Plans to wind down the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. are being expedited. In addition, changes to preferred dividend payments to the government are expected to bolster market confidence. Mortgage bankers expressed cautious support for the plan.
Fannie Mae and Freddie Mac were seized by the Federal Housing Finance Agency on Sept. 7, 2008, and placed into conservatorship. As of the second quarter, government support for the two secondary lenders totaled $188.4 billion, while cumulative dividend payments back to the government amounted to $45.7 billion.
In February 2011, the Obama administration disclosed plans to wind down Fannie and Freddie.
The Department of Treasury, which is the government branch that provides government support through draws and collects the dividend payments, said Friday that it is taking further steps to expedite the wind down of the pair of government-controlled enterprises.
In addition to the expedited wind down, modifications to preferred stock purchase agreements with the FHFA are intended to “make sure that every dollar of earnings each firm generates is used to benefit taxpayers, and support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market.”
Modifications to the agreements accelerate the reduction of the two companies’ investment portfolios to a 15 percent annual rate from a 10 percent annual rate.
As of June 30, Washington, D.C.-based Fannie’s gross mortgage portfolio stood at $673 billion. At McLean, Va.-based Freddie, the June 30 investment portfolio was $581 billion.
A $250 billion target for the investment portfolios will be moved up four years as a result of the accelerated reduction.
FHFA Acting Director Edward J. DeMarco issued a statement indicating that the faster reduction in the retained portfolios will further reduce risk exposure and simplify their operations.
The agreements require annual plans from each entity to the Treasury that detail actions to reduce taxpayer exposure to mortgage credit risk for both of their guarantee books of business and retained investment portfolios.
The modifications replace 10 percent quarterly dividend payments to the Treasury “with a quarterly sweep of every dollar of profit that each firm earns going forward.”
While both Fannie and Freddie were profitable enough in the second quarter to avoid additional requests for Treasury draws, the Treasury still intends to use the modifications to permanently end the “circular practice” of advancing funds to the companies just so they can afford to make the dividend payments. The move is expected to provide greater market certainty about the financial strength of the pair of enterprises.
DeMarco said the agreement modifications will ensure stability in the housing finance market.
He noted that replacing the fixed dividend with variable dividends based on net worth will ensure stability. Had the fixed dividends remained in placed, the government’s financial commitment would have been called into question as the two firms shrink.
“These steps reaffirm our commitment to move forward with the components of the strategic plan for the conservatorships of Fannie Mae and Freddie Mac, which includes building for the future, gradually contracting their operations, and maintaining foreclosure prevention activities and credit availability,” DeMarco stated.
A statement in support of the agreement modifications was issued by Mortgage Bankers Association President and Chief Executive Officer David H. Stevens.
But Stevens cautioned that it is important to ensure continued liquidity for affordable home financing.
“It is critical that the transition of Fannie Mae and Freddie Mac’s role in financing real estate does not limit the availability, or increase the cost, of financing,” Stevens said. “The announcement also re-emphasizes the importance of policymakers and all stakeholders in the mortgage finance system working together to find a bipartisan, long-term solution for the future of the secondary mortgage market.”
