MortgageReal Estate

Fannie, Freddie IPOs at least 3 years away, Raymond James analysts say

"Preparatory steps" include rebuilding $200 billion to $250 billion in capital

While the new head of the Federal Housing Finance Agency said last month he’s considering an initial public offering of Fannie Mae and Freddie Mac as early as the first half of next year, Raymond James analysts are saying it’s not likely to happen for three to four years.

The mortgage companies known as government-sponsored enterprises, or GSEs, will need to rebuild about $200 billion to $250 billion in capital reserves before any IPO, Raymond James analysts Ed Mills and Alex Anderson wrote in a report obtained by HousingWire. They listed “preparatory steps” needed before an IPO could happen and added that politics, particularly the 2020 presidential election, could also play a role.

“We expect the finalization of a GSE capital rule, the reworking of the GSE’s preferred stock purchasing agreement, adjustments to the qualified mortgage patch and determinations on a potential commitment fee as the necessary first steps before a GSE capital raise could be undertaken,” the analysts wrote. “The results of the 2020 elections could add some friction to the process.” 

Fannie and Freddie, who got bailouts from taxpayers of about $188 billion after the 2008 financial crisis, send all their earnings to the U.S. Treasury with the exception of a capital buffer of $3 billion each. Since the Treasury ordered the profit sweep in 2012, the mortgage companies have repaid taxpayers about $100 billion above the cost of their bailouts. The GSEs guarantee more than half of U.S. outstanding mortgages, according to the Federal Reserve.

Mark Calabria, who became director of FHFA in April, has made clear GSE “recap and release,” meaning recapitalization and privatization, is one of his top priorities.

“A guiding principle of Calabria’s is that GSE conservatorship has to end, but the GSEs will need to build up sufficient capital in the lead-up,” the analysts wrote. 

Speculation about the fate of the GSEs have sent Fannie and Freddie stocks soaring, Bloomberg said on June 6.

“Fannie Mae shares have soared 200% so far this year, while Freddie’s have rallied 188%, boosted by speculation government changes will benefit shareholders,’ the Bloomberg story said. “The stocks jumped in the wake of Donald Trump’s 2016 election, then fell amid pessimism about the outlook for mortgage finance overhaul.”

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