ATLANTA (Reuters) - It could take four to five years to raise the capital needed to privatize mortgage giant Freddie Mac using a combination of retained earnings and a public offering of stock, Freddie Mac chief executive Donald Layton said on Tuesday.
With a target capital level of $50 billion, Layton said at an Atlanta Federal Reserve conference, “you can talk about a baseline of retained earnings for four or five years and an IPO of some billions to get over the line.”
He added it would be hard to accelerate the timeline because of legal and other issues still to be resolved before the company can leave government conservatorship.
“It is a lot of money...You are not going to do this in one week in one go,” with the even larger Fannie Mae needing to raise perhaps $75 billion as well, Layton said.
In Freddie’s case, he said the company could start raising capital by holding on to retained earnings of about $8 billion annually instead of turning that money over to the U.S. Treasury.
The Trump administration has said it wants to privatize the two mortgage companies, which are government-backed entities that were taken into full conservatorship as the U.S. housing market foundered on bad debt during the 2007 to 2009 financial crisis.
A final plan is under development, but administration officials have said establishing an adequate capital base is critical to releasing the companies from conservatorship.
Along with plans for raising cash, Layton said a series of legal issues involving former stock holders and future ones will need to be resolved if the company expects to court private investment.
“It is not clear how this is going to work...Equity investors are going to have this issue front and center,” Layton said.
The two companies still have legacy common and preferred equity securities that trade on the loosely policed “pink sheets” markets. While it is unclear if these issues will confer any stake in a recapitalized and privatized Fannie or Freddie, a number of hedge funds have accumulated large stakes in both classes of stock in the two GSEs, and some have sued the government over their seizure in 2008.
Since Mark Calabria won Senate approval last month as the new director of the Federal Housing Finance Agency, which oversees the two companies, the common and preferred shares of both have shot higher.
On Tuesday Fannie Mae’s Series S preferred shares, issued in December 2007 and the most heavily traded of its preferred securities, were up 3% and, at $13.23, were at their highest price since around the time of the government takeover in 2008. They are up more than 28% since Calabria’s Senate confirmation, while Fannie’s common shares have gained around 13%.
Freddie Mac’s Series Z preferred shares, issued in November 2007, were up 3.6% at $13, their highest in five years. They have gained 31% since Calabria’s confirmation and Freddie’s common stock is up 16%.
Reporting by Howard Schneider; additional reporting by Dan Burns in Washington; editing by Chizu Nomiyama