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June 07, 2019  

FHFA Firming Up Outlook for Agency IPOs

The Federal Housing Finance Agency is advancing with plans to recapitalize Fannie Mae and Freddie Mac via an initial public offering.

Fannie and Freddie shareholders who spoke to FHFA head Mark Calabria this week said they are convinced the Trump Administration intends to conduct a $120 billion equity offering in late 2019 or early 2020. The move would bring the mortgage agencies out of conservatorship.

Meanwhile, the U.S. Treasury Department has called banks including Goldman Sachs, J.P. Morgan and Morgan Stanley about leading the stock offering.

The moves solidify statements by Calabria in May that sales of Fannie and Freddie shares are possible next year. They also advance a long-running White House plan to privatize the agencies regardless of whether Congress consents to such an initiative.

A source described the IPO as a joint sale of shares in Fannie and Freddie, although it remains unclear whether the agencies would come to market sequentially or at the same time. Fannie and Freddie currently trade over-the-counter, with both also maintaining a mix of preferred stock.

The Trump Administration apparently plans to release a complete plan for the IPO this month.

Calabria indicated that as part of the effort, Fannie and Freddie would settle a number of lawsuits that investors filed against them after the 2007-2008 market crash. Those complaints stem largely from a series of actions in which the Treasury took control of Fannie and Freddie in 2008 and, starting in 2012, began claiming the agencies’ profits.

Shareholders argue that money should have flowed to them as dividend payments instead. While many of the lawsuits have been dismissed, some still are outstanding. Most of the actions could be resolved by making preferred shareholders whole, potentially via a mass “sweep” of profits.

Fannie and Freddie stockholders were ecstatic at Calabria’s statements. “It’s exactly what we laid out,” one investor said. “The goal of this president is what can be done administratively. You can see there’s a focus on getting it done.”

One potential obstacle: doubts that investor demand would be sufficient to support such a large stock offering.

Skeptics of the plan point out that Pimco tried three times to raise $1 billion for a REIT called Pimco Mortgage Trust, but withdrew the offering in May after investors balked at its valuation. Bank of America, Credit Suisse, Goldman and Morgan Stanley were leading the sale.

Pimco planned to use the proceeds from the sale to buy and securitize agency mortgages, while expanding into non-agency products later. The outcome suggests that “even if Calabria wanted to IPO in six months . . . there’s no way you can turn [Fannie and Freddie] loose in this market,” an executive at another REIT said.

Following Calabria’s gestures in May toward a coming IPO, outgoing Freddie chief executive officer Don Layton also predicted it would take years to raise the needed capital — which he pegged at $125 billion.

But one shareholder said Calabria was firm that an IPO is feasible. “The Pimco IPO is apples and oranges,” he said. “With Fannie and Freddie you’re talking about . . . the largest financial institutions in the world that represent a large portion of the U.S. economy. I don’t think it’s a problem, and neither did Calabria.”

It remains to be seen how the planned share sale would mesh with other efforts to curtail the activities of Fannie and Freddie, including proposals to reduce loan-size limits, raise guarantee fees and lift a provision that allows the agencies to buy loans that don’t conform to the Consumer Financial Protection Bureau’s “qualified-mortgage” standards. Also uncertain is what would become of the Common Securitization Platform, which Freddie tapped to complete a bond sale for the first time on June 3.