Treasury Announces Plan to Hasten Elimination of GSEs
The U.S. Department of the Treasury has announced additional steps to wind down government-sponsored enterprises Fannie Mae and Freddie Mac at an accelerated rate.
The government will modify the mortgage giants' preferred stock purchase agreements in order to maximize the benefit for taxpayers as the entities are slowly phased out of the market.
"With today’s announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market," said Michael Stegman, Counselor to the Secretary of the Treasury for Housing Finance Policy.
There are three main components of the changes.
Portfolio Reductions Accelerate
The new modifications require that the agencies reduce the size of their investment portfolios by 15 percent per year instead of the previous 10 percent mandate.
The net effect of that change is that the overall goal of reducing their investment portfolios to a total of $250 billion is now 2018, four years earlier than previously required.
Stock Dividends Replaced by Income Sweep
The GSEs' required stock dividend payments will be eliminated and replaced with a quarterly income sweep.
All profits made by the firms will be taken by the Treasury, reinforcing the stance that the firms would not be allowed to make a profit and eventually return to their previous forms. The profit sweeps will also eliminate the somewhat cyclical pattern of the GSEs taking additional draws from the Treasury to meet dividend payments.
Requirement of Annual Taxpayer Protection Plan
Each firm will also be required to create an annual plan to the Treasury showing how it can reduce taxpayer risk from mortgage credit, regarding both investments and loan guarantees.
Both Firms Appear To Be Stabilizing
The financial situations of both GSEs appear to be improving in recent months. Fannie Mae has reported profits totaling $7.8 billion for the first two quarters of 2012, while Freddie Mac also required no Treasury draw during the second quarter.