-
Fannie and Freddie's earnings from guaranteeing mortgages were a footnote when they were racking up huge losses. Now that they've stabilized, what fees their conservator sets will determine whether they shrink or can again be profitable.
August 16 -
Stabilizing operational costs and the potential for steady profits at Freddie Mac could further lessen the urgency of structural reforms.
August 7 -
In the United States, outlining a different narrative about what happened in the financial crisis opens one to political attack.
July 17
The Treasury Department on Friday said it is restructuring the terms of its investment in Fannie Mae and Freddie Mac, four years after the government bailout of the beleaguered housing behemoths.
Instead of paying a mandatory 10% quarterly dividend, an arrangement which at times has forced the government-sponsored enterprises to borrow more from the government to pay the government, the Treasury will now capture all of their profits. When Fannie and Freddie aren't making money, they won't have to pay.
The new terms accelerate the shrinkage of the GSEs' portfolios to 15% annually beginning next year, from the current required pace of 10%. The catch is that forking over all their earnings will make it harder for Fannie and Freddie to build capital.
"We are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market," Michael Stegman, the Treasury' official overseeing housing finance.
The Treasury said it wants "to make sure that every dollar of earnings each firm generates is used to benefit taxpayers, and support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market."
The government is reworking the terms because the open-ended financial commitment to the GSEs that the administration announced on Christmas Eve 2009 is set to expire this year. Absent any change, Fannie and Freddie would have been limited in the amount of additional capital they could get from the Treasury.
Though Edward DeMarco, the acting director of the Federal Housing Finance Agency, oversees the GSEs, the Treasury has provided unlimited financial support, injecting a combined $188 billion into the GSEs since they were put into conservatorship in 2009. In exchange, the government took senior preferred shares that pay the 10% dividend.
But the concern has been that Fannie and Freddie would exhaust their capital and default on bond payments, says Jaret Seiberg, a senior policy analyst at Guggenheim Partners. That fear could drive up their borrowing costs, which would require them to seek government capital more quickly and create a vicious cycle that Treasury wants to forestall.
The Treasury has been advancing funds to the GSEs simply to have them pay the funds back to the Treasury.
"The borrow-to-repay problem is only going to worsen as the enterprises shrink their retained portfolios," which are their key profit drivers, Seiberg wrote in a research note Friday.
