September 5, 2019 / 9:02 PM / 17 days ago

UPDATE 1-Fannie, Freddie and the government: it's complicated

(Updated to reflect additional policy moves)

By Pete Schroeder

WASHINGTON, Sept 5 (Reuters) - The Trump administration wants to take Fannie and Freddie out of government conservatorship, but doing so will be complicated due to the central role they play in the housing market and the Treasury's holdings in the two firms.

Here's more detail on those arrangements:

WHAT ARE FANNIE MAE AND FREDDIE MAC?

Fannie Mae and Freddie Mac were created by Congress in 1938 and 1970, respectively, with a mandate to expand the U.S. housing market to help boost American homeownership. The pair buy home loans originated by banks, freeing up lenders' capital to make new loans. They then hold the mortgages or package them into securities to sell on the secondary market. The pair, which are private companies with government charters, currently guarantee over half of U.S. mortgages.

WHY DID THE GOVERNMENT TAKE OVER FANNIE AND FREDDIE?

In September 2008, the firms had mounting losses due to the subprime mortgage crisis. Fearing a meltdown in the U.S. housing market, the U.S. government took direct control of the companies by putting them into conservatorship under the Federal Housing Finance Agency. The Treasury also invested billions of dollars to prop them up and minimize damage to the housing market.

WHAT IS THE STATE OF PLAY NOW?

The firms have remained in conservatorship, with FHFA in control. The Treasury owns warrants representing nearly 80% of the common stock in the companies, as well as preferred shares. From 2012, the firms have given the Treasury all their profits and as of the first quarter of 2019, have paid the government $297 billion - well above the $191.5 billion in government funds they received, according to the companies' quarterly filings.

The companies also have legacy common and preferred equity securities that trade on the “pink sheets” market for unlisted entities. A number of hedge funds have built stakes in both classes of stock and some have sued the government over their 2008 seizure, claiming the private companies' profits have been illegally seized by the federal government.

WHAT HAS THE TRUMP ADMINISTRATION DONE SO FAR?

In March, Trump ordered the Treasury and Housing and Urban Development Departments to develop a housing finance reform plan. That report published Sept. 5 lays out administrative and legislative recommendations for recapitalizing Fannie and Freddie and ending the conservatorship, promoting competition in the housing market, and protecting taxpayers from future bailouts.

Trump regulators have already taken some administrative steps to rein in Fannie and Freddie ahead of any potential overhaul. In July, they announced they would not extend an exemption, which will expire in 2021, that lets the pair back riskier mortgages - nearly one-fifth of their business, according to the Urban Institute.

And in August, the FHFA ordered the companies to cap CEO pay at $600,000.

Meanwhile, Senate Banking Committee Chairman Mike Crapo in February released a sketch for reforming the pair, but housing lobbyists do not expect material legislative action this Congress on such a contentious issue heading into the 2020 presidential election. (Reporting by Pete Schroeder; Editing by Michelle Price, Dan Grebler and Andrea Ricci)

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