Sunday, August 19, 2012

US Treasury shrinking the GSEs, capping taxpayer support

The US Treasury has restructured its holdings in the GSEs with the ultimate goal of shrinking the US government's dominant role in the mortgage market. Fannie Mae and Freddie Mac were told that they will be required to shrink their mortgage programs by 15 (rather than 10) percent annually. And rather than paying a fixed (10%) dividend to the government as they have in the past, the agencies will simply turn over all their profits back to the US Treasury (based on US government's 80% stake).
Bloomberg: - The mortgage companies, which have drawn $190 billion in aid and paid $46 billion in dividends since being taken over by U.S. regulators in 2008, will turn over any quarterly profits to the Treasury, the agency said today. The change replaces a requirement that the companies pay quarterly dividends of 10 percent on the government’s nearly 80 percent stake.

Fannie Mae, based in Washington, and Freddie Mac (FMCC) of McLean, Virginia, also will be required to shrink their investments in mortgages and mortgage-backed securities by 15 percent annually, up from 10 percent, the Treasury said.

“We are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” Michael Stegman, counselor to the secretary of the Treasury for housing finance policy, said in the statement.
The privately held FNMA preferred shares collapsed on the news because there will be no funds left for private investors. All the profits go to the US government and growth will be negative due to the declining mortgage portfolio holdings.

Fannie Mae’s 8.25 percent preferred perpetual shares

One of the reasons to change the fixed 10% dividend to simply paying out all the earnings is to make sure that the GSEs do not run into cash problems. This way they will have the ability to pay out on their bonds even if their profitability drops. After Jan 1 the government support for the agencies is capped.
Bloomberg: - One motivation for the change was Treasury’s concern that investors would be skittish about buying GSE bonds after Jan. 1, when a ceiling on government support for the companies kicks in, according to a banker who discussed the policy with Treasury officials. Each company will be limited after that to no more than $200 billion in taxpayer support.
Many borrowers still don't fully appreciate that the reason they are able to obtain these ridiculously low mortgage rates has to do with the cheap financing the GSEs are getting by issuing agency securities. Without the government support, the mortgage market would be smaller and more expensive. Given the pressure to unwind the GSEs, the government's support for the mortgage market is likely to decline over time - and with it will go the low mortgage rates.
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