FHFA, Treasury Reinstate $3B Capital Reserve for Fannie Mae, Freddie Mac

The Federal Housing Finance Agency and the Treasury Department agreed to reinstate a $3 billion capital reserve for Fannie Mae and Freddie Mac, effective immediately.

The decision comes following congressional passage of a massive tax overhaul, which includes a sharp reduction in the corporate tax rate, from the current 35 percent to 21 percent. Some analysts said this reduction would force Fannie Mae and Freddie Mac, already under FHFA conservatorship since 2008, to make a further draw from the Treasury Department as early as the first quarter.

On Friday, FHFA announced with the Treasury Department that Fannie Mae and Freddie Mac would retain their most recent announced profits and not forward them to Treasury, as they have done since 2009.

Under Preferred Stock Purchase Agreements that went into effect when the Treasury Department placed Fannie Mae and Freddie Mac into conservatorship, their capital reserves must be down to $0 on Jan. 1. Despite being profitable over the past several years–Fannie Mae posted earnings of $3 billion in the third quarter, while Freddie Mac made $4.7 billion–the PSPA agreement prohibits them from rebuilding capital.

As a result of the tax bill passed in late December, analysts said neither Fannie Mae nor Freddie Mac would generate enough earnings to cover anticipated reductions in their deferred tax assets values, nor would they have capital to cover any losses, thus requiring a further draw–which critics characterize as a “bailout”–from Treasury.

The reinstatement announced yesterday would allow Fannie Mae and Freddie Mac to rebuild a limited amount of reserves, said FHFA Director Mel Watt, which should cover any potential contingencies.

“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,” Watt said. “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.”

Mortgage Bankers Association President and CEO David Stevens, CMB, called the FHFA/Treasury decision a “measured response” that should create enough cushion for general accounting losses at Fannie Mae and Freddie Mac, aside from other impacts resulting from the tax legislation.

“Director Watt has expressed significant concern regarding the lack of a capital cushion at the enterprises,” Stevens said. “This negotiated outcome is far better than the Director taking unilateral action and should put to rest calls for indefinite retention of earnings.”

Stevens reiterated MBA’s call for comprehensive secondary market reform, as put forth in the association’s proposal issued earlier this year, Creating a Sustainable, More Vibrant Secondary Housing Market (https://www.mba.org/issues/gse-reform).

“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,” Stevens said.

Fannie Mae Letter Agreement: https://www.fhfa.gov/Media/PublicAffairs/Documents/GSEletteragreementfnm12-21-2017.pdf.

Freddie Mac Letter Agreement: https://www.fhfa.gov/Media/PublicAffairs/Documents/GSEletteragreementfre12-21-2017.pdf.