Fannie Mae and Freddie Mac May Keep Retained Earnings

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) which securitize mortgages related to residential housing. Their federally legislated charters grant them benefits (such as special lines of credit) and costs (such as unique regulatory requirements) which other financial firms do not have, and which limit the lines of business they may engage in. Prior to 2008, the firm’s charters specified that they were for-profit, stockholder-owned enterprises. The United States Treasury took over the firms and placed them in conservatorship during the residential housing and mortgage collapse of 2008. The terms of the conservatorship were later amended so that Treasury sweeped any earnings from the enterprises, effectively making it impossible for the firms to exit conservatorship on their own. Twelve years later, the final fate of the GSEs remains uncertain.

On January 14, 2021, the federal regulator for the GSEs announced that the enterprises may begin keeping retained earnings. Retained earnings is one way for the enterprises to begin to rebuild a capital buffer. The announcement also included a statement that the enterprises would be able to seek some private capital and that Treasury agreed to make further adjustments to its interests.

The Federal Housing Finance Agency (FHFA) is the day-to-day regulator of the GSE’s financial condition and housing mission. However, important conservatorship financial agreements are with the United States Treasury. Therefore, the ultimate fate of the GSEs is unlikely to be decided by FHFA alone. Janet Yellen, former Federal Reserve chair, will reportedly be nominated to be the new Secretary of Treasury. Her views on the role of the GSEs in providing liquidity to mortgage markets, but also as a potential source of systemic risk, will influence the ultimate fate of the GSEs.

I will be sharing my thoughts on the charters of the GSEs and related public policies in upcoming blog posts. I will even weave several issues together with my thoughts on Modern Monetary Theory. The important thing today is that after nearly 12 years of limbo, the fate of over $5 trillion in mortgage-related assets is likely to be under discussion again.

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