The Treasury Department’s decision to change the terms of Fannie Mae and Freddie Mac’s bailout agreements will ensure their financial stability — and the stability of the entire mortgage market, according to the Federal Housing Finance Agency (FHFA).
“These changes provide certainty to Fannie Mae, Freddie Mac and market participants as they continue to perform their critical mission of providing liquidity and stability to the country’s housing market,” said FHFA acting director Edward DeMarco in a press statement.
Friday morning, the Treasury announced that it has amended the preferred stock purchase agreements that the federal government has used to prop up the two GSEs. The two were placed into conservatorship in September 2008.
Under the new terms, the GSEs will no longer pay a 10% dividend on the $180 billion in assistance they have received from the U.S. Treasury, but Treasury will be entitled to all of Fannie and Freddie’s profits going forward.
“Replacing the current fixed dividend in the PSPAs with a variable dividend based on net worth will help to ensure stability, fully capture financial benefits for taxpayers, and eliminate the need for Fannie Mae and Freddie Mac to continue to borrow from the Treasury Department to pay dividends,” DeMarco said.
Fannie Mae and Freddie Mac officials declined to comment on the changes made by Treasury.
Meanwhile, DeMarco views Treasury’s action as a green light to implement his strategic plan, which is aimed as reshaping the secondary mortgage market and gradually reducing the GSEs’ market share.
One aspect of the strategic plan — revealed in a letter to Congress in February — calls for raising the guarantee fees charged to seller/servicers.
In April, the GSEs implemented a 10 basis point g-fee increase, as mandated by Congress.
The FHFA recently said it will propose a new set of “gradual adjustments in guarantee fee pricing” by the end of August.
In making these adjustments, the FHFA will likely adhere to congressional directives to reduce cross-subsidization of risky loans and eliminate the differences in fees paid by large and small lenders, according to analysts at Keefe, Bruyette & Woods (KBW). (Based on their loan production, large lenders generally pay lower g-fees than small lenders.)
“We believe that there will be further fee increases for larger originators in order to create g-fee parity between large and small mortgage originators, although there could also be g-fee reductions for small originators,” KBW analysts write in a new report.