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GSEs' latest payout to taxpayers could be the last

Fannie Mae and Freddie Mac paid billions to the U.S. Treasury last week as scheduled, but their conservator hinted on Tuesday that the most recent payout could be the last one.

In testimony before the House Financial Services Committee, Federal Housing Finance Agency (FHFA) Director Mel Watt indicated he would not allow the capital reserves of the government-sponsored enterprises (GSEs) to fall to zero as scheduled next year.

freddiedividendOne of the side issues in the debate about the future of Fannie and Freddie involves their declining capital cushions. The GSEs’ direct capital reserves — what each enterprise holds as a buffer against quarterly losses — is on track to be wound down to zero to begin 2018. In place of direct reserves, however, the GSEs are able to draw on a massive federal line of credit to cover any losses.

Fannie and Freddie, which were bailed out and placed into government conservatorship in 2008, pay out almost all their profits to the Treasury. The mortgage lobby is divided over whether the profit sweeps should end now to build reserves, and whether the GSEs even need buffers. The large organizations, such as the Mortgage Bankers Association, say reserves are unnecessary because the enterprises are able to draw on a combined $258 billion line of credit, and they have generally been profitable.

Watt has indicated in past speeches and testimony that he wants the GSEs to maintain a small capital buffer, so they can avoid taking draws. The draws, he says, would reduce the size of the government’s line. The limits go down once drawn upon, and are never replenished. If the lines are allowed to diminish, the government’s direct backing could be perceived to decline. That could erode the market’s confidence in the GSEs’ securities, and drive up the cost of home mortgages.

He noted that the GSEs’ earnings can be volatile. Fannie and Freddie also could be forced to take significant one-time draws if corporate taxes are reduced as proposed by the Trump administration.

“Like any business, the enterprises need some kind of buffer to shield against short-term operating losses,” Watt said in his prepared remarks to the committee.

On Sept. 29, Fannie and Freddie paid out a combined $5.1 billion in dividend payments to the Treasury.

There was speculation that Watt would order the GSEs to withhold the second-quarter dividend. The GSEs could make two more dividend payments for the 2017 calendar year, assuming they turn a profit. According to media reports, however, Watt recently sent a letter to six U.S. Senators indicating he is working with Treasury Secretary Steve Mnuchin on a solution.

Watt is advocating for a small capital buffer, and not full recapitalization and release of the GSEs, until Congress reforms the system.

In his testimony Tuesday, Watt said it would be “a serious misconception”  to characterize the FHFA’s moves to avoid draws “as interference with the prerogatives of Congress, as an effort to influence the outcome of housing-finance reform, or as a step toward recap and release.”

“FHFA’s actions would be taken solely to avoid a draw during conservatorship,” Watt said. 


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