In September 2008, the U.S. Treasury began dumping $187 billion in taxpayer dollars into Fannie Mae and Freddie Mac, turning the implicit backing over the federal government for the mortgage giants into something rather more explicit. Since then, Fannie and Freddie have paid out $266 billion to the government that owns 80% of them—a handsome but not outrageous 42.2% return on what was an extremely risky investment at the time—and essentially nothing to its shareholders, a fact which some of them resent because it is preventing them from turning an even handsomer profit without having taken much risk at all, most of them being hedge funds who bought Fannie and Freddie pink sheets for literally pennies.
There was some hope that the political impasse over the companies’ future—which persisted in spite of the fact that shutting the two down was perhaps the only thing that Barack Obama and Jeb Hensarling have agreed upon, ever—might be resolved by the election of Donald Trump and the elevation of indirect Fannie/Freddie shareholder Steve Mnuchin as Secretary of the Treasury, even if the former took time on inauguration day to dash at least some of those hopes. In any event, we’re nowhere near a resolution: The hedge funds’ legal battle to get their share of that $266 billion isn’t going well, the huge profits being swept into the Treasury actually might not be all that good an indication of the long-term health of the companies, Fannie and Freddie are now actually more embedded in the mortgage market then they were before, the Obama appointee running them wants to stop giving all of their profits to the Treasury but was bullied out of it, Jeb Hensarling still wants to kill them but in spite of one-party control in Washington probably still can’t, and Mnuchin really wants to get out of the mortgage-guaranteeing business but is just too busy right now, and the guy he’s appointed to figure the whole thing out is all over the map.
Investors had hoped Donald Trump’s administration would move to sell the government’s stake, but so far the view from the White House is unclear. Treasury Secretary Steven Mnuchin has said that ending government control is a priority, but that he’s focused on regulatory relief and tax reform.
In the middle of the debate is Mel Watt, the Obama appointee who heads the FHFA and essentially controls Fannie and Freddie. Watt has the authority to order the companies’ boards of directors to suspend the dividend payments. He came close to doing so at the end of March, just before Fannie and Freddie’s last payment was due, according to people familiar with the matter. A group of senators wrote Watt a letter that week, warning him against stopping payment, and Watt decided to make it….
Investors would’ve been thrilled if Watt had withheld the dividend in March. Building capital is a necessary precursor to selling Fannie and Freddie back to the private market, where their shares could be worth billions. Mnuchin put one of his counselors, Craig Phillips, in charge of the situation. In meetings, Phillips has floated ideas as wide-ranging as putting the companies into receivership, which could wipe out investors, as well as legislation to replace or supplement them with a new system, according to people familiar with the matter. Clarity on what the administration wants to do could be a long way off.
Fannie and Freddie, Back in the Black [Bloomberg]