Treasury Discussed Hiring Houlihan to Advise on Fannie-Freddie

(Bloomberg) -- The Treasury Department has held talks with Houlihan Lokey Inc. about hiring the restructuring firm to advise it on Fannie Mae and Freddie Mac, the U.S. mortgage giants that have been under federal control since the 2008 financial crisis, said a person with knowledge of the negotiations.

Retaining the investment bank would be an important step in Treasury’s push to overhaul Fannie and Freddie. But Houlihan Lokey hasn’t been hired and there’s no indication that the Trump administration intends to free the companies from the government’s grip anytime soon. Many hurdles remain and the process is fraught with political and technical difficulties.

Treasury Discussed Hiring Houlihan to Advise on Fannie-Freddie

A Treasury spokesman denied that the agency is holding current discussions with any advisory firm. Still, bringing on an outside expert could prove crucial as the administration enters a new phase on housing-finance policy.

On Thursday, Treasury is expected to released its long-anticipated plan -- requested by President Donald Trump -- for ending Fannie and Freddie’s conservatorships, said people familiar with the matter who asked not to be named because the report’s status hasn’t been publicly disclosed.

Shrinking Footprint

Whatever Treasury comes up with, including proposals for Fannie and Freddie to build up their capital cushions and reducing the companies’ footprints in the mortgage market, would still face a long implementation process. Houlihan Lokey, which is known for working on bankruptcies involving Lehman Brothers Holdings Inc. and Enron Corp., could advise on much of that work.

In an emailed statement, the Treasury spokesman said Wednesday that there is no merit to any report that Treasury is currently in talks to contract or hire any firm to serve as a financial adviser to the department on matters related to Fannie and Freddie.

Houlihan Lokey didn’t respond to a request for comment.

Figuring out a fix for Fannie and Freddie, the biggest outstanding issue from the 2008 meltdown, has long confounded politicians and policy makers. The companies were taken over as the housing market tanked, and bailed out with $191.5 billion in taxpayers funds. They have since become profitable again, paying more than $300 billion in dividends to the Treasury in recent years.

Fannie and Freddie don’t extend financing to homebuyers. Instead, they keep the housing market humming by purchasing mortgages from lenders and packaging the loans into bonds. Such securities are sold to investors with guarantees in case borrowers default.

Administration Wary

Treasury Secretary Steven Mnuchin and his team have been working on plans to release Fannie and Freddie from government conservatorship since Trump took office in 2017. Those efforts were complicated by the June departure of counselor Craig Phillips, who had been Treasury’s point man on the issue.

The administration has also grown wary about pursuing big changes to Fannie and Freddie before the 2020 presidential election. Any revamp could hurt the housing market, and the health of the economy is considered key to Trump winning a second term.

In a sign that the release of Treasury’s Fannie-Freddie report is imminent, Mnuchin is scheduled to testify Sept. 10 before the Senate Banking Committee on housing-finance policy. Joining him will be Federal Housing Finance Agency Director Mark Calabria, Fannie and Freddie’s regulator, and Housing and Urban Development Secretary Ben Carson.

Among recommendations that are likely to be included in Treasury’s plan is that rival firms be able to compete with Fannie and Freddie, according to two people familiar with the matter. Such a proposal would require action by Congress, which controls the chartering of rivals to Fannie and Freddie.

More Capital

There are many reforms the Trump administration and FHFA can pursue on their own. For instance, Treasury will likely recommend that Fannie and Freddie be restricted from purchasing certain types or sizes of mortgages, the people said.

Treasury and FHFA officials have long said that Fannie and Freddie need more capital to be able to weather another housing slump, as the companies are currently restricted from holding more than $3 billion each. While selling Fannie and Freddie shares through public offerings is one option to increase their capital, the Treasury report isn’t likely to lay out specifics on the timing of possible stock sales or how they might be structured, said one person with knowledge of the matter.

That could disappoint hedge funds and other investment firms that own the companies’ shares. Such firms have been eager for the government to quickly release the mortgage giants from federal control.

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