WASHINGTON — With less than two weeks remaining in the Trump administration, the Federal Housing Finance Agency and Treasury Department are nearing the deadline to allow Fannie Mae and Freddie Mac to retain more or all of their earnings.
FHFA Director Mark Calabria has identified removing the cap on Fannie and Freddie's capital as a major step toward re-privatizing the mortgage giants. Officials estimate the companies need a capital cushion of roughly $275 billion — much higher than they are allowed to hold — in order to exit conservatorship.
Raising or removing the cap on retained earnings would require amending the stock agreements governing the FHFA and Treasury's oversight of the government-sponsored enterprises. But with Calabria's job security on shaky ground and Treasury Secretary Steven Mnuchin set to depart when President-elect Joe Biden is sworn in, the window may be closing.
It's also not clear that Calabria and Mnuchin entirely agree on how to revise the agreements.
“Director Calabria is in kind of a tough situation because he can’t do anything unilaterally,” said Ted Tozer, senior fellow at the Milken Institute and former president of Ginnie Mae.
The preferred stock purchase agreements, or PSPAs, lay out the government’s ownership of the two GSEs. They were last amended in 2019 to allow the mortgage giants to hold onto a combined $45 billion in capital, but that is a far cry from the amount the companies will need to hold when privatized.
Mnuchin has said that he supports changing the terms of the government’s ownership of the companies to allow them to hold more capital. But it remains to be seen if he will ultimately sign off on the change in the last few days of the Trump administration. It's also unclear if Biden’s pick for Treasury secretary — former Federal Reserve Chair Janet Yellen — would be willing to sign onto an agreement allowing the GSEs to retain their earnings.
“The PSPA has got to be amended by both sides," Tozer said. "I would think if something didn’t come out in the next few days, it’s going to go to the Biden administration on what to do.”
After the FHFA issued a final rule in November imposing higher capital requirements for Fannie and Freddie to take effect once the companies exit their federal conservatorships, senior officials at the agency said the next step would be to amend the PSPAs to allow the GSEs to work toward building the capital that would be needed to meet those requirements.
Many still believe that Treasury and FHFA are likely to come to an agreement before Jan. 20 that would allow Fannie and Freddie to hold more capital, but doubt that it will be as sweeping as some originally thought.
“Something remains likely to happen. No one really knows what that is, and the expectation that it was going to be something monumental was probably overblown,” said Ed Mills, a policy analyst with Raymond James. “It is likely to be less impactful than initially hoped for by those who wanted a big action.”
The Trump administration’s housing finance reform blueprint released last year made recommendations for amending the PSPAs. For example, the plan calls for preserving a periodic commitment fee that Fannie and Freddie pay the government for its backing.
Calabria also at one point expressed support for amending the PSPAs to codify some of the regulatory and supervisory changes made to the GSEs during conservatorship.
But there may not be enough time to negotiate significant revisions to the agreements before the change in administration, experts say.
“The problem with Treasury right now is that they're doing 800 things with only a handful of people. I don't know how you're going to get these guys to prioritize this given that any amendment will impact the secondary market in some way — and it could be received negatively,” said Tim Rood, the head of industry relations at SitusAMC. “That's why I think it's going to be the broader strokes.”
Mills agreed. He said that although Mnuchin and Calabria are likely to come to some agreement, he is skeptical that any agreement would address the payments that Fannie and Freddie have been making to the Treasury for years in an effort to repay the government for the 2008 bailout.
“The most likely change is to recognize the fact that there is a capital rule that's been finalized, and harmonize the PSPA with the updated capital rule, which would allow them to retain more capital and set a path toward meeting those capital requirements,” Mills said.
A revision of the PSPAs could also be held up over determining the amount of dividends Fannie and Freddie pay Treasury as a primary investor, said Tozer.
“Now that they're profitable, I think those are all things we've got to talk about: stopping the sweep so they can build capital, but then also highly compensate the U.S. taxpayer for their investment, and I'm hoping that's what's going on now,” he said.
Tozer added that he didn’t think Treasury and the FHFA could allow the GSEs to retain wider capital cushions without answering the dividend question.
“It gets tricky, because at that point, I would think there could be some legal challenges,” he said. “I would think that that could open up a lot of court challenges of saying the taxpayer has been basically shortchanged.”
Some speculate that a holdup on changing the PSPAs could be due to Mnuchin's busy schedule. He traveled to the Middle East this week and was the Trump administration’s point man in negotiating the most recent congressional stimulus package.
“Mnuchin's portfolio is the largest, most diverse portfolio of any Treasury secretary in the modern era, maybe ever, and so, he is pulled in many different directions,” said Mills. “Because of how diverse his portfolio is, he has limited bandwidth to do much beyond what is the immediate most pressing item.”
The Treasury Department did not respond to a request for comment.
Though the administration has made clear its goal of accomplishing comprehensive housing finance reform, overhauling the GSEs has been less pressing than other agenda items on Mnuchin's plate the last four years.
Mnuchin even told reporters in December that he felt as though GSE reform was “the one area I feel like we didn’t make enough progress.”
“My concern right now is that Secretary Mnuchin has been completely overwhelmed with this COVID package and is dealing with all these issues, so I wonder if because of that" a PSPA agreement "is on the back burner,” said Tozer.
But with the incoming Biden administration likely to bring different priorities for Fannie and Freddie, Calabria and Mnuchin now face urgency to come to an agreement in the next two weeks, said Rood.
“I don't think Calabria or Mnuchin want to chance leaving the PSPAs to the new administration, but it comes down to what are they willing to risk for that insurance,” he said.
While Yellen is likely to focus on more domestic issues than Mnuchin has and could lead “significant policy discussions related to housing,” said Mills, her focus will probably lean more toward mortgage credit availability than privatizing the GSES.
“What I would view from a Yellen perspective is that I think she would certainly be very open to continuing a process, but would not be viewed as someone who would be aggressively moving to recap and release,” he said. “I would view her as ... first, do no harm to the larger housing market.”