Fannie Mae and Freddie Mac to keep their earnings under agreement

Federal Housing Finance Agency Director Mark Calabria

The Federal Housing Finance Agency and the Treasury Department have come to an agreement that will allow Fannie Mae and Freddie Mac to keep their earnings. Both agencies agreed to amend the preferred stock purchase agreement.

The amendments would allow Fannie and Freddie to keep all of their earnings until they meet the requirements of new capital rules issued by the FHFA last year. Under the rule, the two mortgage giants would have been required to hold $283 billion in unadjusted total capital as of June 30, 2020, based on their assets at the time.

In 2019, the two agencies reached an agreement that would let the mortgage giants retain a total of $45 billion in earnings —— $25 billion for Fannie Mae and $20 billion for Freddie Mac. Before that, all of Fannie and Freddie’s earnings were swept to the Treasury Department as a dividend to repay the federal government for bailing the enterprises out.

The agreement does not address the status of Treasury preferred shares, while Fannie Mae and Freddie Mac remain in conservatorship. In the wake of president-elect Joe Biden’s successful presidential campaign, there have been reports that the Trump administration is considering a plan to remove Fannie and Freddie from conservatorship, which would require Treasury approval.

Lawmakers from both parties have expressed concern that a hasty exit from conservatorship could cost taxpayers if it involves the Treasury writing down its holdings in Fannie and Freddie.

In announcing the agreement, FHFA Director Mark Calabria called it “a step in the right direction,”  but said that allowing Fannie and Freddie to retain earnings would not be enough to get both of them to where they need to be in terms of capital.

However, Fannie and Freddie are functionally unable to raise private capital because of the Treasury’s preferred shares. For now, Fannie and Freddie shares are unattractive to investors because the terms of the takeover mean they won’t receive dividends.

Damon Harrison
Market Analyst, IPG Group