Cushion urged for mortgage giants

Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage giants be required to hold hundreds of billions of dollars in capital to guard against losses.

The Federal Housing Finance Agency rule proposal released Wednesday outlines how much capital Fannie and Freddie would have to retain against their total assets as fully private companies. Based on their September 2019 asset totals, the companies would have to have a combined total of about $240 billion.

“We must chart a course for the Enterprises toward a sound capital footing so they can help all Americans in times of stress,” agency Director Mark Calabria said in a statement. “More capital means a stronger foundation on which to weather crises. The time to act is now.”

The proposal is the latest sign of progress toward Calabria’s goal of freeing Fannie and Freddie from nearly 12 years in federal conservatorship. Private shareholders, including hedge funds and other investment firms, could make billions of dollars when the companies are released, and the public stock offerings would probably be among the largest ever.

A senior agency official said the ultimate goal of the rule is to ensure that the companies are never leveraged more than 25 to 1, or 4%. As of September 2019, that would have meant they needed about $243 billion in capital, according to the agency. As with other financial firms, Fannie and Freddie would face different requirements depending on market conditions and their books of business, the agency said.

If Fannie and Freddie had been subject to the proposed requirement before the 2008 financial crisis, neither company would have been at risk of going under, the senior official said.

Fannie and Freddie received more than $187 billion in taxpayer money after they were seized by regulators during the 2008 financial crisis. They have since returned more than that in dividends to the U.S. Treasury in fulfilling the terms of their bailout agreements.

The companies have maintained thin levels of capital while under U.S. control. In 2012, the government amended the bailout terms in a way that effectively eliminated their capital buffers. The terms were changed again last year to let the companies keep as much as $45 billion in earnings combined. As of March, Fannie’s net worth was about $13.9 billion while Freddie’s was $9.5 billion.