Senior officials at the Federal Housing Finance Agency recently expressed a growing concern at the 0% capital buffer requirements Fannie Mae and Freddie Mac will reach in 2018.
Under 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.
Also under the terms of the PSPAs, the capital reserve of both Fannie and Freddie is set to be drawn down to $0 in 2018, but to say the government-sponsored enterprises face a resulting level of danger is disputable.
“Capital is a measurement of risk,” Freddie Mac CEO Donald Layton told HousingWire after reporting earnings this morning. “It does not factor into our day-to-day operations.”
His comment indicates that Freddie Mac is not facing elevated levels of risk to the guarantee business model, save for a larger economic downturn in the U.S. economy.
That's why Layton is perfectly comfortable with allowing the FHFA execs to express concerns at the 0% capital buffer requirements; but it is an emotional response he does not share.
“It is not at the top of issues we have to deal with,” he said. “To the vast majority of the people here, we are just a regular business.”
So how do they manage the risk? Layton said his staffers behave as if the capital is there and continue to manage risk appropriately. Instead, Layton is more concerned with maintain healthy levels of competition between teams and keeping an emphasis on excellent customer service.
Besides, he adds, “extremely large levels of capital reside on the books at the Treasury.”
He should know, Freddie put a lot of that capital there, to be sure.