Treasury and FHFA Agree to Extend Capital Retention for Fannie Mae and Freddie Mac

Treasury and the Federal Housing Finance Agency ("FHFA") agreed to amend the terms of the preferred stock purchase agreements of Fannie Mae and Freddie Mac (the government-sponsored enterprises or the "GSEs"). Treasury Secretary Steven Mnuchin and FHFA Director Mark Calabria determined that capital retention for the GSEs should be extended, and that the GSEs should continue to accumulate first-loss capital in order to "stand in front of and protect investors."

In addition to extending capital retention, terms in the Fannie Mae letter and the Freddie Mac letter include:

• that a GSE cannot exit from conservatorship until it has common equity tier 1 capital of at least 3% of its assets;

• that a GSE may issue up to $70 billion in common stock, provided that Treasury has exercised its full warrant to acquire a GSE's common stock and all material litigation relating to conservatorship has been resolved or settled;

• restrictions on the acquisition by the GSEs of single-family mortgage loans that exhibit certain higher-risk characteristics; and

• compliance with the FHFA regulatory capital framework (consistent with the Financial Stability Oversight Council's statement on secondary mortgage market activities, see previous coverage).

In addition, Treasury provided a "blueprint" on future steps for GSE reform, in which it identified key steps for continued cooperation between Treasury and FHFA for the purposes of (i) facilitating the "orderly exit" of the GSEs from conservatorship, (ii) ensuring that Treasury is "appropriately compensated" and (iii) allowing the GSEs to raise third-party capital and make distributions.

Treasury recommended that GSEs should continue to build equity capital and should determine how current capital structures and pending litigation relate to conservatorship complicate capital-raising processes. Further, Treasury recommended that the two agencies (i) establish a periodic commitment fee on the GSEs to compensate taxpayers for their ongoing support through the funding commitments, (ii) continue the conservatorship-era practice of pricing oversight and (iii) assess whether the GSEs' operations should be consolidated into a single entity.

The Structured Finance Association ("SFA") supported Treasury's decision not to restructure taxpayer investments in the GSEs. SFA CEO Michael Bright called on the incoming Biden administration and Congress to undertake the reformation of the housing finance system. As previously covered, in a letter to Mr. Mnuchin, the SFA cautioned against a calendar-driven release from conservatorship for the GSEs.

House Financial Services Committee Chair Maxine Waters (D-CA) said that Mr. Mnuchin and Mr. Calabria's changes to the Treasury's ownership stake in the GSEs was "unacceptable," particularly with regard to the directive that GSEs "bail out" hedge funds that speculated on the GSEs. Ms. Waters asserted that Mr. Mnuchin and Mr. Calabria "clearly ignored" her previous warnings (see here and here) to halt all efforts to raise the capital requirements for the GSEs and to release the GSEs from conservatorship.