Fannie, Freddie reform closer, Treasury details plan for profits

The U.S. Treasury Department and the Federal Housing Finance Authority on Monday announced a change to the amount of earnings Fannie Mae and Freddie Mac will be able to retain – the first step toward eventually releasing the firms from government control.

Continue Reading Below

TickerSecurityLastChangeChange %
FNMAFANNIE MAE3.25+0.09+2.85%
FMCCFREDDIE MAC2.98+0.08+2.76%

Fannie and Freddie will be able to maintain capital reserves of $25 billion and $20 billion, respectively, pursuant to an adjustment recommended by a reform plan released earlier this month.

The GSE’s were previously allowed to maintain a $3 billion capital cushion as part of their Preferred Stock Purchase Agreements (PSPAs). The remainder of the profits were ceded to the Treasury in exchange for support.

“These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the Federal Government in the housing finance system and protect taxpayers against future bailouts,” U.S. Treasury Secretary Steven Mnuchin said in a statement.

In order to move forward with recapitalization plans, Treasury and FHFA said further adjustments to the PSPAs may be necessary.

The plan to reform the mortgage giants – which have been under conservatorship for more than a decade – includes eventually removing the government-sponsored entities from conservatorship, which has been a longtime goal of the Trump administration.

The two GSE’s do not originate loans – instead they purchase and guarantee them on the secondary market. They guarantee more than half of the nation’s mortgages.

Mnuchin told FOX Business in November 2016 that the administration had to “get them out of government control.”

Taking Fannie Mae and Freddie Mac out from under the government's thumb could be a boon to shareholders – who have essentially had shares wiped out. As of 2012, profits from Fannie and Freddie have been redirected to the U.S. Treasury. Some hedge funds, however, have been betting on their return to the private sector.