Federal Housing Finance Agency, Treasury reinstate capital reserves for Fannie, Freddie

The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, and the Treasury Department agreed to reinstate a $3 billion capital reserve for the government-sponsored entities under the Senior Preferred Stock Purchase Agreements.

“While it is apparent that a draw will be necessary for each enterprise if tax legislation results in a reduction to the corporate tax rate, FHFA considers the $3 billion capital reserve sufficient to cover other fluctuations in income in the normal course of each enterprise’s business. We, therefore, contemplate that going forward enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances,” FHFA director Melvin Watt said.

House Financial Services Committee Chairman Rep. Jeb Hensarling (R-TX) criticized the move, saying it will increase the cost of Fannie and Freddie and rollback taxpayer protections.

“I’m very disappointed at FHFA and Treasury’s decision to roll back these vital taxpayer protections,” Hensarling said. “There is simply no good reason, policy or otherwise, why we should be putting the GSEs’ balance sheets ahead of the interest of taxpayers. In fact, the Congressional Budget Office evaluated this issue last year and said that such a change not only converts a potential draw on federal funds into an immediate draw but increases ‘the explicit federal backstop for the GSEs—and thus the risk to taxpayers. Taxpayers remain explicitly on the hook for more than $250 billion of future GSE loses, and literally trillions more in implicit GSE backing.”