traded as low-value stocks—well below $5 per share -- as the government maintained control of the outfits and siphoned its profits.

Mark Calabria, who was appointed to run FHFA in April, has publicly stated his desire to recapitalize the companies, first by ending the government’s taking of Fannie and Freddie profits (known as the net-worth sweep) and then eventually through a public offering of new stock. Calabria has also said he wants an explicit federal guarantee of Fannie and Freddie’s activities, but that might take an act of Congress, delaying reform even further.

While the Treasury report is expected to discuss recapitalization of the companies it is not expected to address the possibility of a stock issuance, these people say. Under the Treasury’s proposal, it’s unclear how shareholders would fare. A public offering could dilute common shareholders, meaning the value of their shares could fall from their current penny stock levels, but an end to the net-worth sweep might bolster shares.

Those investors holding preferred stock, which offers more protection from dilution, may benefit from any recapitalization.

The Treasury Plan – and a separate plan to be issued by the Department of Housing and Urban Development – may be light on specifics on exactly when these changes will take place, but at least on paper, both will provide the first tangible steps in the reforming  GSE’s and their giant share of the housing market.