WASHINGTON – The U.S. Department of the Treasury (Treasury) and the Federal Housing Finance Agency (FHFA) today announced an agreement to amend the Preferred Stock Purchase Agreements (PSPAs) between Treasury and each of Fannie Mae and Freddie Mac (the GSEs) 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. The agreement also outlines a plan for Treasury, in consultation with FHFA, to develop a proposal for continued GSE reform.
“Today’s agreement to extend capital retention 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. 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 today’s agreement and are thankful for all of the various stakeholders who have helped inform our work.” said Secretary Steven T. Mnuchin.
Treasury entered into the PSPAs on September 7, 2008, the day after FHFA placed the GSEs into conservatorship. Under the PSPAs, Treasury committed to invest in each GSE to the extent necessary to maintain a positive net worth. Treasury’s funding commitment was initially $100 billion for each GSE, but was subsequently increased in order to ensure a level of capital support that would provide confidence to financial markets and ensure the continued flow of mortgage credit. Today, $254 billion of the funding commitment remains available to the GSEs.
In return for its commitment, Treasury received from each GSE nonvoting senior preferred shares, warrants to purchase 79.9% of the GSEs’ common stock, and a right to a periodic commitment fee to be determined at a later date. The liquidation preference of the senior preferred shares increases by the amount of each draw on the PSPA funding commitment and, after $191.5 billion in combined draws and $37.2 billion in non-cash increases, the GSEs’ combined senior preferred liquidation preference now stands at $228.7 billion.
Treasury’s senior preferred shares were entitled to receive quarterly dividends at an annual rate of 10% of the liquidation preference. As neither GSE was able to consistently generate earnings sufficient to cover the required dividend, in August 2012, Treasury and FHFA amended the senior preferred shares to replace the fixed 10% dividend with a variable dividend equal to each GSE’s positive net worth above a specified capital reserve. The August 2012 amendments also suspended the periodic commitment fee while the variable dividend is in place.
The capital reserve was initially set at $3 billion for each GSE, with the amount declining by $600 million each year until it was scheduled to decline to zero on January 1, 2018. In December 2017, Secretary Mnuchin and FHFA Director Mel Watt executed letter agreements allowing each GSE to retain additional capital by restoring the capital reserve to $3 billion.
In September 2019, Secretary Mnuchin and FHFA Director Calabria again amended the PSPAs to permit additional capital retention — up to $25 billion for Fannie Mae and up to $20 billion for Freddie Mac. As compensation for taxpayers forgoing cash dividends, the December 2017 and September 2019 changes provided that the liquidation preferences for Treasury’s senior preferred stock would increase by the amount of capital the GSEs were permitted to retain. As of September 30, 2020, Fannie Mae and Freddie Mac had retained equity capital of approximately $21 billion and $14 billion, respectively.
In order to better protect against unexpected future losses, Secretary Mnuchin and Director Calabria determined that the GSEs should be permitted to continue to accumulate more first-loss capital to stand in front of and protect taxpayers. To this end, Treasury and FHFA have today executed letter agreements that 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.
Key terms of the agreements are:
Executed Letter Agreement for Fannie Mae
Executed Letter Agreement for Freddie Mac
Treasury Department Blueprint on Next Steps for GSE Reform
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