Fannie Mae, Freddie Mac May Keep Future Earnings, Under Agreement Between Treasury And Regulators

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The Federal Housing Finance Agency and the Treasury Department have reached an agreement that will allow Fannie Mae FNMA, and Freddie Mac FMCC, -0.51% to maintain their earnings for the foreseeable future. The FHFA and the Treasury agreed to amend the preferred stock purchase agreements for the shares of the two companies that the federal government continues to maintain after the Great Recession. The amendments will allow Fannie and Freddie to withhold all earnings until they have met the requirements set by the new FHFA capital rule issued late last year. Under that rule, the two mortgage giants were required to have $ 283 billion in total unadjusted equity as of June 30, 2020, based on the size of their assets at the time.

In 2019, the two agencies reached an agreement to allow the mortgage giants to retain up to $ 25 billion in profits. Before that, all of Fannie and Freddie’s profits were transferred to the Treasury Department as a dividend to repay the federal government for the funds used to bail out the two companies. The two companies have already nearly reached the $ 25 billion in capital they were allowed to retain, which requires the agreement between the FHFA and the Treasury, an FHFA official said. The deal leaves the status of Treasury preferred shares unaddressed and keeps Fannie and Freddie under guardianship. 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 quickly from tutelage, which would require approval from the Treasury. Lawmakers on both sides of the aisle raised concerns that a hasty exit from the conservatorship could come at the taxpayer’s expense, if it involved the Treasury writing about the stakes it owns in Fannie and Freddie. Treasury Secretary Steven Mnuchin also commented in December that Fannie and Freddie should have “appropriate capital” before being privatized. In announcing the deal, FHFA Director Mark Calabria said it was “a step in the right direction” but cautioned that retained earnings alone would not be enough to get Fannie and Freddie where they need to be on terms. capital. “Retained earnings alone are insufficient to adequately capitalize companies,” Calabria said. “Until companies can raise private capital, they run the risk of failing in the next real estate crisis.” However, functionally, Fannie Mae and Freddie Mac are unable to raise private equity due to Treasury preferred stock. Currently, the shares of Fannie and Freddie have little appeal to investors, as the terms of the tutelage mean that they do not receive dividends.