Mortgage Giants Cut Deal With Treasury to Cover Expected Losses

Posted December 21, 2017 7:55 p.m. EST
Updated December 21, 2017 8:00 p.m. EST

WASHINGTON — Fannie Mae and Freddie Mac, the government-controlled mortgage finance giants rescued during the financial crisis, reached a deal with the U.S. Department of the Treasury on Thursday allowing them to keep some of their profits as they brace for losses that will be activated by the tax bill soon to be signed by President Donald Trump.

Under the terms of the agreement, each company will be allowed to retain $3 billion from their earnings to serve as a capital cushion against future losses, including a decline in the value of their tax-deferred assets.

The arrangement is a change from the 2012 agreement that they reached with the Obama administration requiring that they send most of their profits to the Treasury as a condition for having been rescued by the Bush administration during the financial crisis. Fannie and Freddie required $187 billion of taxpayer aid in the 2008 financial crisis and were placed under government conservatorship as a result.

The firms, which buy or guarantee home loans, have been profitable for the past several years but are required to send almost all those profits to the Treasury, leaving the firms with little capital to protect against future losses. The $3 billion capital cushion is intended to help Fannie and Freddie deal with “ordinary income fluctuations” that could be exacerbated by the coming corporate tax cut. The drop in the corporate rate to 21 percent from 35 percent is expected to bring steep losses to Fannie and Freddie as they write down the value of their tax-deferred assets.

“Treasury’s first duty is to ensure that taxpayers are being protected,” said Steven Mnuchin, the Treasury secretary.

Analysts have projected that Fannie and Freddie could stand to lose $10 billion to $20 billion combined as a result of the corporate tax cut. But Melvin L. Watt, the director of the Federal Housing Finance Agency, which is the conservator of Fannie and Freddie, said in a statement on Thursday that he expected the additional cushion to be sufficient to cover the normal course of business; however, additional funds could be necessary to address the impact of the tax cuts

Fannie and Freddie borrowed about $187 billion from the federal government after the housing market crashed nearly a decade ago. Since then, they have more than repaid that amount and the Trump administration has been considering what to do with the firms going forward.

Jim Parrott, a housing finance expert at the Urban Institute, said that the deal that was announced Thursday was intended to minimize the risk of rash decision-making by Congress. He thinks lawmakers would be more likely to make hasty decisions if the companies are seen as taking bailouts.

“They’ve now mitigated the political risk that a draw will trigger nervous action by Congress,” Parrott said, though he thinks that fear is overblown. “A world in which they are asked to draw or need to draw on the Treasury is a world where a lot of folks on the Hill and elsewhere yell and scream about bailouts.”

But the backlash is already in the air. Republicans swiftly criticized the deal, arguing that taxpayers should not be doing more to prop up the mortgage finance companies.

“I’m very disappointed at FHFA and Treasury’s decision to roll back these vital taxpayer protections,” said Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee and a longtime critics of the mortgage giants.

Last year, before he was confirmed as Treasury secretary, Mnuchin said “it makes no sense that these are owned by the government” and that Fannie and Freddie would be out of government control “reasonably fast.” During his confirmation hearings earlier this year, however, Mnuchin softened his tone and said that housing finance change was necessary because the status quo was not acceptable.

On Thursday, the secretary signaled that, with the tax overhaul out of the way, he would renew his focus on Fannie and Freddie in 2018.

“The administration looks forward to working with Congress on comprehensive housing finance reform, a top priority in the year ahead,” Mnuchin said.