Fannie, Freddie recapitalization unlikely before 2020 election: KBW

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The recapitalization of Fannie Mae and Freddie Mac prior to the 2020 election is unlikely even if the net worth sweep ends, according to a Keefe, Bruyette & Woods report.

The report reiterates the laundry list generated from the Trump administration's housing finance reform report to explain why the recapitalization will likely take so long. The challenges include the Federal Housing Finance Agency's need to publish capital standards and Treasury's need to determine the commitment fee that the GSEs will pay for the ongoing government guarantee of their MBS.

Also cited as a challenge is a resolution regarding the qualified mortgage patch, which could cut the government-sponsored enterprises' volume by 30%. If the fate of the patch weren't known, it would be hard to forecast potential earnings for Fannie and Freddie, KBW said.

"Finally, there would need to be a very large capital raise, and we think the market could not accommodate that in 2020, given the issues noted above," said the report from analysts Bose George, Brian Gardner, Thomas McJoynt-Griffith and Eric Hagen.

FHFA Director Mark Calabria said he would like to give Congress a full term to act on the Trump administration report's recommendations, the analysts' added.

"Given this backdrop, we think GSE recapitalization is unlikely to happen until after the 2020 election and then it will obviously be dependent to a large degree on the outcome of the election," the KBW analysts said. "This dependence on the outcome of the election adds to our caution on the shares" of Fannie Mae and Freddie Mac.

In addition, it is likely the current common stockholders would see their holdings diluted, the KBW analysts said. Dilution is likely because of there is the potential for Treasury to convert its senior preferred shares in both companies to common stock, and because Calabria has said that taxpayers would receive additional shares in the GSEs in return for allowing them to build capital.

Under a 2017 agreement between then-FHFA Director Mel Watt and Treasury, both GSEs are allowed to retain a $3 billion capital cushion.

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