Treasury moves forward with wind-down of Fannie and Freddie

by Ethan Handelman, National Housing Conference

The Treasury Department announced today that it had agreed with the Federal Housing Finance Agency (FHFA) to modify the agreements that govern the conservatorship of Fannie Mae and Freddie Mac. The changes to the Preferred Stock Purchase Agreements (PSPAs), include:

• Replacing the 10% dividend with a sweep of profits. This is a valuable clarification. Until this change, Fannie and Freddie paid an annual 10% dividend to Treasury based on the advances received, but also received periodic infusions of capital to cover losses, including the cost of paying the dividend. In effect, Treasury was advancing money to pay dividends back to itself. Now the relationship is much clearer, and we can better evaluate choices made for the GSEs, such as whether targeted principal reductions make sense or how to address the multifamily part of the GSE business.
• Accelerating the sell-off of the portfolios. The revised PSAs set a new target of 15% per year for the sell-off of the GSEs' retained portfolios. The sooner the portfolios are wound down, the easier it will be to move to the next stage of mortgage finance reform. Key will be to achieve this quicker rate of sell-off without depressing prices for the assets. We will likely see market reactions soon.
• Annual plan from FHFA on taxpayer protection. This should help FHFA explain how the choices it makes as conservator reduce the overall exposure of taxpayers.

This announcement also reaffirms the Administration’s commitment “that the GSEs will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.” In other words, there will be a next step to mortgage finance reform. We’ll still have to wait until after the election to get more detail, but at this point that’s no surprise.

For excellent and thoughtful analysis, see NHC Board Member Barry Zigas’ blog post.