The Federal Housing Financing Agency and the Treasury Department have reached an agreement that Fannie Mae FNMA,
and Freddie Mac FMCC,
to retain their earnings within the foreseeable future.
The FHFA and the Treasury have agreed to amend the preferential purchase agreements for the shares in the two companies that the federal government still holds after the Great Recession. With the amendments, Fannie and Freddie can retain all earnings until they meet the requirements that FHFA’s new capital rule issued late last year. Under the rule, the two mortgage giants would be required on June 30, 2020 to own $ 283 billion of unadjusted total capital, based on their then assets.
In 2019, the two agencies reached an agreement to keep the mortgage giants up to $ 25 billion in earnings. Previously, all of Fannie and Freddie’s earnings were swept to the Treasury Department as a dividend to repay the federal government for rescuing the businesses.
The two businesses have already raised nearly $ 25 billion in capital that they may retain, necessitating the agreement between FHFA and the treasury, an FHFA official said.
The agreement leaves the status of the treasury’s preference shares untouched and keeps Fannie and Freddie in custody. In the wake of President-elect Joe Biden’s successful presidential campaign, reports surfaced that the Trump administration was considering a plan to remove Fannie and Freddie quickly from the conservatory, which would require the abolition of the treasury.
Lawmakers on both sides of the aisle have expressed concern that a hasty exit from the conservatory could come at taxpayers’ expense, if it involves the treasury’s write-off of the interests in Fannie and Freddie. Finance Minister Steven Mnuchin said in December that Fannie and Freddie must have ‘appropriate capital’ before being 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 get Fannie and Freddie where their capital should not be.
“Retained earnings alone are insufficient to adequately capitalize the businesses,” Calabria said. “Until businesses can raise 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 the treasury’s preference shares. The shares of Fannie and Freddie currently hold few investors, as the preservation conditions mean they receive no dividend.