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No Big Windfall For Fannie-Freddie Investors, Calabria Predicts

No Big Windfall For Fannie-Freddie Investors, Calabria Predicts

(Bloomberg) -- Fannie Mae and Freddie Mac’s existing shareholders shouldn’t expect a huge payday after the mortgage giants raise capital from new investors as part of a plan to free them from U.S. control, the companies’ chief regulator said Tuesday.

“The shareholders will be heavily diluted when we raise capital,” Federal Housing Finance Agency Director Mark Calabria said in a Bloomberg Television interview. “So at the end of the day I am not focused on whether there’s a windfall, because I don’t think there’s really going to be that big of a windfall.” He noted that the shareholders haven’t had a dividend in more than a decade.

No Big Windfall For Fannie-Freddie Investors, Calabria Predicts

Calabria reiterated his view that investors should have been wiped out after Fannie and Freddie were seized by regulators during the 2008 financial crisis, and said that current shareholders could be wiped out in the future “were we to find ourselves in the situation where they’re insolvent again.”

He said that when the time comes for the companies to go to the public markets to raise capital, it could result in the “largest equity offering ever.” FHFA is working with investment bank Houlihan Lokey to figure out specifics such as whether Fannie and Freddie would go to market at the same time or sequentially, he said.

“We are looking at alternatives,” Calabria said. “Can we do this at once? Does it need to be done multiple times? Do both companies need to go at once? Should it be sequential? These are all factors that we are working on now.” Doing one large equity raise would “probably be more” than the market has an appetite for, he said.

Specific Timetable

President Donald Trump’s administration has vowed to free Fannie and Freddie from the conservatorships they’ve operated under for more than a decade. Treasury Secretary Steven Mnuchin has called for more work to map out how that will be done and has said that he is not set on a specific time frame or approach.

While Calabria talked about an equity offering on Tuesday, he has previously said that he would be open to letting the companies retain more of their profits to meet capital requirements if that’s what his advisers determine is the best approach.

It is up to Treasury to determine how existing shareholders are treated, Calabria said. He reiterated that his focus is on ensuring Fannie and Freddie raise enough capital to survive another downturn.

In September FHFA and the Treasury Department made changes to the companies’ bailout agreements that allowed them to retain more of their own profits instead of sending them to the government. Calabria said that while the goal is to remove the so-called net worth sweep entirely, it’s possible that regulators could decide to make a similar incremental tweak early next year when Fannie and Freddie are expected to hit the current threshold.

He said he expects it will take another year for Fannie and Freddie to continue to build capital, and that the FHFA’s plans to re-propose a rule dictating capital requirements are a key step for the companies as they plan to go to market. Calabria said at a conference earlier this week that he expects the FHFA to announce its reproposal “at the end of the first quarter.”

--With assistance from Michael McKee.

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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