NEW YORK (Reuters) - Concerns by Fannie Mae and Freddie Mac’s regulator about the U.S. mortgage finance agencies’ lack of capital has opened the door for federal actions that may eventually end government control over them, Bank of America Merrill Lynch said on Wednesday.
In 2008, the agencies went into conservatorships following the housing bust in order to get taxpayer help to deal with heavy losses.
Profits from their mortgage business and investments have been going to Uncle Sam even after they repaid the government for their $187 billion bailout. Because of this, they have been unable to rebuild their cushion against losses - a concern raised by Mel Watt, director of the Federal Housing Finance Agency, last week.
“In an unusual speech, the FHFA director flagged lack of capital as the most serious risk for Fannie and Freddie,” Ralph Axel, rates strategist for Bank of America Merrill Lynch, wrote in a research note on Wednesday.
“We think this opens the door to FHFA pursuing a recapitalization plan, eventually leading to the end of the conservatorships,” he said.
FHFA also oversees the Federal Home Loan Bank System, another mortgage government-sponsored enterprise.
Watts warned in a speech at the Bipartisan Policy Center in Washington last Thursday that Fannie and Freddie would have no capital buffer starting Jan. 1, 2018 against possible losses.
Since their 2008 bailout, Fannie would have sent a total of $148 billion to the U.S. Treasury by next month, and Freddie a sum of $98 billion, data from the agencies show.
No decisive push has come from either the White House or Congress to end the conservatorships of Fannie and Freddie.
“Now that the FHFA has made the decision to tackle the undercapitalization issue at Fannie/Freddie, we think FHFA will continue to push in this direction and cite its statutory obligation as the driver,” Axel wrote.
(Corrects paragraph 7 to say “Jan. 1, 2018” instead of “Jan. 2, 2018”)
Reporting by Richard Leong; Editing by Richard Chang