The Federal Housing Finance Agency and the Treasury Department have reached an agreement that will allow Fannie Mae FNMA,
and Freddie Mac FMCC,
to maintain their income in the foreseeable future.
The FHFA and Treasury agreed to modify the preferred stock purchase agreements for the shares of the two companies that the federal government continues to hold after the Great Recession. The amendments will allow Fannie and Freddie to retain all profits until they have met the requirements set out in the new FHFA capital rule released late last year. Under that rule, the two mortgage giants would have been required to hold $ 283 billion in unadjusted total capital as of June 30, 2020, based on their current assets.
In 2019, the two agencies reached an agreement to let the mortgage giants withhold up to $ 25 billion in profits. Prior to that, all of Fannie and Freddie’s profits were taken to the Treasury Department as a dividend to pay the federal government for rescuing the companies.
The two companies have already nearly reached the $ 25 billion in capital they were allowed to withhold, which required the agreement between FHFA and Treasury, an FHFA official said.
The agreement leaves untreated the status of the Treasury’s preferred shares and keeps Fannie and Freddie in a conservative state. Following the success of President-elect Joe Biden’s presidential campaign, reports emerged that the Trump administration was considering a plan to quickly remove Fannie and Freddie from the conservatory, which would require the Treasury’s signature.
Lawmakers on both sides of the aisle expressed concern that a hasty exit from the Conservative could come at the expense of taxpayers, if it were to cancel Treasury’s holdings on Fannie and Freddie. Treasury Secretary Steven Mnuchin commented in December that Fannie and Freddie had to have the “right capital” before they could be privatized.
Announcing the deal, FHFA director Mark Calabria said it was “a step in the right direction,” but warned that the revenue withheld would not be enough to get Fannie and Freddie to where they need to go. be in terms of capital.
“The retained profits alone are insufficient to properly capitalize the companies,” Calabria said. “Until companies can get private capital, they run the risk of failing in the next housing crisis.”
Functionally, however, Fannie Mae and Freddie Mac are unable to raise private capital due to Treasury preferred shares. The shares of Fannie and Freddie currently remain unattractive to investors, as conservative conditions mean they do not receive a dividend.