The Federal Housing Finance Agency and the Treasury Department have reached an agreement that will allow Fannie Mae FNMA,
and Freddie Mac FMCC,
to keep your earnings for the foreseeable future.
The FHFA and the Treasury have agreed to amend the preferred share purchase contracts for the shares of the two companies that the federal government continues to hold after the Great Recession. The changes will allow Fannie and Freddie to retain all profits until they have met the requirements set out in the new FHFA capital rule issued last year. Under that rule, the two mortgage giants would be required to hold $ 283 billion in total unadjusted capital as of June 30, 2020, based on their assets at the time.
In 2019, the two agencies reached an agreement to allow mortgage giants to retain up to $ 25 billion in earnings. Before that, all Fannie and Freddie’s earnings were transferred to the Treasury Department as a dividend to reimburse the federal government for the companies’ bailout.
The two companies have almost reached the $ 25 billion in capital they have been able to retain, requiring an agreement between the FHFA and the Treasury, an FHFA official said.
The agreement does not address the status of Treasury preferred shares and keeps Fannie and Freddie under guardianship. In the wake of the success of President-elect Joe Biden’s presidential campaign, reports have emerged that the Trump administration was considering a plan to remove Fannie and Freddie from custody quickly, which would require Treasury approval.
Lawmakers on both sides of the corridor have expressed concerns that a hasty exit from guardianship could come at the taxpayer’s expense, if it involves the Treasury’s write-off of its holdings in Fannie and Freddie. Treasury Secretary Steven Mnuchin commented in December that Fannie and Freddie should have “appropriate capital” before they are privatized.
In announcing the deal, FHFA director Mark Calabria said it was “a step in the right direction” but warned that retained earnings alone would not be enough to take Fannie and Freddie where they need to be in terms of capital.
“Retained earnings alone are insufficient to adequately capitalize companies,” said Calabria. “Until companies can raise private capital, they risk failing in the next real estate crisis.”
Functionally, however, Fannie Mae and Freddie Mac are unable to raise private capital because of Treasury preferred shares. Fannie and Freddie’s shares currently attract little investors, since the conditions of the tutelage mean that they do not receive dividends.