An agreement has been struck for the government-sponsored enterprises to maintain a small capital buffer. While the modifications addresses immediate concerns, lawmakers need to come up with a long-term housing finance solution next year.
On Thursday, the Department of the Treasury issued a statement indicating that it has agreed with the Federal Housing Finance Agency to modify the Preferred Stock Purchase Agreements with Fannie Mae and Freddie Mac.
Previous modifications to the PSPAs required that the pair of secondary mortgage lenders pass through all their profits to the Treasury in the form of dividends — wiping out any capital buffer.
The new agreement allows Fannie and Freddie to maintain a $3 billion capital buffer. In return, the Treasury will have a $3 billion liquidation preference for its preferred stock in the companies.
“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,” FHFA Director Melvin L. Watt said in a statement. “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.”
But if Fannie or Freddie miss a dividend payment, the capital buffer will be immediately terminated.
The Treasury has committed to provide each GSE from time to time an aggregate amount as much as $100 billion. In return, Fannie and Freddie sold 1 million shares of senior preferred stock to the Treasury at an initial liquidation preference of $1,000 per share.
“The agreement provides that the aggregate liquidation preference of the outstanding shares of senior preferred stock shall be automatically increased by an amount equal to the amount of each draw under Treasury’s funding commitment, and the certificate originally provided that the senior preferred stock shall accrue dividends at the annual rate per share equal to 10 percent on the then current liquidation preference,” the agreements state.
Treasury Secretary Steven T. Mnuchin noted in the statement that the agreement balances FHFA’s concerns of with taxpayer compensation.
In a written statement, Mortgage Bankers Association President and Chief
Executive Officer David H. Stevens called the modifications “a measured response.”
“This negotiated outcome is far better than the director taking unilateral action and should put to rest calls for indefinite retention of earnings,” Stevens said. “Now that this issue is settled, it is time to focus our attention on the legislative actions being contemplated in the Senate and the House to resolve this conservatorship through congressional reform.”
Mnuchin agreed that working with Congress on housing finance reform is a top priority in the coming year.
