The Trump administration has laid out more than two dozen unilateral actions it wants to take to put Fannie Mae and Freddie Mac on firmer ground and release them from government conservatorship.
But, there’s a little thing called “election risk.” If President Donald Trump isn’t re-elected, or if the ongoing impeachment inquiry results in him either resigning or being removed from office, a new president can throw the blueprint in the trash. A court ruling last month said the head of the Federal Housing Finance Agency, the regulator of the GSEs, can be replaced without cause. In other words, FHFA Director Mark Calabria serves at the pleasure of the president.
In a note to investors obtained by HousingWire, Cowen Washington Research Group is suggesting the FHFA may resort to using consent decrees to ensure the GSEs stay on the path to privatization whether Trump is in office or not.
“A new president could replace Calabria as FHFA director,” the Friday note said. “There is no guarantee that the new director will support the same post-conservatorship structure. Having the consent decree in place would make it tougher for the new regulators to derail recap and release. As such, this would reduce election risk.”
Other federal regulators use concent decrees – sometimes called consent orders – to legally bind the companies they regulate to act in predetermined ways. For the Federal Reserve and the Office of the Comptroller of the Currency, it’s a normal way to ensure their orders are carried out.
“The bank regulators use consent decrees with banks that have become undercapitalized to lay out a plan and a timeline for them to recapitalize,” the Cowen note said. “Such orders also tend to include conduct restrictions on the banks.”
Calabria has discussed using consent decrees to facilitate the recap and release of Fannie and Freddie, the note said.
“The idea is to include conduct restrictions in the decree such as the prohibition on volume discounts as well as to specify firm dates by which each enterprise has to raise specific amounts of new capital,” it said. “We believe this could even include requiring Fannie and Freddie to reach an agreement with Treasury and junior preferred shareholders on the future of their stakes. The advantage of this approach is that it could put Fannie and Freddie on a path to recap and release next year even if they are not ready to approach new investors until 2021 or 2022.”
But, there’s a drawback, the Cowen note said.
“Our concern is that we believe FHFA cannot use a consent decree to establish permanent restrictions on an enterprise,” it said. “Eventually, consent decrees expire. This could be because the target has completed what is required in the decree or the issuer can conclude it is no longer needed. We are unsure how one could make a consent decree permanent.”