There’s been plenty of talk about when Fannie Mae and Freddie Mac will see recapitalization and be released from their conservatorships. Federal Housing Finance Agency Director Mark Calabria has made comments suggesting he expects it to happen as early as 2021 with a public offering in 2022. However, that timeline may be a bit too optimistic, according to one expert.
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No recapitalization for Fannie Mae until at least 2022
Former Freddie Mac CEO Don Layton said in a presentation hosted by Odeon Capital Group that he doesn't expect the recapitalization and release of Fannie Mae and Freddie Mac until at least 2022. He believes the FHFA hasn't finalized anything on a number of major issues that must happen before they are recapitalized and released from conservatorship.
He notes that the agency just finished hiring consultants for the process. Layton expects it to be a lengthy one because of the many activities they will need to complete and the "steep learning curve needed in such a specialty environment as the GSEs," analyst Dick Bove explained.
The Treasury Department is also studying important issues that must be resolved before a public offering can take place. The agency will set the tone for the new public offering in several important ways. However, unlike the FHFA, the Treasury Department hasn't offered any indications about what it plans to do or what kind of progress it might be making.
Creating the needed capital
In order for recapitalization to occur at Fannie Mae and Freddie Mac, Layton believes the build-up of retained earnings is the best way to create the necessary capital. He explained that this "avoids some sensitive political decisions in the near term." However, if the build-up of the necessary capital is done only through the retained earnings, it could take up to five years to collect enough.
Regarding how much capital the two government-sponsored enterprises need, Layton believes that the focus should be on risk-based capital rather than an accounting-based leverage ratio. He adds that the actual risk held by Fannie and Freddie right now is fairly low compared to the risks of a traditional bank because of the issuance of MBS against mortgages and the use of CRT.
Layton also believes a consent decree is a creative idea that will allow new stock issuances much earlier than would otherwise be possible. However, the success of such a decree depends on what's in it.