The Federal Agency for Housing Financing and the Ministry of Finance have reached an agreement whereby Fannie Mae FNMA,
and Freddie Mac FMCC,
to maintain their earnings for the foreseeable future.
The FHFA and the Treasury agreed to amend the preferred stock purchase agreements for the shares in the two companies that the federal government will retain after the Great Recession. The changes will allow Fannie and Freddie to keep all income until they meet the requirements of FHFA’s new capital rule issued late last year. Under that rule, the two mortgage giants would have had to hold $ 283 billion in unadjusted total capital by June 30, 2020, based on their then assets.
In 2019, the two agencies reached an agreement to let the mortgage giants keep up to $ 25 billion in revenue. Before that, all of Fannie and Freddie’s income was transferred to the Treasury Department as dividends to repay the federal government for bailing out the businesses.
The two companies have nearly reached the $ 25 billion in capital they were allowed to keep, necessitating the agreement between FHFA and Treasury, an FHFA official said.
The deal leaves the status of Treasury’s preferred stock unaffected and keeps Fannie and Freddie conservatorships. In the wake of President-elect Joe Biden’s successful presidential campaign, reports surfaced that the Trump administration was considering a plan to quickly remove Fannie and Freddie from the conservatory, which would require the signing of Treasury.
Lawmakers on both sides of the aisle were concerned that a hasty exit from the conservatory could come at the expense of the taxpayer if it meant Treasury writing off interests in Fannie and Freddie. Treasury Secretary Steven Mnuchin noted in December that Fannie and Freddie must have “proper capital” before being 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 get Fannie and Freddie where they need to be in terms of capital.
“Retained earnings alone are not enough to adequately capitalize the companies,” said Calabria. “Until the corporations 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 because of Treasury’s preferred stock. Fannie and Freddie’s shares currently have little appeal to investors as the terms of the conservatorship mean they will not receive dividends.