FHFA Chief Mel Watt Sets the Table for an Eventual Treasury Draw by the GSEs?
By Paul Muolo
In the wake of a quarterly loss reported by Freddie Mac, Federal Housing Finance Agency Director Mel Watt Tuesday morning issued a statement cautioning that the thin capital cushion afforded to the GSEs eventually could result in additional taxpayer assistance.
The $475 million 3Q loss suffered by Freddie is the first-ever quarterly loss posted by either Freddie Mac or Fannie Mae under Watt’s tenure. In 2018 – as the regulator notes in his statement – the GSE capital cushion falls to zero as proscribed by the senior preferred stock purchase agreements. Currently, Freddie has a net worth reserve of $1.8 billion.
Watt also explains in his statement that the loss posted by Freddie in 3Q had nothing at all to do with a decline in credit quality, but instead is tied to the vicissitudes of hedging interest rate risk.
In theory, after the capital cushion falls to zero and if either company posts a loss – for any reason, hedging or otherwise – they will need to ask the Treasury Department, which owns their senior preferred stock, for cash assistance to maintain a positive net worth.
There has long been a concern in the market that if either GSE has a negative net worth, that investors will stop buying their mortgage-backed securities, which would cause the home buying process in America to grind to a halt.