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 their earnings for the foreseeable future.
The FHFA and the Treasury have agreed to amend the Preferential Share Purchase Agreements for shares in the two companies that the federal government still holds after the Great Recession. The changes will allow Fannie and Freddie to retain all earnings until they meet the requirements set by the new FHFA capital rule issued at the end of last year. Under that rule, the two mortgage giants would have been asked to hold $ 283 billion in unadjusted total 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 withhold revenues of up to $ 25 billion. Prior to that, all of Fannie and Freddie’s earnings were transferred to the Treasury Department as a dividend to be reimbursed to the federal government for rescuing businesses.
The two companies have already fulfilled nearly $ 25 billion in capital they were allowed to withhold, requiring an agreement between the FHFA and the Treasury, an FHFA official said.
The agreement does not address the status of the Treasury’s preferred shares and keeps Fannie and Freddie conservative. Following the successful presidential campaign of President-elect Joe Biden, there have been reports that the Trump administration is considering a plan to quickly remove Fannie and Freddie from the Conservatives, which would require the Treasury to sign.
Lawmakers on both sides of the aisle have expressed concern that a hasty exit from the Conservatory could come at the expense of taxpayers if it involved canceling Fannie and Freddie’s stake in the treasury. Treasury Secretary Steven Mnuchin commented in December that Fannie and Freddie should have “adequate capital” before being privatized.
Announcing the deal, FHFA director Mark Calabria said it was “a step in the right direction,” but warned that retained revenue would not be enough to get Fannie and Freddie to get where they need to be in terms of capital. .
“Only the gains carried forward are insufficient to properly capitalize on businesses,” Calabria said. “Until businesses can raise private capital, they risk failing in the next housing crisis.”
Functionally, however, Fannie Mae and Freddie Mac are unable to raise private capital due to Treasury preferred shares. Fannie and Freddie shares currently have little appeal to investors, as conservatory conditions mean they do not receive dividends.