Known as the “net worth sweep” or “Third Amendment,” this decision ignored HERA and decades of established practice, undermined public trust in the government role in insolvencies, and undercut the vital role that fair treatment in insolvencies plays in a market economy. Mark Calabria wrote a paper that earned him his Director position at FHFA where he wrote: Steven Mnuchin has been working with FHFA Director Mark Calabria for months on such an amendment. In order to raise third-party capital you need to pursue SPSPA modifications that incentivize capital markets to put up that capital by offering them a return on that capital as well as supports established solvency principles. This is why you need to raise third-party capital as explained by Mnuchin. That’s, to me, the issue.Īnd rightly so, the agreements that Treasury has with Fannie and Freddie prevent them from retaining capital over $45B whereas their regulator ( FHFA) says they need $283B. You need to raise third-party capital and you need to retain capital. Treasury Secretary Steven Mnuchin has confirmed that this is the issue: Straight from the Treasury Housing Finance Reform Plan:Įach GSE should be recapitalized with significant first-loss private capital so that Treasury’s ongoing commitment under each PSPA could be drawn upon only in exigent circumstances. PSPA Modification Should Enable Significant First-Loss Private Capital That is, of course, if Treasury's Mnuchin and FHFA's Calabria don't pre-emptively do the right thing and put Fannie and Freddie on an irreversible path out of conservatorship as I believe they will and the following is my explanation and analysis of public statements supporting this irreversible action. In other words, in the same way Obama depleted Fannie and Freddie of the capital necessary for them to exit conservatorship, we can expect Biden to make similar decisions that push Fannie and Freddie's money away from Fannie and Freddie. The Trump administration has clearly indicated its intent to end the conservatorships administratively if they cannot reach a legislative solution the Biden campaign has not addressed the issue but conventional wisdom is that a Biden administration is unlikely to pursue that route. Ed Demarco, who implemented the net worth sweep that has held Fannie and Freddie captive in this never-ending conservatorship says : People representing Joe Biden have come out strong in lots of news publications saying that if Joe Biden gets elected he is unlikely to pursue the end of the conservatorships. This is a deadline that I have come to believe in. PSPA Modification Should Happen Before Inauguration Commons could soar from $2.40 to $3-4 but may be able to go multiples further if the past year is used as a guide for crazy retail shareholders buying without an awareness of value. I figure the day the SPSPA modification happens the preferred shares soar from 35% of par to over 50% of par. If the current administration takes the steps necessary to enable Fannie and Freddie to raise capital, preferred shares are first in line in the capital structure as undervalued, followed by common shares. Everything has been put into place in preparation for a Senior Preferred Stock Purchase Agreement ( SPSPA) Amendment that enables Fannie and Freddie to go to capital markets this next year and raise capital. The capital rule was delayed but got finalized November 18. The current administration has been working for over a year to prepare to put Fannie and Freddie on an irreversible path out of conservatorship and a framework has been sitting on Mnuchin's desk for weeks. In any event there are now less than 15 days until Inauguration day. It makes me wonder if the Business Insider article about possibly making Fannie and Freddie employees work through their holidays pushed back the PSPA amendment time frame out of respect for their holiday season. In case you didn't know, that was last year and the amendment did not happen. Last month, an FHFA official was quoted by Bloomberg ( emphasis mine):Ī different senior FHFA official said the agency and Treasury Department are actively negotiating an amendment, which the FHFA wants to finalize this year. FHFA finalized capital requirements setting the end goal for how much capital is required for Fannie and Freddie. Fannie Mae ( OTCQB:FNMA) and Freddie Mac ( OTCQB:FMCC) are two government sponsored enterprises that have been retaining capital since Septemas part of the White House's plan to end their conservatorships.
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