Treasury, FHFA Take Steps to "Responsibly Wind Down" GSEs

by devteam August 17th, 2012 | Share

Inrna move that virtually ends any hope that Freddie Mac and Fannie Mae will returnrnto viability, the Department of the Treasury and the Federal Housing FinancernAgency (FHFA) have revised the Preferred Stock Purchase Agreement (PSPA) betweenrnTreasury and the two government sponsored enterprises (GSEs).   The new agreement will strip the GSEs of anyrnprofit from their operations and will accelerate the rate at which they arernreducing their owned loan portfolios. </p

The agreements will replace the 10rnpercent dividend payments made to Treasury on its preferred stock investmentsrnin Fannie Mae and Freddie Mac with a quarterly sweep of every dollar of profitrnthat each firm earns going forward.  Under the existingrnagreement the Treasury Department has provided financial support to the GSEs inrnthe combined amount of $188 billion since conservatorship began in August 2008.  The GSEs have paid Treasury $46 billion inrndividends during this period frequently needing to request additional fundsrnfrom Treasury in order to do so.</p

In addition the investment portfoliosrnheld by the two companies will now be wound down at an annual rate of 15rnpercent instead of the 10 percent annual reduction required in the previousrnagreements. As a result of this change, the GSEs’ investment portfolios must bernreduced to the $250 billion target set in the previous agreements in 2018, fourrnyears earlier than previously scheduled.</p

Thernchanges will prevent the companies from rebuilding capital, and dashes thernhopes of investors who bought GSE stock on the cheap hoping they might re-emergernfrom conservatorship as viable companies. rnIt also appears that the demands of many members of Congress tornterminate the GSEs as rapidly as possible are being met.   </p

“With today’s announcement, we arerntaking the next step toward responsibly winding down Fannie Mae and FreddiernMac, while continuing to support the necessary process of repair and recoveryrnin the housing market,” said Michael Stegman, Counselor to the Secretary of thernTreasury for Housing Finance Policy.  “As we continue to work towardrnbi-partisan housing finance reform, we are committed to putting in placernmeasures right now that support continued access to mortgage credit forrnAmerican families, promote a responsible transition, and protect taxpayerrninterests.”</p

A press release from Treasury saidrnthat the “sweep” of GSE profits into the Treasury coffers would accomplishrnseveral things: </p<ul class="unIndentedList"

  • Ensure that every dollar of earnings that Fannie Mae and FreddiernMac generate will be used to benefit taxpayers for their investment in thosernfirms. </li
  • End the circular practice of the Treasury advancing funds tornthe GSEs simply to pay dividends back to Treasury. </li
  • Support the continued flow of mortgage credit by providing marketrnplayers and taxpayers with additional confidence in the ability of the GSEs tornmeet their commitments and provide greater market certainty regarding thernfinancial strength of the GSEs.</li</ul

    Treasury said the move was also inrnline with the Administration’s 2011 White Paper commitment to wind down the GSEsrnwhile not allowing them to retain profits, rebuild capital, and return to thernmarket in their prior form.</p

    BothrnGSEs have recently reported substantial profits.  Fannie Mae, in its second quarter financialrnreport claimed $7.8 billion in net income in thus far in fiscal 2012 comparedrnto a loss of $9.4 billion at the same point in 2011 and Freddie Mac reported</asecond quarter net income of $3.0 billion compared to $577 million one yearrnearlier.  Both companies paid thernrequired dividends for the second quarter and neither requested additionalrnfunds.  </p

    Apparentlyrnthe markets were still fearful that the companies might exhaust their Treasuryrnsupport, especially as a temporary agreement to provide unlimited money endsrnthis year and the Treasury obligation returns to its original level which willrnallow it to inject an additional $125 billion into Fannie Mae and $150 billionrninto Freddie Mac.</p

    Arnpress release from FHFA contained the following statement.  “As Fannie Mae and Freddie Mac shrink, therncontinued payment of a fixed dividend could have called into question the adequacyrnof the financial commitment contained in the PSPAs.  In addition, the faster reduction in thernretained mortgage portfolio will further reduce risk exposure and simplify thernoperations of Fannie Mae and Freddie Mac.</p

    “Thesernchanges provide certainty to Fannie Mae, Freddie Mac and market participants asrnthey continue to perform their critical mission of providing liquidity andrnstability to the country’s housing market. rnThe steps today are also important as Congress and policymakersrncontemplate the future of Fannie Mae and Freddie Mac.”

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