Fannie Mae and Freddie Mac will each be allowed to maintain a capital buffer of $3 billion under a new agreement between the Treasury Department and the Federal Housing Finance Agency announced today. The GSEs’ current capital buffer — put in place under the terms of the Senior Preferred Stock Purchase Agreements — had been set to run down to zero on Jan. 1.
The GSEs’ quarterly dividend payments to Treasury will now be calculated using the $3 billion buffer as a baseline, though Treasury noted that the capital buffer may be terminated in the event that Fannie Mae or Freddie Mac fail to declare and pay a full quarterly dividend. In addition, Treasury’s liquidation preference for the preferred stock held in Fannie Mae and Freddie Mac will increase by $3 billion as of Dec. 31 to offset losses to taxpayers on the dividend payments.
FHFA Director Mel Watt called the buffer “sufficient to cover … fluctuations in income in the normal course of each enterprise’s business,” though he noted that Fannie and Freddie may need to draw on Treasury funding to cover changes resulting from the tax reform bill, including write-downs on deferred tax assets held on the GSEs’ balance sheets. The American Bankers Association noted that this step by FHFA and Treasury is a prudent one to help ensure stability at the GSEs until Congress can act on housing finance reform legislation. For more information, contact ABA’s Joe Pigg.