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Blog: Doubts raised over GSE dividend payments

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac last week reported solid earnings for the second quarter.

This usually would mean that the GSEs would cut a big check to American taxpayers by Sept. 30. There is some question as to whether that will happen this time, however.

dividendsThrough its present agreement with the government and based on their second-quarter financial performance, Fannie and Freddie would normally be obligated to pay separate dividends to the U.S. Treasury of $3.1 billion and $2 billion, respectively. This is the same amount of their reported comprehensive incomes for the second quarter.

Each quarter, Fannie and Freddie pay out most of their profits to Treasury and their capital buffers have been reduced to the current level of $600 million each. At the start of 2018, their capital levels will go to zero. In place of this, the government has extended a massive line of credit in the event of future quarterly losses.

There has been much speculation about the dividend payments this year because Federal Housing Finance Agency (FHFA) Director Mel Watt expressed concerns about the GSE’s diminishing capital levels in May when he testified before Congress. He hinted that he could take steps to lessen the risk of the GSEs’ needing to take a draw on the government's line of credit, an act that he believes could erode the market’s confidence in the GSEs' securities.

The GSEs’ second quarter-earnings press releases added to this speculation.  

In past quarters, when the profits were strong, the GSEs would state their intention to make the obligatory dividend payment near the top line of the press release. This time around, however, both GSEs tweaked their press releases to qualify that statement.  

Freddie, for example, indicated much farther down in the release that it could be obligated to pay out $2 billion “if the conservator declares a senior preferred stock dividend equal to our dividend requirement and directs us to pay it before Sept. 30, 2017.”

Fannie also said the dividend would be conditional on the FHFA calling for the payment.

In a call with reporters, Freddie Mac Chief Executive Officer Donald Layton denied that Watt’s testimony in May influenced Freddie’s new wording, but that the change was made to be more technically accurate.

In his call with the media, Fannie Mae CEO Tim Mayopoulos also said that he was unaware of any policy change at the FHFA. Notably, Mayopoulos drew attention to the quarterly volatility of its earnings, saying that certain factors out of the GSE's control affect the bottom line. He said that while he expected the GSE to remain profitable in the near future, Fannie would likely have to make Treasury draws down the road.

“Director Watt will make his decision this quarter as he does in every quarter as to whether to direct us to make that payment or not,” Mayopoulos said. “Obviously, if he directs us, we’ll make the payment. But that’s FHFA’s decision to make.”


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