Federal authorities are making modifications to the preferred stock purchase agreements (PSPAs) with Fannie Mae and Freddie Mac.
Under the modifications made by the U.S. Treasury Department and the Federal Housing Finance Agency (FHFA) Fannie Mae and Freddie Mac will be allowed to maintain capital reserves of $25 billion and $20 billion, respectively. These changes will allow the government-sponsored entities to retain earnings over the $3 billion capital reserves currently permitted by their PSPAs.
“These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the Federal Government in the housing finance system and protect taxpayers against future bailouts,” U.S. Treasury Secretary Steven Mnuchin said.
To compensate Treasury for the dividends that it would have received without these modifications, the Treasury’s liquidation preferences for its Fannie Mae and Freddie Mac preferred stock will gradually increase. Specifically, it will increase by the amount of the additional capital reserves until the liquidation preferences increase by $22 billion for Fannie Mae and $17 billion for Freddie Mac.
These changes were recommended in the Treasury Housing Reform Plan, which was released in September. That plan also recommended that Treasury and FHFA develop recapitalization plans for Fannie Mae and Freddie Mac after identifying and assessing the options. Further amendments to the PSPAs may result following the implementation of any recapitalization plans.