Concerns by Fannie Mae and Freddie Mac's regulator about the U.S. mortgage finance agencies' lack of capital has opened the door for federal actions that may eventually end government control over them, Bank of America Merrill Lynch said on Wednesday.
In 2008, the agencies went into conservatorships following the housing bust in order to get taxpayer help to deal with heavy losses.
Profits from their mortgage business and investments have been going to Uncle Sam even after they repaid the government for their $187 billion bailout. Because of this, they have been unable to rebuild their cushion against losses - a concern raised by Mel Watt, director of the Federal Housing Finance Agency, last week.
"In an unusual speech, the FHFA director flagged lack of capital as the most serious risk for Fannie and Freddie," Ralph Axel, rates strategist for Bank of America Merrill Lynch, wrote in a research note on Wednesday.
"We think this opens the door to FHFA pursuing a recapitalization plan, eventually leading to the end of the conservatorships," he said.
FHFA also oversees the Federal Home Loan Bank System, another mortgage government-sponsored enterprise.
Watts warned in a speech at the Bipartisan Policy Center in Washington last Thursday that Fannie and Freddie would have no capital buffer starting Jan. 1, 2018 against possible losses.
Since their 2008 bailout, Fannie would have sent a total of $148 billion to the U.S. Treasury by next month, and Freddie a sum of $98 billion, data from the agencies show.
This is capital reserves, as opposed to 'cash' on hand to cover default risk in their mortgage business. Don't ask me to explain, I am not sure.
Congress keeps no capital reserves, nor do any of the socialist enterprises they own. Congress will just go borrow whatever bailout funds it needs. So what? If Congress sells of the two insurers, they will get a weaker price, and it will likely be a fire sale.
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