The Federal Housing Finance Agency (FHFA) and the U.S. Department of the Treasury announced amendments to the preferred stock purchase agreements that will allow Fannie Mae and Freddie Mac (the Enterprises) to continue to retain earnings until they satisfy the 2020 capital rule requirements.
“In the agreement, [the] Treasury committed itself to provide to the Enterprise, on the terms and conditions provided in the agreement, immediately available funds in an amount determined from time to time as provided in the agreement, but in no event in an aggregate amount exceeding [$100 billion],” letters to the Enterprises stated.
“In consideration for Treasury’s commitment, the Enterprise agreed to sell, and did sell, to Treasury 1,000,000 shares of senior preferred stock, in the form of variable liquidation preference senior preferred stock of the Enterprise with terms set forth in the certificate, and an initial liquidation preference equal to $1,000 per share.”
After entering the purchase agreements in 2008, the Enterprises and Treasury entered several amendments over the last 12 years. The most recent amendments address definitions for certain defined terms, the applicable capital reserve amount, an increase in liquidation preference, the issuance of capital stock, the periodic commitment fee, the conservatorship, and mortgage assets.
The Treasury also said the Enterprises are allowed to raise private capital and, once certain conditions are met, exit conservatorship. In its conclusion, the letter stated that the treasury would endeavor to have a proposed timeline and process for the Enterprises to exit conservatorship to Congress by Sept. 30, 2021.
“Today’s agreement that allows Fannie Mae and Freddie Mac to continue retaining earnings is a step in the right direction, but more hard work remains,” FHFA Director Mark Calabria said in a release. “Capital at Fannie Mae and Freddie Mac protects the housing finance system and taxpayers. Retained earnings alone are insufficient to adequately capitalize the Enterprises. Until the Enterprises can raise private capital, they are at risk of failing in the next housing crisis.”