US Treasury Hastens Demise of GSEs

WASHINGTON, DC-The US Treasury Department appears to be speeding up the day of reckoning for Fannie Mae and Freddie Mac by revamping its bailout terms of the GSEs. The bottom line is that the government has stepped up the pace at which taxpayers will see their money returned. When that day arrives the GSEs will be easy, in theory, to shut down or privatize--or whatever path official Washington decides to take with the two mortgage finance giants.

Under the new terms, the GSEs will have to reduce their investment portfolios more quickly, by 15% a year from 10% under the original terms. Put another way, the GSEs' investment portfolios must be reduced to the $250 billion target set in the previous agreements four years earlier than previously scheduled. Treasury has also replaced the 10% dividend payments the GSEs make to it on their preferred stock investments. Now, every quarter Treasury will sweep all profits that the firms earn.

Of course, in recent years there were quarters when the GSEs were unable to make any payments but instead came to Treasury, hat in hand, for funding. Recent quarters, however, the GSEs have been posting profits. These new measures harken back to an Obama Administration White Paper released last year stating that the GSEs will be wound down and not be allowed to retain profits, rebuild capital, and return to the market in their prior form.

So far the reaction from the industry has been mixed, with support for the return of taxpayers’ funds being voiced—along with concerns about liquidity. Calling the new agreement a “clear and appropriate effort to limit taxpayer exposure resulting from the federal government’s investment in Fannie Mae and Freddie Mac,” David H. Stevens, president and CEO of the Mortgage Bankers Association, gave the agreement his support but added that MBA wants “to emphasize the importance of ensuring continued liquidity that will provide the affordable mortgage financing necessary to support the housing market. It is critical that the transition of Fannie Mae and Freddie Mac’s role in financing real estate does not limit the availability, or increase the cost, of financing.”