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Regulator Says Government Will ‘Wipe Out’ Fannie Mae and Freddie Mac Shareholders If Needed
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Shares of Fannie Mae and Freddie Mac have tripled in value this year as shareholders eagerly welcomed the Trump administration’s interest in ending the two mortgage firms’ conservatorship.
But a side comment made by a regulator during a congressional hearing Tuesday shows how little is settled when it comes to the fates of the two companies that underpin much of the housing finance market in the United States.
“If the circumstances present itself to where we have to wipe out the shareholders, we will,” Federal Housing Finance Agency director Mark Calabria said during a hearing before the House Financial Service Committee, referring to Fannie Mae and Freddie Mac’s shareholders.
The remark came in an exchange with Rep. Bill Foster, a Democrat from Illinois, who suggested that the plan to recapitalize Fannie Mae and Freddie Mac was benefiting shareholders rather than U.S. taxpayers.
‘If the circumstances present itself to where we have to wipe out the shareholders, we will.’
“I agree completely that we should have and we should still wipe out these shareholders,” Foster responded.
When Fannie Mae and Freddie Mac’s troubles emerged amid the 2008 financial crisis, many thought that the mortgage giants’ shareholders would suffer losses as the government sought to bail the firms out. Instead, Fannie Mae and Freddie Mac’s common and preferred shares have continued trading, even as the mortgage giants went into conservatorship.
Since entering conservatorship, the two companies have sent most of their earnings to the U.S. government to pay back the money they received in bailout funds. But that left the two companies with little money on hand to handle potential losses in the event of a future housing market downturn. Calabria frequently noted that Fannie and Freddie were operating at leverage ratios of 500 to 1, while most major banks are only allowed to maintain leverage ratios of 10 to 1.
“Even if every single loan Fannie and Freddie made were pristine, they would still fail at that level of leverage” in the event of a downturn, Calabria said.
Recently, the Trump administration has signaled its interest in ending the conservatorship of the two companies, as outlined in reform plans put forth by the Treasury Department and the Department of Housing and Urban Development last month.
A major piece of this plan is recapitalizing Fannie and Freddie — the FHFA has already moved in this direction by reducing the amount of money Fannie and Freddie must “sweep” to the Treasury Department.
Foster, however, expressed concern that allowing Fannie and Freddie to keep this money would enrich shareholders rather than protect taxpayers, citing increases in the companies’ share prices as evidence.
He was not the only person to cite the Fannie and Freddie’s share prices during the hearing. Rep. Alexandria Ocasio-Cortez, a Democrat from New York, raised the subject, noting that Fannie and Freddie’s share prices increased substantially following Treasury Secretary Steven Mnuchin’s Senate confirmation hearing in which he said releasing Fannie and Freddie to the private sector was a priority.
“I think it was clear the market didn’t understand my comments and what they implied,” Mnuchin, who was also in attendance at Tuesday’s hearing, said in response to Ocasio-Cortez.
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