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Fannie and Freddie regain capital reserves; withhold billions from Treasury

GSEs make scheduled dividend payments minus newly allowed reserves

It’s official.

Fannie Mae and Freddie Mac have capital reserves again.

As expected, the government-sponsored enterprises on Friday made their quarterly dividend payments to the Department of the Treasury.

But, thanks to the new agreement between the Federal Housing Finance Agency and the Treasury, each of the GSEs withheld billions from the Treasury to ensure that each has enough capital on hand to “cover other fluctuations in income in the normal course of each Enterprise’s business.”

Under the previous version of the Preferred Stock Purchase Agreements that went into effect when the government took the GSEs into conservatorship, Fannie and Freddie send dividends to the Treasury each quarter that they are profitable.

The PSPAs also stipulated that the GSEs were prohibited from rebuilding capital and each of the GSEs’ capital base was required to be reduced, with their capital reserves scheduled to be drawn down to $0 in 2018.

But that all changed earlier this month when the FHFA announced a new agreement with the Treasury that allows the GSEs to hold a $3 billion capital reserve.

Collectively, the GSEs made dividend payments this week to the Treasury of $2.897 billion. Of that, $2.249 billion came from Freddie Mac and $648 million came from Fannie Mae.

But those amounts are far less than the amount of profit that each GSE made in the third quarter.

Freddie Mac’s profit was $4.7 billion, while Fannie Mae’s checked in at $3 billion, but unlike previous quarters, the GSEs did not send all of their profits to the Treasury.

Based on some rough calculations, Freddie withheld $2.451 billion from the Treasury, while Fannie withheld $2.352 billion.

As the chart from the FHFA states:

As set forth in the Letter Agreement dated December 21, 2017, amending the Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, the dividend amount is the Net Worth Amount for the dividend period minus the Applicable Capital Reserve Amount. Beginning in 2018, the Capital Reserve Amount is set at $3 billion under most circumstances.

With the $2.897 billion sent to the Treasury for the third quarter, Fannie and Freddie have now paid approximately $278.783 billion to the Treasury in dividend payments since the fourth quarter of 2008.

(h/t Bloomberg’s Joe Light)

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