Fannie, Freddie allowed to hold limited $3 billion capital buffer

Fannie Mae and Freddie Mac will be allowed to maintain a limited capital buffer to protect against possible losses, according to a new deal announced Thursday by the Treasury Department and the Federal Housing Finance Agency (FHFA).

The mortgage giants, which were taken over by the government in the wake of the 2008 financial crisis, will each get a capital cushion of $3 billion starting Dec. 31, a day ahead of when their capital was expected to fall to zero.

“Both the Treasury and the FHFA believe that a draw on the Treasury funding commitment may be required given tax reform legislation and the write-down of the deferred tax assets held on the balance sheets of Fannie Mae and Freddie Mac,” the Treasury Department said.

{mosads}The new agreement changes the arrangement requiring Fannie and Freddie to send quarterly dividends to Treasury until their capital hits zero, which was expected by the start of 2018.

“Treasury’s first duty is to ensure that taxpayers are being protected,” said Treasury Secretary Steven Mnuchin.

“This agreement balances the concerns of the FHFA with compensation for taxpayers,” Mnuchin said.

Comprehensive housing finance reform is a top priority next year, Mnuchin said.

FHFA Director Mel Watt said that “while it is apparent that a draw will be necessary for each enterprise if tax legislation results in a reduction to the corporate tax rate, FHFA considers the $3 billion capital reserve sufficient to cover other fluctuations in income in the normal course of each enterprise’s business.”

“We, therefore, contemplate that going forward enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances,” Watt said.

Watt has been exploring options during the past several months to address the capital issue.

As part of the deal, the $3 billion capital buffer will be used as a baseline each quarter to determine dividend payments from Fannie and Freddie, Treasury said.

Treasury made clear that any failure by the government-sponsored enterprises (GSE) to declare and pay a full quarterly dividend “will result in the automatic, immediate termination of its capital buffer.”

But House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said he was “very disappointed” with the decision to “roll back these vital taxpayer protections” that leave them on the hook for upward of $250 billion of future losses.

“There is simply no good reason, policy or otherwise, why we should be putting the GSEs’ balance sheets ahead of the interest of taxpayers,” Hensarling said.

“Americans deserve better, and we need to reform our broken financing system now, not tomorrow, not next Congress, not next crisis. Now,” he said. 

Congress has yet to pass legislation that would overhaul Fannie and Freddie despite several attempts.

There has been a debate among housing, mortgage and banking groups over whether Fannie and Freddie should be allowed to keep their profits instead of sending them to the Treasury beyond the amount owed taxpayers.

David Stevens, head of the Mortgage Bankers Association, said that establishing the buffer “is a measured response and will create enough cushion for general accounting losses, aside from the impacts resulting from the latest tax legislation.”

“This negotiated outcome is far better than the director taking unilateral action and should put to rest calls for indefinite retention of earnings.”

Stevens, who has long pushed for Congress to write a housing finance bill that would overhaul Fannie and Freddie, said it is time to focus on resolving the “conservatorship through congressional reform.”

Independent Community Bankers of America (ICBA) President and CEO Camden Fine threw his support behind the new agreement and advocated for recapitalizing Fannie and Freddie. 

“ICBA has been an ardent supporter of allowing the government-sponsored enterprises (GSEs) to rebuild their capital buffers, which had been scheduled to drop to zero at the end of the year, to avoid another taxpayer bailout and support the mortgage market,” Fine said.

He argued that the two agencies have sent more than $280 billion to the Treasury since 2013, nearly $100 billion more than the capital infusion they received from taxpayers to stay afloat during the financial crisis.

“While this sweep of GSE revenue has been a great investment for the federal government, it harms the taxpayers and community banks that depend on the liquidity that Fannie Mae and Freddie Mac provide,” Fine said.