The Trump administration attempted to kick-start plans for the privatisation of Fannie Mae and Freddie Mac, the US mortgage finance giants bailed out by the taxpayer in 2008, saying they would need to raise around $200bn to return to private control.
The proposal on Wednesday, pitched as the next step towards what could be the largest public offering in history, comes against the backdrop of tumbling profits at the two companies, which guarantee more than half of all US mortgages.
Millions of Americans are skipping payments during the coronavirus downturn under a forbearance programme promoted by Fannie and Freddie, which has set back the companies’ ability to rebuild their balance sheets on their own.
“We must chart a course for the enterprises toward a sound capital footing so they can help all Americans in times of stress,” said Mark Calabria, the director of the Federal Housing Finance Agency, which regulates the companies. “More capital means a stronger foundation on which to weather crises. The time to act is now.”
The new minimum capital proposals would require Fannie and Freddie to hold a combined $240bn — more than envisaged under an earlier plan in 2018 that did not come to fruition.
Fannie and Freddie have been under conservatorship — which means they are under government control, but without their assets appearing on the public balance sheet — since 2008, when their previous capital cushions proved insufficient to ride out the financial crisis.
Last year, Steven Mnuchin, the Treasury secretary, suspended the rule under which the two entities had to hand over the bulk of their profits to the Treasury each year.
Since then, the two have increased their capital from $3bn to $23.5bn. The plan released by Mr Calabria on Wednesday does not address future payments to the Treasury, but it is likely that the companies would be allowed to retain their profits for another year before raising the rest of what they require from private investors.
The re-privatisation of Fannie and Freddie remains a complex and politically fraught prospect, given how central the pair are to the American housing market. The fixed-rate 30-year mortgages used by most borrowers are made possible largely because of Fannie and Freddie’s guarantees, and the bailout of the companies provoked a firestorm.
It is unclear what approach a Democratic administration might take if Donald Trump loses November’s presidential election.
The required fundraising could easily be around $200bn, said Trump administration officials, which would probably dwarf any other initial public offering in history even if some of the money came in the form of bonds or other instruments rather than equity.
Saudi Aramco, the Saudi state energy giant, recently ran the biggest equity IPO ever, raising just under $30bn.
The amount required would also depend on how significantly Fannie and Freddie can build up capital themselves given the pandemic. Mr Calabria told the Financial Times earlier this year Fannie and Freddie could require an injection of capital just to survive the current crisis if the worst estimates over the number of people who would default on their mortgages came true.
The proportion of people asking for delays in repaying their home loans had reached 7 per cent at the end of April, Fannie Mae said this month, and officials said it appeared to be stabilising far below the 25 per cent some had feared in the initial stages of the pandemic.
The FHFA’s new capital rules — which will not be finalised for another three months, after a consultation period — set the $240bn minimum based on Fannie and Freddie’s current level of business. It includes a $90bn buffer and the pair would be allowed to run their capital down to $150bn in times of stress.