The agencies aim to steer the GSEs toward capitalization levels "consistent with their size, risk, and importance to the U.S. economy," codify several existing FHFA conservatorship practices, and continue GSE reforms.
The Treasury Department and Federal Housing Finance Agency have announced an agreement to amend the Preferred Stock Purchase Agreements (PSPAs) between the Treasury and each of the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—to "move the GSEs toward capitalization levels consistent with their size, risk, and importance to the U.S. economy, and to codify several existing FHFA conservatorship practices, including providing small lender protections and limiting future increases in certain higher risk lending practices." In addition, the agreement sketches a plan for the Treasury, in consultation with the FHFA, to develop a proposal for continued GSE reforms.
Treasury Secretary Steven T. Mnuchin commented that although "we would have preferred to have been able to achieve further reforms to the housing finance system through legislative action over the past several years, we are pleased to announce" the agreement, which "marks an important step for housing finance reform and leaves behind a blueprint that we hope will help guide additional reforms amidst the complex legal and capital structure considerations that remain."
Backdrop. In September 2008, shortly after the FHFA placed the GSEs into conservatorship, the Treasury entered into the PSPAs, committing to invest in Fannie Mae and Freddie Mac to the extent necessary to maintain a positive net worth. According to the Treasury, about $254 billion of the funding commitment presently remains available to the GSEs. In return for its commitment, the Treasury receives from each GSE a certain percentage of nonvoting senior preferred shares and a right to a periodic commitment fee—to be determined later. In September 2019, the Treasury Secretary and FHFA Director amended the PSPAs to permit additional capital retention, and have determined that Fannie Mae and Freddie Mac, to protect against unexpected future losses, "should be permitted to continue to accumulate more first-loss capital to stand in front of and protect taxpayers." According to the Treasury, as of Sept. 30, 2020, Fannie Mae and Freddie Mac had retained equity capital of approximately $21 billion and $14 billion respectively.
Along these lines, the respective January 2021 letter agreements concerning Fannie Mae and Freddie Mac will allow the GSEs to "continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the FHFA Enterprise Capital Framework finalized in December 2020."
Agreement highlights. Among other things, the Fannie Mae and Freddie Mac letter agreements announced by the Treasury and FHFA:
- extend the capital retention, replacing the variable dividend ("net worth sweep") with alternative compensation to permit the GSEs to continue their recapitalization efforts;
- provide that there will be no exit until "all material litigation relating to the conservatorship is resolved or settled," and the pertinent GSE "has common equity tier 1 capital of at least 3% of its assets";
- allow each GSE to issue common stock at the appropriate time upon the achievement of certain specified future conditions;
- limit the cap on the GSEs’ retained mortgage portfolios, reducing the current cap of $250 billion to $225 billion by the end of 2022, while providing the GSEs with the flexibility to "manage through the current economic environment";
- provide protections for small lenders and community lenders by, among other things, codifying FHFA conservatorship directives that require the GSEs to "purchase loans for cash consideration, and to operate this cash window with non-discriminatory pricing";
- call for each GSE to cap multifamily acquisitions "at $80 billion over the trailing 52-week period" and require that "50% of these acquisitions are mission driven";
- limit the risk to Fannie Mae and Freddie Mac by keeping certain higher-risk single-family mortgage acquisitions at their current levels;
- provide that the GSEs will comply with FHFA’s recently finalized regulatory capital framework, consistent with the findings of the Financial Stability Oversight Council; and
- outline a plan to develop a proposal for continued GSE reforms.
Next steps. Notably, in a separate Jan. 14, 2021, release, the Treasury Department set forth its "Blueprint on Next Steps for GSE Reform." While the Treasury communicates that it will "continue to evaluate potential administrative actions to end the conservatorships," the agency maintains that "Congress is best positioned to adopt comprehensive housing finance reform." At the same time, the Treasury recommends that: (i) the GSEs continue to build or raise (when appropriate) sufficient equity capital to "facilitate their ability to operate through a severe downturn"; (ii) because pending litigation related to the conservatorships and previous amendments to the PSPAs "complicate the GSEs’ valuations and capital-raising processes," the current capital structures of the GSEs "must be addressed to facilitate the GSEs’ capital restructuring and eventual exit from conservatorship"; (iii) setting a "commitment fee" for ongoing government support by taxpayers; (iv) the FHFA should continue its conservatorship-era practice of "pricing oversight" during any post-conservatorship period; and (v) further study is needed to determine the "optimal number of mortgage guarantors" to achieve the GSEs’ mission.
Reactions in Congress. The Ranking Member of the House Financial Services Committee, Rep. Patrick McHenry (R-NC), and the incoming Ranking Member of the Senate Banking Committee, Sen. Pat Toomey (R-Pa), issued a statement that the announcement by the Treasury and the FHFA "represents a positive step towards the long overdue exit from conservatorships for Fannie Mae and Freddie Mac." Maintaining that the GSEs have been "woefully undercapitalized," McHenry and Toomey said that "[e]nding the profit sweep and raising the cap on retained earnings will allow the GSEs to begin correcting this problem," and the "safeguards against risky lending will make future taxpayer bailouts less likely and protect borrowers from loans they cannot afford."
In contrast, Rep. Maxine Waters (D-Calif), Chairwoman of the House Financial Services Committee, criticized the latest actions of the Treasury and FHFA, asserting, "It is simply unacceptable that Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria are moving in the last days before President-Elect Biden takes the oath of office to make major changes to the housing finance system which will have repercussions across the country, and could lock families out of homeownership." According to Waters, the "deal that Secretary Mnuchin and Director Calabria have struck also directs the GSEs to bail out hedge funds that speculated on Fannie Mae and Freddie Mac shares and line their pockets with taxpayer dollars."
Companies: Fannie Mae; Freddie Mac
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