FHFA dividend fix may provide GSE payback solution
The Office of the Inspector General for the Federal Housing Finance Agency may have found the solution for Fannie Mae and Freddie Mac to payback taxpayers while preserving the marketplace.
According to a recent OIG white paper, the Treasury and the FHFA amended the 2012 Senior Preferred Stock Purchase Agreements Amendments, modifying the structure of the dividend payments owed, "ending the circular practice of having Treasury provide money to the Enterprises to enable them to pay the dividends."
Thus, the 2013 amendment means the government-sponsored enterprises may pay more to the Treasury than under the previous 10% dividend as long as they have positive net worth.
"The replacement of the 10% dividend with the sweep of quarterly net worth may result in more money being returned to Treasury and hence to taxpayers," the white paper reported.
The hike in dividends emphases the overarching theme of winding down the GSEs, something Ed DeMarco, acting director of the FHFA, wants to happen within the next five years.
Whether the new dividend structure results in larger or smaller payments to Treasury than the previous 10% dividend will depend on the level of Fannie Mae and Freddie Mac’s net worth and as well as the size of the remaining buffer – the amount of positive net worth the GSEs keep under the 2012 Amendments.
For instance, Freddie Mac’s dividend obligation to the Treasury in March will be $5.8 billion – based on its 2012 net worth of $8.8 billion. This is the first dividend under the sweep, reflecting the accumulation of positive net worth from prior quarters and the full impact of the $3 billion buffer.
As a result, under the 10% dividend, the dividend would be $1.8 billion for the quarter.
Furthermore, if the buffer was absent, the net payment to the Treasury would be greater if positive net worth is above what the 10% dividend would have been; otherwise the net payment would be the same.
"Recent experience indicates that quarterly positive net worth greater than the dividend under the old system is possible. As a result, over the long run, the new system could result in larger net payments to the Treasury," the OIG said.
While the 2012 Amendments, including the dividend hike, will wind down the Enterprises’ retained mortgage investment portfolio, they may not wind down the GSEs’ securitization business.
In fact, that side of their businesses may continue to prosper as a result of improvements in the mortgage markets and recent guarantee fee hikes, the white paper explained. So instead of contracting, the GSEs could continue to expand.
"Fundamentally, the 2012 Amendments position the Enterprises to function in a holding pattern, awaiting major policy decisions in the future," the OIG said.