Firms Warn of Risks in Plan to Take Fannie Mae, Freddie Mac Private
November 24 2019 - 6:00AM
Dow Jones News
By Andrew Ackerman
WASHINGTON -- Some of the biggest names in finance are warning
that the government's plan to return Fannie Mae and Freddie Mac to
private ownership risks disrupting a market critical to the U.S.
housing system.
The investors, including BlackRock Inc., Fidelity Investments
and Pacific Investment Management Co., have told the Trump
administration that any move to privatize Fannie and Freddie should
include an explicit guarantee of the $5 trillion in mortgage-backed
securities they issue, which only Congress can provide, according
to people familiar with the matter. The Trump administration, by
contrast, says it is willing to move forward without such a
guarantee, arguing that it is past time for the government to
reduce its role in housing.
"The structure and significance of the guarantee remains a
sticking point given its centrality to the discussion," said Isaac
Boltansky of Compass Point Research & Trading, which serves
large, institutional investors. "The guarantee itself means not
only deeper, more liquid markets but also cheaper borrowing costs
for consumers."
To prevent a collapse of the mortgage-finance giants during the
2008 financial crisis, the U.S. government agreed to absorb
unlimited losses at the companies and ultimately provided nearly
$190 billion in taxpayer money.
Eleven years later, the Trump administration has outlined plans
to put the companies back into private hands -- and the way in
which taxpayers could be on the hook to bail out the institutions
has emerged as a stumbling block.
Fannie and Freddie buy mortgages from lenders, package them into
securities sold to investors and provide guarantees to those
investors in the event of default. This role has helped preserve
America's popular 30-year, fixed-rate mortgage -- something few
other countries have.
But there is a downside. The arrangement gives the
mortgage-finance companies special market advantages that could
encourage them to take on risky loans on the assumption that they
would be bailed out by taxpayers in the event of a crisis -- a
phenomenon known as moral hazard.
Concern about Fannie and Freddie's future prompted a White House
meeting this summer with buyers of the companies' debt, including
BlackRock, Fidelity, Bank of America Corp. and Nomura Holdings Inc.
The gathering around a conference table with staff from the
National Economic Council, not previously reported, was organized
by the Securities Industry and Financial Markets Association, a
Wall Street industry group, according to the people familiar with
the matter.
The companies' federal regulator is working on a plan that could
reduce the size of Fannie and Freddie and require them to hold more
than $180 billion of capital to absorb possible losses -- a
multiyear process likely to culminate in the raising tens of
billions in cash through public offerings.
Though the administration says it wants Congress to act on a
sweeping remake of housing finance, it is laying the groundwork to
privatize the firms even if Congress is unable to agree on
legislation. The administration has said it could support a federal
guarantee for Fannie and Freddie securities, but it warned that
action to end the companies' conservatorships couldn't wait
indefinitely.
"Indefinite limbo" isn't an option for Fannie and Freddie, said
Mark Calabria, the head of the Federal Housing Finance Agency, the
companies' independent federal regulator. "My obligation...is to
get them out" of conservatorship, he told reporters at a mortgage
bankers' conference in Austin, Texas, last month.
At present, Fannie and Freddie's securities don't have an
explicit guarantee, but the companies can tap a $250 billion
Treasury line of credit in an emergency. In the absence of a
congressional guarantee, the administration proposes to maintain a
version of the existing Treasury backstop. Large investors in their
securities say that support would be insufficient once the firms
leave government control.
A Treasury backstop "could be withdrawn by future
administrations, which is not equivalent in either magnitude or
stability with a legislated, explicit guarantee," Kent Smith,
Pimco's executive vice president and portfolio manager, said in a
statement. Pimco, among the biggest buyers of Fannie and Freddie's
securities, supports keeping the companies under government control
if Congress fails to act -- as appears likely.
The issue is unlikely to be resolved soon. Thorny policy details
remain to be decided, such as how much capital the firms must
maintain after they leave government control and how to dispose of
the government's massive stakes in the firms.
Ken Bentsen, president and chief executive of Sifma, said the
administration "can and should" take steps to prepare Fannie and
Freddie to exit conservatorship. But allowing them to leave
government control without an explicit guarantee would sour
investors on their securities, which in turn would likely increase
mortgage costs.
"We don't want an exit from conservatorship without Congress
because of the market impact," he said.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
(END) Dow Jones Newswires
November 24, 2019 05:45 ET (10:45 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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