February 18, 2020
Our brokers know that the majority of loan production is now ultimately purchased by Freddie Mac and Fannie Mae. Certainly Orion offers your clients a multitude of other products to help your clients, but although Orion’s brokers don’t deal directly with “The Agencies,” we believe that it is important for you to keep abreast of the latest developments.
Both Agencies reported solid earnings for the 4th quarter of 2019. But the industry is watching what is happening behind the scenes. The Federal Housing Finance Agency (FHFA), which oversees both Freddie and Fannie, announced Houlihan Lokey Capital as an advisor to help design a plan to end the U.S. government's control of Fannie Mae and Freddie Mac, a significant milestone towards ending the conservatorships.
To come up with a roadmap for the possible privatization of the GSEs, Houlihan Lokey will examine various aspects of such a move, including business and capital structures, market impacts and time and options for the GSEs to raise capital. Conservatorship began more than a decade ago during the global credit crisis, and this past September, the FHFA and Treasury Department allowed the GSEs to retain their profits in an effort to raise their capital buffer.
We’re not talking about chump change. Analysts have estimated the two GSEs would need to raise a combined more than $100 billion in capital against their current books of business. Under this arrangement, Fannie is permitted to keep its retained earnings until it reaches $25 billion, while Freddie has a limit set at $20 billion. The FHFA will pay Houlihan Lokey $9 million in the first year of the contract, with the options to extend the work for another 4-1/2 years with the contact not going above $45 million.
After this announcement, the next major milestone for FHFA is the re-proposal of the capital rule, which will happen sometime in 2020. So you can assure your clients that it is “full speed ahead” for Fannie and Freddie, and that is a good thing for your borrowers and the housing market in general.