WASHINGTON – The Treasury Department and the Federal Housing Finance Agency reached an agreement that would allow Fannie Mae and Freddie Mac to hold significantly more capital at the last minute to reform the businesses, but have stopped making the sweeping changes that the Officials once aspired to.
The changes to the Preferred Stock Purchase Agreements, which require government ownership of the mortgage giants, allow the state-sponsored corporations to keep all of their earnings until they meet the requirements of the FHFA's new capital framework.
With the capital envelope finalized in November, Fannie and Freddie will ultimately have to hold around $ 275 billion after retiring from the Conservatory. This is a significant step up from the $ 45 billion Fannie and Freddie have been allowed to keep since September 2019. However, it would likely take more than a decade for Fannie and Freddie to reach that amount from retained earnings alone.
The GSEs currently hold approximately $ 35 billion in capital, about seven times less than it would take to leave the conservatory under the new arrangement.
"Today's agreement, which will allow Fannie Mae and Freddie Mac to continue making profits, is a step in the right direction, but more hard work remains," FHFA Director Mark Calabria said in a statement. “Fannie Mae and Freddie Mac's capital protects the home finance system and taxpayers. Retained earnings alone are not enough to adequately capitalize companies. Until companies can raise private capital, they run the risk of failing in the next real estate crisis. "
With the capital envelope finalized in November, Fannie and Freddie will ultimately have to hold around $ 275 billion after retiring from the Conservatory.
The FHFA also said in a statement that the Treasury Department has agreed that the GSEs can raise private capital and leave the Conservatory "once certain conditions are met," and that the Treasury Department has committed to restructure its investments in the companies.
However, it is unclear whether the Biden government will pursue this path to reform the GSE. Many have speculated that the new government will replace Calabria. A new FHFA director and Janet Yellen, the election of President-elect Biden as Treasury Secretary, could go in a dramatically different direction.
Calabria has set itself the task of building the capital cushion in the GSEs in order to protect the companies in the event of a downturn. Before joining FHFA in 2019, the GSEs had to pay back virtually all of their profits to the Treasury Department to repay the government for the 2008 bailout.
Calabria had theorized that Fannie and Freddie could potentially build the capital needed to exit the Conservatory by going into the market looking for investors sometime this year or next. But with the delicate elements of the PSPAs untouched and the inauguration of President-elect Joe Biden only a week away, that schedule will almost certainly be postponed.