WASHINGTON — The Treasury Department and the Federal Housing Finance Agency have reached an agreement to allow Fannie Mae and Freddie Mac to hold significantly more capital in a last-minute step to reform the companies, but stopped short of making the sweeping changes officials had once sought.
The amendments to the preferred stock purchase agreements, which dictate the government’s ownership of the mortgage giants, will allow the government-sponsored enterprises to retain all of their earnings until they meet the requirements laid out in
The capital framework, which was finalized in November, will require Fannie and Freddie ultimately to hold roughly $275 billion after they have exited conservatorship. That is a significant step up from the $45 billion that Fannie and Freddie have been permitted to keep since September 2019. But it would likely take more than a decade for Fannie and Freddie to reach that amount through retained earnings alone.
Currently, the GSEs together hold capital of about $35 billion, about seven times less than they would need to exit conservatorship under the new agreement.
“Today’s agreement that allows Fannie Mae and Freddie Mac to continue retaining earnings is a step in the right direction, but more hard work remains,” FHFA Director Mark Calabria said in a news release. “Capital at Fannie Mae and Freddie Mac protects the housing finance system and taxpayers. Retained earnings alone are insufficient to adequately capitalize the Enterprises. Until the Enterprises can raise private capital, they are at risk of failing in the next housing crisis.”
The FHFA also said that the Treasury has agreed that the GSEs can raise private capital and exit conservatorship “once certain conditions are met,” and that Treasury has committed to restructure its investment in the companies.
However, it is unclear if the Biden administration will pursue that path for reforming the GSEs. Many have speculated that the incoming administration will replace Calabria. A new FHFA director and Janet Yellen, President-elect Joe Biden's choice for Treasury secretary, could go in a dramatically different direction.
Calabria has made it his mission to build up the capital cushion at the GSEs to protect the companies in the event of a downturn. Before he joined the FHFA in 2019, the GSEs were required to return virtually all of their profits to the Treasury in an effort to repay the government for the 2008 bailout.
Calabria had theorized that Fannie and Freddie could potentially build up the capital needed to exit conservatorship by going to market sometime this year or next and seeking out investors. But with the thornier elements of the PSPAs left untouched and Biden’s inauguration just a week away, that timetable will almost certainly be dashed.
