Ahead of Fannie Mae, Freddie Mac massive IPO, FHFA poised to pick Wall Street adviser

Contenders include Perella Weinberg Partners, possibly PJT Partners

The federal agency in charge of mortgage giants Fannie Mae and Freddie Mac is moving close to selecting a Wall Street financial adviser to guide the agencies through a massive public offering that could be among the largest stock sales in history and clear the way for the agencies to leave government control, the FOX Business Network has learned.

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The Federal Housing Finance Agency – known by its acronym FHFA – has been interviewing what were described as “a handful” of Wall Street investment banks for the job in recent weeks and has signaled to executives at those firms that a selection could be made sometime after Thanksgiving, according to people directly involved in the process. These people say it’s unclear exactly when the financial decision will be made and it’s possible the announcement could slip into the new year.

Shares of both Fannie Mae and Freddie Mac spiked late Thursday after FOX Business first reported the progress made in the adviser selection on the “Claman Countdown.” Among the outfits that are said to have been interviewed by the FHFA for the role are boutique investment banks such as Perella Weinberg Partners, and possibly PJT Partners, a firm run by former Morgan Stanley investment banking chief Paul Taubman.

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It’s unclear if major banks like JP Morgan are vying for the job because they would be likely underwriters of the public offering and could not perform both roles. Still, winning the adviser appointment would be a coveted one — and potentially lucrative given the size of the offering, somewhere between $150 billion and $200 billion, government officials have told possible investment advisers.

Fannie and Freddie are publicly traded corporations that nearly failed and were seized and put under government conservatorship during the 2008 financial crisis following a massive taxpayer bailout. Since that time, they have been wards of the state even as their shares traded in the over-the-counter market at penny-stock levels.

The agencies are considered vital to the US mortgage market because they buy loans from banks, package them into securities, allowing the banks to keep lending to potential homeowners. Government officials believed the bailout was necessary to save the agencies and protect housing during the banking collapse and the Great Recession that followed.

But the Trump administration has made it a goal to relinquish Fannie and Freddie from government control and allow them to operate once again as private companies as long as it would not put the taxpayer at risk for another collapse. On Thursday, during a House Financial Services Committee hearing, Treasury Secretary Steven Mnuchin discussed the need for housing reform and that taxpayers were at risk to fund another bailout if Fannie and Freddie are not released from conservatorship.

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The man directly in charge of the recapitalization and release of Fannie and Freddie, FHFA director Mark Calabria, has expressed similar comments about the need to reduce the government’s role in housing finance. Calabria, an appointee of President Trump, has stated a loose timetable for the public offering that could take place in 2021 and that the end of conservatorship could come no later than 2024 when his term is slated to end.

Calabria has said that before Fannie and Freddie are to be released from government control they need to retain capital and seek public investors to build their balance sheets to a point where they can withstand a 2008-style financial shock.

His No. 2 at the agency, Adolfo Marzol, has been the designated point man on selecting a financial adviser, which would be a key first step in both the eventual stock offering to recapitalize the mortgage companies. Marzol has been involved in interviewing the adviser candidates over the past month and had indicated the selection could be made in the coming weeks, though people involved in the process say it could be delayed indefinitely given the dicey politics involved in the process.

An FHFA spokesman had no comment but would not deny the development.

While the selection of an adviser is important, it certainly doesn’t mean the road to the end of government control and a public offering to recapitalize the mortgage giants will be a smooth one. Calabria has said Fannie and Freddie, even as private companies with public shareholders, need an explicit government guarantee in order to convince investors to buy their stock and mortgage-backed securities once they leave conservatorship.

The reason for the government backstop is that the companies basically perform a service no private companies would ever do, thus investors may be skittish about its business model particularly after nearly going insolvent in 2008. But getting a guarantee of this sort would take an act of Congress, and the Democrat-controlled the House of Representatives is unlikely to help the Trump administration with any major initiative in the run-up to the 2020 presidential election.

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Another possible hiccup: A change in presidential administrations with a Democrat in the White House and the Democrats controlling both houses of Congress. While the Trump administration is leery of the government playing such a direct role in housing market, Democrats are likely to want to retain control of both agencies to make sure they follow through on their public-policy goals of providing affordable housing (Both Fannie and Freddie were created through acts of Congress).

By law, Calabria and the FHFA operate independently from the executive branch, but being at odds with the White House could complicate his plans to recapitalize and release the agencies.

Calabria, however, has broad powers to do as he sees fit with Fannie and Freddie, which means he could issue stock even before ending their conservatorship. He also could end their conservatorships without either White House or congressional buy-in.

The possible stock sale, meanwhile, has been described as something of a hybrid between a traditional initial public offering and a secondary offering of stock, or a “re-IPO,” since both agencies already have outstanding shares even if the stock sales will amount to a watershed moment in their post-conservatorship existence.

And given the amount of money Calabria and his team are discussing that needs to be raised — between $150 billion and $200 billion — it could be the largest stock sale of any kind in financial history. The largest IPO in history is the upcoming Saudi Aramco IPO of $25.6 billion that will exceed Alibaba Group’s $25 billion sale of stock in 2014. The largest secondary offering appears to be Petroleo Brasileiro, also known as Petrobras; the Brazilian government-controlled oil and gas company raised $70 billion in a follow-on sale of stock in 2010.

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