Fannie Mae and Freddie Mac can hold future dividends, subject to an agreement between Treasury and regulators

The Federal Housing Finance Agency and the Treasury Department have reached an agreement allowing Fannie Mae FNMA,

Freddie Mac FMCC,
To retain their profits for the foreseeable future.

FHFA and Treasury Agree to the amendment Preferred share purchase agreements for stocks in the two companies that the federal government continues to hold after the Great Recession. The amendments would allow Fannie and Freddie to keep all profits until they reach the requirements set out by the new FHFA Capital Act issued late last year. Under that base, The two mortgage giants were required to hold $ 283 billion in total unadjusted capital as of June 30, 2020, based on their assets at the time.

In 2019, the two agencies reached an agreement to allow the mortgage giants to keep up to $ 25 billion in profits. Prior to this, all Fannie and Freddie earnings were transferred to the Treasury as dividends to pay off the federal government to bail out companies.

An FHFA official said the two companies had already fulfilled the $ 25 billion in capital they were allowed to keep, necessitating an agreement between FHFA and the Treasury.

The agreement leaves the Treasury’s preferred stock status unaddressed and keeps Fannie and Freddie in custody. In the wake of the successful presidential campaign of President-elect Joe Biden, reports emerged that the Trump administration was mulling a plan to quickly remove Fannie and Freddie from custody, which would require Treasury approval.

Lawmakers on both sides of the corridor have expressed concerns that accelerated departures from conservation could come at taxpayers’ expense, if the Treasury Department’s write-off includes its stakes in Fannie and Freddie. Treasury Secretary Stephen Mnuchin commented in December that Fannie and Freddie must have “adequate capital” before privatizing.

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Announcing the agreement, FHFA Director Marc Calabria said it was “a step in the right direction”, but warned that retained earnings alone would not be sufficient to get Fannie and Freddie to where they should be in terms of capital.

“Retained earnings alone are insufficient to generate sufficient capital for enterprises,” Calabria said. Until companies can raise private capital, they are at risk of failure in the next housing crisis.

Functionally, though, Fannie Mae and Freddie Mac are unable to raise private equity due to preferred shares of the Treasury. Fannie and Freddie stocks have little appeal at the moment for investors, since custody conditions mean they are not earning profits.

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