GSE's Allowed to Keep Their Earnings

The latest on Fannie Mae & Freddie Mac Conservatorship

The latest on the fates of Fannie Mae and Freddie Mac has finally come rolling in. On January 14th, 2021, The Federal Housing Finance Agency (FHFA) and the United States Department of the Treasury came to an agreement regarding the GSE’s, though it wasn’t about conservatorship release -- directly, in any case. Instead, the agreement signaled amendments to the Preferred Stock Purchase Agreements (PSPAs). 

In a nutshell, these amendments pave the way for Fannie Mae and Freddie Mac to continue retaining earnings until the previously announced capital requirements outlined in the 2020 Enterprise capital rule are reached. The capital requirements, as we have discussed before, represent the minimum capital that each enterprise must have reserved at all times as a sort of safety net in the event of another economic meltdown. Fannie and Freddie, at the time of this writing, are hilariously below their capital requirements, a solid reason as to why FHFA Director Mark Calabria was unable to vanquish the government conservatorship agreement for the two mortgage giants on his original timeline. 

Still, last week’s agreement is a huge step forward, since the GSEs can continue to retain all earnings in the service of meeting their $283 billion capital goal. Additionally, the Treasury has agreed that the two GSEs are allowed to raise private capital as well as exit conservatorship once certain conditions are met. This officially puts an end to the dividend payments that were being funneled into the Treasury as repayment for the bailout back when the housing crisis of 2008 hit and puts the enterprises on track to finally ditch their government babysitter once the required conditions are met.

Even so, $283 billion is a far cry from the $45 billion combined total earnings Fannie and Freddie were allowed to keep after a similar agreement was reached back in 2019. There is a long road ahead before the capital requirement is met, but at least the conservatorship has finally reached its final lap. Even more pertinent, FHFA Director Calabria used the announcement to voice his sentiment on what needs to happen to put an end to the conservatorship once and for all. 

According to the FHFA Director, “Until the Enterprises can raise private capital, they are at risk of failing in the next housing crisis.” His concern is that the retained earnings alone would still largely fall short of the immense capital requirement set by the agency, at least for quite some time. This of course only leaves in question how the Treasury’s preferred shares will be addressed, a significant roadblock in the way of the GSEs raising private capital. Currently, Fannie and Freddie’s shares hold little to no value for investors, since the standing conservatorship conditions dictate no dividend payouts on them. To this end, the Treasury has vowed to “restructure” its investment in each enterprise.

So here we are, one step closer, yet still miles away from true Fannie Mae and Freddie Mac freedom. We would love to hear some of our readers’ thoughts on the current state of Fannie and Freddie, as well as some suggestions and theories on the best possible scenario (for our industry) for transitioning away from conservatorship!