According to Bloomberg [1], Fannie Mae and Freddie Mac are expected to retain “limited and tailored government support” after they are freed from U.S. control, Treasury Secretary Steven Mnuchin said in a letter to lawmakers.
“Treasury expects that it will be necessary to maintain limited and tailored government support” to provide confidence that the GSEs will meet their financial obligations, Mnuchin wrote. “Stability in the housing finance system is crucial, and there should be no disruption to the market as a result of Treasury’s recommended administrative reforms.”
In 2019, the GSE’s took an important step toward privatization when the U.S. Department of the Treasury and the Federal Housing Finance Agency (FHFA) recently announced that they had agreed to modifications to the Preferred Stock Purchase Agreements (PSPAs), permitting Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion capital reserves currently permitted by their PSPAs.
“These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the Federal Government in the housing finance system and protect taxpayers against future bailouts,” said U.S. Treasury Secretary Steven T. Mnuchin.
According to Mnuchin and Calabria Fannie and Freddie will “need to raise third-party capital.” As part of its process to take the GSEs out of conservatorship, the FHFA has selected [2] Houlihan Lokey Capital, Inc., as its financial advisor to assist in the development of a plan to conservatorship of Fannie Mae and Freddie Mac.
The FHFA’s report states Houlihan Lokey will consider business and capital structures, market impacts, timing, and available capital raising alternatives among other items.
“Hiring a financial advisor is a significant milestone toward ending the conservatorships of the Enterprises," said Calabria. “The next major milestone for FHFA is the re-proposal of the capital rule, which will happen in the near future."