The U.S. Treasury Department is altering how Fannie Mae (FNMA:US) and Freddie Mac pay taxpayers for the government’s stake in the firms, ending a system that sometimes required them to spend more on dividends than they earned.
The mortgage companies, which have drawn $190 billion in aid and paid $46 billion in dividends since being taken over by U.S. regulators in 2008, will turn over any quarterly profits to the Treasury, the agency said today. The change replaces a requirement that the companies pay quarterly dividends of 10 percent on the government’s nearly 80 percent stake.
Fannie Mae, based in Washington, and Freddie Mac (FMCC:US) of McLean, Virginia, also will be required to shrink their investments in mortgages and mortgage-backed securities by 15 percent annually, up from 10 percent, the Treasury said.
“We are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” Michael Stegman, counselor to the secretary of the Treasury for housing finance policy, said in the statement.
Both Fannie Mae and Freddie Mac this month reported second- quarter profits even after paying dividends on Treasury’s preferred shares, marking the first time either company had enough revenue to avoid taking a Treasury draw since the first quarter of 2011. In some quarters, the government-sponsored enterprises sought aid because operating profits were exceeded by their dividend obligations.
Fannie Mae’s 8.25 percent preferred perpetual shares slumped 55 percent to $1.05 as of 4 p.m. after the Treasury Department announcement.
One motivation for the change was Treasury’s concern that investors would be skittish about buying GSE bonds after Jan. 1, when a ceiling on government support for the companies kicks in, according to a banker who discussed the policy with Treasury officials. Each company will be limited after that to no more than $200 billion in taxpayer support.
Treasury spokesman Matt Anderson declined to comment on the agency’s motivation beyond the contents of the statement.
The new system means that the companies will be unlikely to reach the aid ceiling, analysts for Barclays Research said in an e-mailed report.
“This puts to rest any worries about GSE credit risk even in intermediate maturities,” the Barclays analysts said.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value fell about 1 basis point to 129 basis points, or 1.29 percentage points, higher than an average of five- and 10-year Treasury rates as of 3 p.m. in New York. The spread yesterday reached the widest in a month. The yield relative to U.S. government debt on its unsecured notes due August 2017 fell 4 basis points to 14 basis points, the lowest since the debt’s July 18 issuance.
The new payment structure accelerates the rate at which the risk in the companies’ portfolios is transferred to private investors and makes it impossible for Fannie Mae and Freddie Mac to rebuild capital. At the same time, it doesn’t address the broader question of the future of the two companies, which own or guarantee about 60 percent of U.S. home loans.
Republicans in Congress have called for an end to Fannie Mae and Freddie Mac. Treasury Secretary Timothy F. Geithner has said he will propose a housing finance overhaul that may include dismantling the firms. Geithner said at the beginning of this year that the administration would release a wind-down plan by the spring. No plan has been released.
Representative Spencer Bachus, the Alabama Republican who leads the House Financial Services Committee, said Treasury’s move “blunts efforts to reform Fannie and Freddie.”
“The administration took its first step toward GSE reform in nearly four years today,” Bachus said in a statement. “Unfortunately, rather than announcing steps to wind down Fannie Mae and Freddie Mac, the administration opted to create a permanent, off-budget source of funding for housing that it will control.”
Representative Scott Garrett, a New Jersey Republican, said the new policy amounted to “continuing to kick the can.”
“Instead of devoting time and energy towards prolonging bailouts, the Obama Administration should work with Congress to wind these companies down and create a new and sustainable housing finance system where taxpayers are not at risk,” Garrett said in an e-mailed statement.
Peter Wallison, co-director of the American Enterprise Institute’s program on financial policy and a frequent critic of the GSEs, said the new arrangement will help ensure the companies eventually are wound down.
“The most significant issue here is whether Fannie and Freddie will come back to life because their profits will enable them to re-capitalize themselves and then it will look as though it is feasible for them to return as private companies backed by the government,” Wallison said in a telephone interview. “What the Treasury Department seems to be doing here, and I think it’s a really good idea, is to deprive them of all their capital so that doesn’t happen.”
Karen Shaw Petrou, founder and managing partner of Federal Financial Analytics in Washington, said winding down the GSEs isn’t “a realistic prospect any time soon.”
“Regardless of this agreement, the GSEs will still be the bulwark of U.S. mortgage finance -- not exactly a wind-down,” she said in a statement. “Treasury could have changed the agreement any time over the past four years and, had it done so, the GSEs now would be a lot more stable and a real wind-down a lot more likely.”
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