Fannie Mae (FNMA)

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Letting the GSEs Build a (New) Capital Buffer: The Devil’s in the Details

By Paul Muolo [e-mail]

For the most part, several different factions of the mortgage industry have applauded the move by the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to build some type of capital buffer. Now comes the hard part: the details.

Early this week, FHFA Acting Deputy Director of the Division of Conservatorship Bob Ryan said in a speech that the capital buffer plan would entail a delay of dividend payments to the U.S. Treasury Department – not an elimination of them.

No other specifics were provided. Speculation, meanwhile, has centered on the government-sponsored enterprises making their dividend payments annually instead of quarterly. The thinking is that if one, or both, posts a quarterly loss next year – when the capital buffer falls to zero – they can make up for the performance the next quarter.

The irony is that management at both GSEs has been forecasting future profits as far as the eye can see. The risk of a loss is rooted in their hedging instruments, whose value declines when rates suddenly dive at the end of a given quarter. For more details, see the new edition of Inside Mortgage Finance, now available online.