Fannie, Freddie Poised to Keep Profits in an Initial Privatization Move

INDIANAPOLIS—Mortgage-finance companies

Fannie Mae

FNMA 1.03%


Freddie Mac

FMCC 0.82%

are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department.

The move, in an expected agreement between the Trump administration and their federal regulator, would be an initial major step in allowing the companies to build up capital so they can operate as private companies again. Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion,

Mark Calabria,

the Federal Housing Finance Agency chief, said in an interview after touring a senior center financed in part by the Federal Home Loan Bank of Indianapolis. FHFA oversees Fannie, Freddie and the Federal Home Loan Bank system. “We’re still in the middle of negotiations with Treasury, but I think we’re close,” Mr. Calabria said. “I hope to have it done by the end of the month.” Fannie and Freddie are central players in the housing market, buying about half of all U.S. mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them during the 2008 crisis in a bid to stabilize the housing market as mortgage defaults mounted. How the government addresses the companies’ future could resolve the last major problem from the financial crisis. At present, the companies hold just $3 billion each in capital, and the agreement under consideration would substantially increase that figure. The move would be significant because it would start a process of the companies raising a combined $100 billion-plus that they will likely need to hold before they can return to private hands.

“If you’re leveraged 1,000-to-1, you could have Superman as your regulator and Wonder Woman as your CEO, and you’re still going to fail at some point,” Mr. Calabria said. The timing of the agreement and the precise amount of earnings the companies would be allowed to retain hasn’t been completed. The overall deal could slip to the end of the year, he said. Every quarter Fannie and Freddie send nearly all of their profits, minus the $3 billion they are currently permitted to retain as capital, to the Treasury Department as payment for their ongoing support from the department. Under the terms of the 2008 conservatorship, the firms have access to more than $250 billion in support, though they have been generally profitable in recent years and have drawn on that support only once since 2012. Should the companies report a loss going forward, they could continue to draw on their support from the government. They just wouldn’t send their profits to Treasury until they had retained more than about $20 billion in profits. The upcoming change comes after a federal appellate court in New Orleans criticized the profit sweep in a Sept. 6 ruling. The decision, in litigation brought by investors in the companies, gave new life to court challenges over the handling of Fannie and Freddie’s profits. The administration is deciding whether to appeal. The Trump administration wants to recapitalize the companies through a mix of retained earnings and raising tens of billions of dollars from investors, a process likely to take years. It is a priority for the administration, which outlined a path to return the firms to private ownership earlier this month. “They’ve been in conservatorship for too long, and we want to make sure they’re not in conservatorship on a permanent basis,” Treasury Secretary

Steven Mnuchin

said in a Sept. 9 interview on Fox Business Network. Any move now to pause the profit sweep would give Treasury and the FHFA time to negotiate bigger changes to the terms of the companies’ existing support agreement with Treasury, Mr. Calabria said. That includes the creation of a fee the companies’ would be required to pay in exchange for ongoing support from Treasury, which is necessary for their business model. The broader changes could also encompass new restrictions on the companies’ activities, as envisioned by the recent Treasury report, which urged FHFA to scrutinize the firms’ purchases of cash-out refinancings and loans for investment and vacation properties. Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now. Through June, the companies have paid about $300 billion in dividends to the Treasury, while taking some $190 billion from taxpayers in the years after the 2008 financial crisis. The companies have paid an average $18.2 billion annually over the past three years to the Treasury. Reducing those payments would add to a widening U.S. budget deficit that is on track to exceed $1 trillion a year. The government seized the companies during the George W. Bush administration, and agreed to inject money to support some $5 trillion in debt securities issued by the companies. Write to Andrew Ackerman at

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