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Fitch: GSEs will need large Treasury draw next year

The government-sponsored enterprises will likely need to write down billions of dollars and take draws on the U.S. Treasury early next year in anticipation of a lower corporate tax rate, even though the government announced changes Thursday that will soften the blow.

Fitch Ratings estimated that Fannie and Freddie will need to write down deferred tax assets by $12.2 billion and $5.8 billion, respectively. As of  the end of the third quarter, Fannie and Freddie had equity of $3.65 billion and $5.25 billion, respectively, leaving a shortfall that would likely require one-time Treasury draws, Fitch said.

These assets will be worth less once the corporate tax rate falls to 21 percent, down from 35 percent. Republicans in Congress passed the tax bill on Wednesday, and it only awaits the signature of President Donald Trump.  

Fitch said a lower corporate tax rate should increase profits for the enterprises’ long-term, but would result in a one-time hit to their fourth-quarter bottom line.  

On Thursday, the U.S. Treasury Department announced it would allow each enterprise to retain a capital buffer of $3 billion, modifying the plan to wind down their reserves to zero to begin 2018. 

Fitch indicated that Treasury’s move to allow for capital buffers would likely prevent the GSEs from needing future draws on the $258.1 billion line of credit that is currently available to the enterprises, but also would prolong the status quo and limit the likelihood of significant housing finance reform in the near future.

The value of Freddie’s deferred tax assets totaled $14.6 billion at the end of the third quarter, Freddie spokesman Chad Wadler said. He referred questions about the anticipated write down to the Treasury and Federal Housing Finance Agency.

Fannie didn’t immediately respond. 


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