Trump administration nudges Fannie Mae, Freddie Mac away from government control

[WASHINGTON] The US Treasury Department said Thursday it was altering its stake in Fannie Mae and Freddie Mac, charting a course for the housing finance giants to move away from government control, while acknowledging numerous issues will have to be solved by President-elect Joe Biden's administration.

The changes, agreed with their regulator the Federal Housing Finance Agency (FHFA), would allow the pair to retain profits in exchange for increasing the Treasury's stakes. But the plan implies it will still take years for the pair to build enough capital to be able to pay dividends to investors or exit government control.

The pair would not be allowed to pay dividends to shareholders until they build roughly US$283 billion minimum in capital, or 4 per cent of assets, required by the FHFA under its new capital rule finalised last year. They hold just US$35 billion currently, according to the Treasury.

The new arrangement also stipulates that Fannie and Freddie cannot exit government conservatorship until litigation between the government, the companies, and various shareholders is resolved. Furthermore, the pair will not be allowed to issue common stock until the Treasury has exercised its warrants to purchase nearly 80 per cent of their stock.

Fannie and Freddie, which guarantee over half the nation's mortgages, have been in conservatorship since they were bailed out during the 2008 financial crisis.

The Trump administration was eager to release the pair from government control and in 2019 laid out a blueprint for ways to achieve that, but the challenge will now fall to the Biden administration, which takes power on Jan 20.

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Democrats have criticised the Trump administration's plan, saying it could hurt affordable housing, and policy experts expect Mr Biden to try to shelve the issue.

US Treasury Secretary Steven Mnuchin and Janet Yellen, Biden's pick to take over the Treasury, have met to discuss the issue, a senior Treasury official said on Thursday.

"Although we would have preferred to have been able to achieve further reforms to the housing finance system through legislative action over the past several years, we are pleased to announce today's agreement," Mr Mnuchin said in a statement.

In a statement, FHFA Director Mark Calabria called the changes "a step in the right direction.

REUTERS