a move that virtually ends any hope that Freddie Mac and Fannie Mae will return
to viability, the Department of the Treasury and the Federal Housing Finance
Agency (FHFA) have revised the Preferred Stock Purchase Agreement (PSPA) between
Treasury and the two government sponsored enterprises (GSEs). The new agreement will strip the GSEs of any
profit from their operations and will accelerate the rate at which they are
reducing their owned loan portfolios.
The agreements will replace the 10
percent dividend payments made to Treasury on its preferred stock investments
in Fannie Mae and Freddie Mac with a quarterly sweep of every dollar of profit
that each firm earns going forward. Under the existing
agreement the Treasury Department has provided financial support to the GSEs in
the combined amount of $188 billion since conservatorship began in August 2008. The GSEs have paid Treasury $46 billion in
dividends during this period frequently needing to request additional funds
from Treasury in order to do so.
In addition the investment portfolios
held by the two companies will now be wound down at an annual rate of 15
percent instead of the 10 percent annual reduction required in the previous
agreements. As a result of this change, the GSEs' investment portfolios must be
reduced to the $250 billion target set in the previous agreements in 2018, four
years earlier than previously scheduled.
changes will prevent the companies from rebuilding capital, and dashes the
hopes of investors who bought GSE stock on the cheap hoping they might re-emerge
from conservatorship as viable companies.
It also appears that the demands of many members of Congress to
terminate the GSEs as rapidly as possible are being met.
"With today's announcement, 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," said Michael Stegman, Counselor to the Secretary of the
Treasury for Housing Finance Policy. "As we continue to work toward
bi-partisan housing finance reform, we are committed to putting in place
measures right now that support continued access to mortgage credit for
American families, promote a responsible transition, and protect taxpayer
A press release from Treasury said
that the "sweep" of GSE profits into the Treasury coffers would accomplish
- Ensure that every dollar of earnings that Fannie Mae and Freddie
Mac generate will be used to benefit taxpayers for their investment in those
- End the circular practice of the Treasury advancing funds to
the GSEs simply to pay dividends back to Treasury.
- Support the continued flow of mortgage credit by providing market
players and taxpayers with additional confidence in the ability of the GSEs to
meet their commitments and provide greater market certainty regarding the
financial strength of the GSEs.
Treasury said the move was also in
line with the Administration's 2011 White Paper commitment to wind down the GSEs
while not allowing them to retain profits, rebuild capital, and return to the
market in their prior form.
GSEs have recently reported substantial profits. Fannie Mae, in its second quarter financial
report claimed $7.8 billion in net income in thus far in fiscal 2012 compared
to a loss of $9.4 billion at the same point in 2011 and Freddie Mac reported
second quarter net income of $3.0 billion compared to $577 million one year
earlier. Both companies paid the
required dividends for the second quarter and neither requested additional
the markets were still fearful that the companies might exhaust their Treasury
support, especially as a temporary agreement to provide unlimited money ends
this year and the Treasury obligation returns to its original level which will
allow it to inject an additional $125 billion into Fannie Mae and $150 billion
into Freddie Mac.
press release from FHFA contained the following statement. "As Fannie Mae and Freddie Mac shrink, the
continued payment of a fixed dividend could have called into question the adequacy
of the financial commitment contained in the PSPAs. In addition, the faster reduction in the
retained mortgage portfolio will further reduce risk exposure and simplify the
operations of Fannie Mae and Freddie Mac.
changes provide certainty to Fannie Mae, Freddie Mac and market participants as
they continue to perform their critical mission of providing liquidity and
stability to the country's housing market.
The steps today are also important as Congress and policymakers
contemplate the future of Fannie Mae and Freddie Mac."