Fannie Mae will be on consent decree by January

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Fannie Mae and Freddie Mac are up against a strict deadline to enter a consent decree if President Donald Trump doesn’t win election, or at least, that’s the argument some are making. However, not everyone is convinced that the government-sponsored enterprises won’t make their deadline.

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Tim Pagliara of CapWealth Advisors believes Fannie Mae and Freddie Mac will be on a consent decree and exiting their conservatorships much faster than what the general consensus believes. He told ValueWalk in a recent interview that he believes the GSEs will be on track to exit their conservatorships in plenty of time before the next presidential inauguration.

Deadline for Fannie Mae, Freddie Mac on consent decree?

Many have argued that Joe Biden would not allow Fannie Mae and Freddie Mac to exit their conservatorships if he is elected president. Thus, they see a deadline of inauguration day to get the GSEs settled in their new status. However, Pagliara believes they will be past the point of no return by then.

He expects Fannie Mae and Freddie Mac to be operating on a consent decree by inauguration day. But even if they aren't, he still believes Biden will go ahead with getting them out of their conservatorships. He said it all goes back to the ongoing litigation that's making its way through the courts.

"There's hardcore litigation, and the government is losing some litigation that will be very, very embarrassing," Pagliara told ValueWalk.

Update on litigation

He noted that there's the Supreme Court's review of the Fifth Circuit court's ruling on the constitutionality of the Federal Housing Finance Agency. The court has already found that the government violated the administrative procedures act, and it's been remanded to court for damages.

He added that there is another piece of legislation in Judge Lambert's court about the contractual rights of the preferred shareholders, which he described as the "big elephant in the room."

"They can't do what the government was doing by taking profits in perpetuity," he said. "It's outside the scope of their authority. It was done under false pretenses."

He also said the government "committed perjury" and "lied." He said the government will lose the case, and officials understand that. Thus, they know that Fannie Mae and Freddie Mac need to be recapitalized and released from their conservatorships.

Timing for Fannie Mae's, Freddie Mac's consent decrees

When asked about the timing for Fannie Mae and Freddie Mac to enter their consent decrees, he said he expects it by January. Then he expects the GSEs to have a clean runway to raising capital and getting prepared for their stock offerings. He believes Fannie and Freddie will hold their stock offerings by the end of the second quarter or during the third quarter of next year.

The point of the consent decrees is for the GSEs to be able to operate until they have retained enough capital to get them to the required amount of capital that must be held on their balance sheets. The FHFA still must finalize the capital rule for Fannie and Freddie, and Pagliara expects it to be scaled back from the initial 4% that was proposed by FHFA Director Mark Calabria.

Pagliara also noted that operating on a consent decree will allow Fannie Mae and Freddie Mac to build earnings on their balance sheets by retaining them instead of by issuing a bunch of new shares, which would be dilutive to shareholders. He believes Calabria has plenty of levers he can pull to adjust the capital rule before it's finalized.