WASHINGTON, DC—As they have every three months of profitability since the fourth quarter of 2008, Fannie Mae and Freddie Mac sent dividend payments to the US Treasury Department this past Friday, with the cumulative total now at slightly less than $279 billion. This quarterly payment was different, though, in that the GSEs didn't pass all their Q3 profits—totaling $7.7 billion—along to Treasury.
That's because of a new agreement between the Federal Housing Finance Agency and the GSEs, announced this past Dec. 21. It grants Fannie and Freddie each a capital reserve of $3 billion under the senior Preferred Stock Purchase Agreements that have been in place since the two lenders entered conservatorship following the global financial crisis.
Prior to the amended agreement reinstating these reserves, the PSPAs barred Fannie and Freddie from rebuilding their capital buffers, which were expected to be drawn down to zero at the start of this year. Treasury Secretary Steven Mnuchin said this past September that his department “expect[s] our dividends to be paid” until any future reforms of the housing finance system went into effect.
FHFA Director Mel Watt testified before the House Financial Services Committee this past October that the GSEs needed some form of capital buffer to protect against short-term operating losses. “GAAP accounting regularly results in large fluctuations in [GSE] gains or losses in the ordinary course of business,” Watt testified. These fluctuations don't stem from the quality of the GSEs' portfolios, he said.
“Some of these non-credit related factors include interest rate volatility and the accounting treatment of derivatives used to hedge risks,” Watt told committee members. Further, the GSEs continue to report reduced income from declining retained portfolios and reduced revenue from the increasing volume of credit risk transfers “which, while supporting our objective of transferring risk and opportunity to the private sector, also transfer current revenues away” from the GSEs.
“We also know that a short-term consequence of corporate tax reform would be a reduction in the value of the [GSEs] deferred tax assets, which would result in short-term, non-credit related losses” to Fannie and Freddie, Watt said in October. “The greater the reduction in the corporate tax rate, the greater the short-term losses to the [GSEs] would be.”
These losses would ripple beyond the GSEs themselves, argued the National Association of Federally-Insured Credit Unions and the Independent Community Bankers of America in a letter to Watt. “It is essential that the GSEs maintain a modest capital buffer—perhaps only enough to cover losses in a single quarter—so that they are not forced to draw on the PSPA commitments at the expense of taxpayers,” NAFCU and ICBA wrote. “Such an occurrence would not only erode investor confidence but would also taint the public's perception of the housing finance system and the secondary market, putting the future of the housing finance system at risk.”
In announcing the amended agreement with the GSEs late last month, Watt said that while it's apparent that a draw on the capital reserve would be necessary if tax legislation resulted in a reduction to the corporate tax rate, “FHFA considers the $3-billion capital reserve sufficient to cover other fluctuations in income in the normal course of each [GSE's] business. We, therefore, contemplate that going forward [GSE] dividends will be declared and paid beyond the $3-billion capital reserve in the absence of exigent circumstances.”
Along with reinstating the GSEs' capital reserves, FHFA also reduced their 2018 multifamily lending cap slightly, from $36.5 billion this past year to $35 billion. The agency expects this year's multifamily market to be “slightly smaller” than in '17, but will conduct its customary quarterly review of market conditions and make adjustments if necessary.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
