Fannie, Freddie to Retain Earnings; Treasury's move is first step toward returning firms to private hands
By Andrew Ackerman and Kate Davidson
WASHINGTON—Mortgage-finance companies Fannie Mae and Freddie Mac will start keeping earnings as part of a Trump administration process aimed at moving the companies out of conservatorship and back into the private sector.
The move, announced Monday between the Treasury Department and the companies' federal regulator, suspends a yearslong arrangement in which the companies handed nearly all of their profits to the Treasury. Under the agreement, Fannie Mae will be allowed to retain $25 billion and Freddie Mac will be able to retain $20 billion, the Treasury and Federal Housing Finance Agency said Monday.
"These modifications are an important step toward implementing Treasury's recommended reforms that will define a limited role for the federal government in the housing finance system and protect taxpayers against future bailouts," Treasury Secretary Steven Mnuchin said in a statement.
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Fannie and Freddie are central players in the housing market, buying about half of all U.S. mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them during the 2008 crisis in a bid to stabilize the housing market as mortgage defaults mounted. How the government addresses the companies' future could resolve the last major problem from the financial crisis.
At present, the companies hold just $3 billion each in capital, and the agreement would substantially increase that figure. The move starts a process of the companies raising a combined $100 billion-plus that they will likely need to hold before they can return to private hands. The precise amount is to be worked out over the coming months by their federal regulator.
Every quarter Fannie and Freddie send nearly all of their profits, minus the $3 billion they are currently permitted to retain as capital, to the Treasury Department as payment for government support. Under the terms of the 2008 conservatorship, the firms have access to more than $250 billion. They have been generally profitable in recent years and have drawn on that support only once since 2012. Should the companies report a loss going forward, they could continue to draw on their support from the government. They just wouldn't send their profits to the Treasury until they had retained more than about $45 billion—$25 billion for Fannie Mae and $20 billion for Freddie Mac .
The pause in the profit sweep comes after a federal appellate court in New Orleans characterized the sweep in a harsh light in a Sept. 6 ruling, though the judges stopped short of ending it. The decision gave new life to court challenges brought by investors in the companies, who say the handling of Fannie's and Freddie's profits has been illegal. The administration hasn't said whether it intends to appeal the decision.
The Trump administration wants to recapitalize the companies through a mix of retained earnings and raising tens of billions of dollars from investors, a process likely to take years.
While Fannie and Freddie pause the sweep of their profits, the Treasury and the FHFA are expected to negotiate bigger changes to the terms of the companies' existing support agreement with Treasury. That includes the creation of a fee the companies' would be required to pay in exchange for ongoing support from the Treasury, which is necessary for their business model.
The Treasury said Monday it intended to negotiate additional changes "that would further enhance taxpayer protections by adopting covenants that are broadly consistent with" administrative changes the government outlined in its proposal earlier in September.
In exchange for allowing the companies to retain earnings now, taxpayers will see an increase in the face value of the stakes they hold in the companies under the agreement—stakes that would likely have to be repaid before private investors in the companies can receive dividends on their investments. The agreement would increase those stakes by $22 billion for Fannie Mae and $17 billion for Freddie Mac .
Write to Andrew Ackerman at andrew.ackerman@wsj.com and Kate Davidson at kate.davidson@wsj.com
