Houlihan Hired to Advise FHFA on Fannie-Freddie Release Plan

(Bloomberg) -- Fannie Mae and Freddie Mac’s regulator has picked Houlihan Lokey Inc. to help develop a plan to free the mortgage giants from federal control, which is a top goal of the Trump administration.

The investment bank will assist the Federal Housing Finance Agency by providing analysis and recommendations on how to end the companies’ conservatorships, the agency said in a Monday statement. Houlihan will be paid $9 million for its first year of work, with its contract stipulating that the firm can be retained for an additional four-and-a-half years and paid as much as $45 million, according to a statement.

While Houlihan will advise the regulator, FHFA Director Mark Calabria has said Fannie and Freddie will have to retain their own underwriters to carry out whatever the plan for ending U.S. control entails. Calabria called hiring Houlihan a “significant milestone.”

Among the most important steps in releasing Fannie and Freddie is mapping out a strategy for how the companies could potentially raise billions of dollars from investors to protect against the risk of future losses. Calabria, in the statement, said the next benchmark is proposing a capital rule, which he expects will happen “in the near future,” according to the statement.

Taxpayer Rescue

In September, the Treasury Department issued a report laying out its objectives. Calabria has said FHFA wants to end the conservatorships as quickly as possible.

Fannie and Freddie have been under U.S. control since 2008, when they were seized by regulators as the mortgage market tanked. They received more than $191 billion in taxpayer aid to keep them afloat in the wake of the crisis, but have returned to profitability and paid more than $300 billion in dividends to the Treasury.

The companies don’t make loans. Instead, they keep the market flowing by buying mortgages and packaging them into bonds that are guaranteed against defaults.

Calabria and Treasury Secretary Steven Mnuchin haven’t determined how Fannie and Freddie will go about boosting the companies’ capital buffers. Whether it’s a public offering, a debt restructuring or another alternative, any capital raise would be massive. It’s possible the companies could also just continue retaining earnings until they reach certain targets laid out by the FHFA.

Consent Decree?

Calabria has said he expects that Fannie and Freddie could be ready to raise funds in 2021 or 2022 and that they may operate at some point under a consent decree in which they technically exit conservatorship but aren’t entirely free from the government’s grip. There are still a number of thorny issues that will need to be worked out before the companies are ready to go to market, many of which could have significant implications for the $10 trillion mortgage market.

Hedge funds including Paulson & Co. have been waiting for years for Fannie and Freddie to be released, hoping it will lead to a windfall on their investments in the companies.

Calabria and Mnuchin are negotiating changes to the terms of the mortgage giants’ bailout agreement, which currently requires that they send their profits to the Treasury. It’s not clear yet whether such changes would enable shareholders to make the billions in profits they believe they are owed for their stakes in the companies.

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