The Federal Housing Finance Agency and the Treasury Department have reached an agreement that will allow Fannie Mae and Freddie Mac to keep their earnings for the foreseeable future.
The FHFA and Treasury agreed to amend the preferred stock purchase agreements for the shares in the two enterprises that the federal government continues to hold following the Great Recession. The amendments will let Fannie and Freddie retain all earnings until they have reached the requirements set by FHFA’s new capital rule issued late last year. Under that rule, the two mortgage giants would have been required 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 let the mortgage giants retain up to a combined $45 billion in earnings — $25 billion for Fannie Mae and $20 billion for Freddie Mac. Prior to that, all of Fannie and Freddie’s earnings were swept to the Treasury Department as a dividend to repay the federal government for bailing the enterprises out.
The two enterprises have already almost met the $45 billion in capital they were allowed to retain, necessitating the agreement between FHFA and Treasury, an FHFA official said.
The agreement leaves unaddressed the status of Treasury’s preferred shares and keeps Fannie and Freddie in conservatorship. In the wake of President-elect Joe Biden’s successful presidential campaign, reports emerged that the Trump administration was considering a plan to remove Fannie and Freddie from conservatorship quickly, which would require Treasury’s sign-off.
Lawmakers on both sides of the aisle expressed concerns that a hasty exit from conservatorship could come at taxpayer expense, if it involved Treasury’s writing off the stakes it holds in Fannie and Freddie. Treasury Secretary Steven Mnuchin commented in December that Fannie and Freddie should have “appropriate capital” before being privatized.
In announcing the agreement, FHFA Director Mark Calabria said it was “a step in the right direction,” but he cautioned that retained earnings alone would not be enough to get Fannie and Freddie to where they need to be in terms of capital.
“Retained earnings alone are insufficient to adequately capitalize the Enterprises,” Calabria said. “Until the Enterprises can raise private capital, they are at risk of failing in the next housing crisis.”
Functionally, though, Fannie Mae and Freddie Mac are unable to raise private capital because of Treasury’s preferred shares. Fannie and Freddie shares hold little allure at present to investors, since the conditions of the conservatorship mean they don’t receive a dividend.