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Trump’s Fannie-Freddie Redo Faces ‘Reality’ Limits, Beacon Says

The Treasury Department is expected to turn in a new plan for the agencies on Tuesday. But an overhaul may not happen until after the election.

(Bloomberg)—The Trump administration may not be able to turn plans to overhaul mortgage giants Fannie Mae and Freddie Mac into a “reality” before the 2020 elections, according to Beacon Policy Advisors.

And if the president fails to win re-election, the “blueprint will likely fall out of favor as quickly as Trump leaves,” Beacon wrote in a note. The Treasury department is due on Thursday to release a long-anticipated plan -- requested by President Donald Trump -- for ending Fannie and Freddie’s conservatorships, according to people familiar with the matter.

“Change may be coming,” Beacon cautioned, but “it will likely be far more drawn out and less specific than investors may hope.”

Investors bet change is coming for the companies

Beacon believes the overhaul blueprint won’t be “exceedingly detailed, though it will likely have multiple recommendations for what can be done unilaterally” by the Federal Housing Finance Agency, or FHFA, and the Department of Housing and Urban Development, or HUD, in conjunction with the Treasury, along with what Congress may be asked to do.

Among the “asks” for Congress, Beacon sees “passing a law that would allow the chartering of rivals” that would compete with Fannie and Freddie. Even so, Beacon doubts “any substantive new housing finance legislation” can pass this Congress.

Probable administrative reforms include recommendations for new restrictions on the GSEs’ purchase of some mortgages, which would shrink the “footprint of the enterprises and taxpayer risks.” That might also boost “mortgage costs in an election year with a weakening economy,” Beacon noted. The term “GSEs,” or government sponsored entities, refers to Fannie and Freddie.

Beacon also sees capital as a “focus of the blueprint,” though specifics on future sales of shares, how to treat Treasury’s current shares, and the overall restructuring process probably won’t be discussed in detail before negotiations between the Treasury and FHFA begin. There may be an amendment to the preferred stock purchase agreement, which “sweeps” profits to the Treasury, before year-end, it said.

Separately, Compass Point’s Isaac Boltansky wrote that the mortgage finance report was likely to come after market close on Thursday. On Wednesday, Cowen wrote that the Senate Banking Committee’s action to set a Sept. 10 hearing on the future of housing finance was positive for the “recap and release” of Fannie Mae and Freddie Mac.

Recap and release refers to the process of bolstering Fannie and Freddie’s ability to absorb losses and then returning them to private shareholder ownership. Treasury Secretary Steven Mnuchin and FHFA director Mark Calabria are due to testify at the Sept. 10 hearing.

Fannie common shares have rallied 180% so far this year, while Freddie’s have gained 168%, amid shareholder optimism change is coming. In Thursday morning trading, Fannie rose as much as 2.1% to the highest intraday since June 18; Freddie gained as much as 2.1% to the highest since June 17.

To contact the reporters on this story: Felice Maranz in New York at [email protected];

Jarrell Dillard in New York at [email protected].

To contact the editors responsible for this story: Catherine Larkin at [email protected]

Jennifer Bissell-Linsk

© 2019 Bloomberg L.P.

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