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Add another 6 months to Fannie, Freddie recap and release timeline

FHFA will be forced to reissue rule to avoid lawsuits, Cowen’s investors note says

In a note to investors obtained by HousingWire, Cowen Washington Research Group on Friday said the new rule for the “recap and release” of Fannie Mae and Freddie Mac probably is at least six months away. 

The Federal Housing Finance Agency issued a proposed capital requirements rule for the privatization of Fannie Mae and Freddie Mac last year. Since then, Mark Calabria has replaced Mel Watt as head of the FHFA, and several of Watt’s senior staffers have been replaced with people chosen by Calabria. By now, the final product is probably different enough that it will require the process to start again, Cowen said.

That means publishing it in the Federal Register and allowing at least a 60-day period for comment. Because Fannie Mae and Freddie Mac play such a critical role in the U.S. mortgage-financing system, the comment period last year was extended. The two mortgage companies purchased almost half of all single-family mortgages originated in the U.S. last year, according to FHFA data.

“We suspect FHFA will reissue the rule out of an abundance of caution,” Jaret Seiberg, Cowen’s managing director, said in the note issued on Friday. “The last thing the agency wants is for the courts to strike down the capital rule because FHFA made enough changes from the proposal that the public needed another opportunity to comment. Such a court ruling could come just as the enterprises were trying to raise between $100 billion and $150 billion of capital.”

In August 2018, the FHFA said it was pushing back the deadline for the public to comment on its proposed rule because it had received a high level of interest and several requests from stakeholders for more evaluation time. 

“To us, it is unlikely that Fannie or Freddie could get investor commitments for $100 billion to $150 billion in new capital while there is uncertainty over the capital requirements,” Cowen's note on Friday said. “This is because those capital requirements will help the market understand how to value the GSE business.”

And, without the finalization of the rule, the privatization of the world's two largest mortgage companies can't go forward, Cowen said.

“Adoption of a capital rule, in our view, is a critical precondition to the recap and release of Fannie Mae and Freddie Mac,” the note said.

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