Fannie and Freddie Get to Keep Their Earnings
Tuesday, October 15, 2019
The U.S. Department of the Treasury and the Federal Housing Finance Agency jointly announced that they will allow the government-sponsored enterprises to retain up to $45 billion in combined capital. Both Freddie Mac and Fannie Mae have repaid more to the Treasury than originally drawn down during the financial crisis. The recent announcement is part of the administration’s plan to work on ending the conservatorship and the profit sweep imposed during the financial crisis.
The administration will modify the Preferred Stock Purchase Agreements (PSPAs) to permit Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion capital reserves currently permitted by their PSPAs. Under the modifications, Fannie Mae and Freddie Mac will be permitted to maintain capital reserves of $25 billion and $20 billion, respectively. These changes to the PSPAs were recommended in the Treasury Housing Reform Plan (Plan) released on September 5, 2019.
To compensate Treasury for the dividends that it would have received absent these modifications, Treasury’s liquidation preferences for its Fannie Mae and Freddie Mac preferred stock will gradually increase by the amount of the additional capital reserves until the liquidation preferences increase by $22 billion for Fannie Mae and $17 billion for Freddie Mac.
Treasury and Fannie Mae and Freddie Mac have also agreed to negotiate an additional amendment to the PSPAs that would further enhance taxpayer protections by adopting covenants that are broadly consistent with the recommendations for administrative reforms contained in the Plan.