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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 modify the preferred share purchase agreements 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 keep any winnings until they meet the requirements set by 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 total unadjusted capital as of June 30, 2020, based on their assets at the time.
In 2019, the two agencies struck a deal to allow mortgage giants to keep up to $ 25 billion in profits. Previously, all of Fannie and Freddie’s profits were paid to the Treasury Department as a dividend to reimburse the federal government for bailing out the companies.
The two companies have already almost reached the $ 25 billion in capital they were allowed to hold, which required the agreement between the FHFA and the Treasury, an FHFA official said.
The deal leaves Treasury preferred stock status unanswered and keeps Fannie and Freddie in custody. Following the success of President-elect Joe Biden’s presidential campaign, reports have revealed that the Trump administration is planning to quickly remove Fannie and Freddie from trusteeship, which would require Treasury approval.
Lawmakers on both sides of the aisle have expressed concerns that a hasty exit from trusteeship could come at taxpayer expense, if it involved the Treasury’s write-off of its holdings in Fannie and Freddie. . Treasury Secretary Steven Mnuchin said in December that Fannie and Freddie would need to have “appropriate capital” before they were privatized.
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 bring Fannie and Freddie where they need to be in terms of capital.
“Retained earnings alone are insufficient to adequately capitalize businesses,” Calabria said. “Until companies 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 stock. Fannie and Freddie’s shares are currently unattractive to investors as the terms of the trusteeship prevent them from receiving a dividend.
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