The Treasury Department is preparing to release a plan detailing the privatization of Fannie Mae and Freddie Mac, inside sources told The Wall Street Journal Thursday.
The plan, which is being finalized now, would put the GSEs on more solid footing and then release them from government control.
The proposal is being written by the Treasury with guidance from the Federal Housing Finance Agency and will still have to work its way through the administration before it lands on President Donald Trump’s desk, which could happen in the coming weeks, sources told the Journal.
But some say the move to strengthen the GSEs before releasing them – an idea that has become known as “recap and release” – is a massive undertaking could cost as much as $125 billion to shore up the GSEs’ reserves to ensure they could withstand another housing slump without requiring a taxpayer bailout.
Part of those funds would be raised by launching an initial public offering of the companies and selling shares. To put the magnitude of that capital raise in perspective, the Journal notes that the largest initial public stock offering ever was $25 billion for Alibaba Group Holding in 2014 – a far cry from $125 billion that regulators estimate it will take.
According to the WSJ’s sources, the proposal currently in the works would keep the Treasury backstop in place, but the GSEs would pay a periodic commitment fee for the federal line of credit.
“The Treasury’s in-house process for drafting the plan is near completion, with signoff expected soon from Treasury Secretary Steven Mnuchin,” the Journal reported. “That approval is likely to come before Craig Phillips, a counselor to Mr. Mnuchin and the Treasury’s point man on the project, leaves the government sometime next month.”
“People familiar with the Treasury document cautioned it would likely include substantial changes to the business models of the companies, including steps to reduce over time their footprints in housing finance,” the article continued.
Those steps might include limits on the types of loans Fannie and Freddie can purchase and would be intended to reduce their capital needs, but the restrictions could make potential investors less enthused about buying GSE shares.
FHFA’s Calabria has made no secret of his avid intention to release the GSEs from conservatorship, dropping morsels of information at speaking events and to the media as to how it might go down.
At the Mortgage Bankers Association Secondary Conference in Manhattan earlier this month, he said ending the net worth sweep is the first step toward privatization, and then setting up an IPO to raise capital may follow.
And just last week, Calabria told Reuters that Fannie and Freddie may not be privatized in unison, as the government might choose to release one and then the other. “It may be preferable to stagger that process due to the complexities involved in getting the government-backed firms,” he said.
Only time will tell what actual GSE reform will look like, but it seems like, after years of speculation, that things are finally moving forward.