WASHINGTON (Reuters) - The Trump administration wants to take Fannie and Freddie out of government conservatorship, but doing so will be complicated due to the central role they play in the housing market and the Treasury’s holdings in the two firms. [L2N24J0YC]
Here’s more detail on those arrangements:
Fannie Mae and Freddie Mac were created by Congress in 1938 and 1970, respectively, with a mandate to expand the U.S. housing market to help boost American homeownership. The pair buy home loans originated by banks, freeing up lenders’ capital to make new loans. They then hold the mortgages themselves or package them into securities to sell on the secondary market. The pair, which are private companies with government charters, currently guarantee over half of U.S. mortgages.
In September, 2008, the firms had saw mounting losses due to the subprime mortgage crisis. Fearing a meltdown in the U.S. housing market, the U.S. government took direct control of the companies by putting them into conservatorship under the Federal Housing Finance Agency. The Treasury also invested billions of dollars to prop them up and minimize damage to the housing market.
The firms have remained in conservatorship, with FHFA in control. The Treasury owns warrants representing nearly 80% of the common stock in the companies, as well as preferred shares. From 2012, they have given the Treasury all their profits and in total have paid $292 billion. That’s well above the $191.5 billion in the government funds they received, public data shows.
The companies also have legacy common and preferred equity securities that trade on the “pink sheets” market for unlisted entities. A number of hedge funds have built stakes in both classes of stock and some have sued the government over their 2008 seizure.
In March, Trump ordered the Treasury and Housing and Urban Development Departments to develop a housing finance reform plan. Those recommendations will lay out options for ending the conservatorship of Fannie and Freddie, promote competition in the housing market, protect taxpayers from future bailouts and encourage sustainable homeownership. The release of the report, due around September, is to kick-start efforts to overhaul the companies.
Reporting by Pete Schroeder; Editing by Michelle Price and Dan Grebler