US mortgage giants to each receive $4b capital cushion

WASHINGTON • Fannie Mae and Freddie Mac, the government-controlled mortgage finance giants rescued during the financial crisis, reached a deal with the US Treasury Department on Thursday, allowing them to keep some of their profits as they brace themselves 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 firm will be allowed to retain US$3 billion (S$4 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 US$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 US$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 per cent from 35 per cent 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 Treasury Secretary Steven Mnuchin.

The US$3 billion (S$4 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.

Analysts have projected that Fannie and Freddie could stand to lose US$10 billion to US$20 billion combined as a result of the corporate tax cut. But Mr Melvin Watt, the director of the Federal Housing Finance Agency (FHFA), 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 US$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.

Republicans swiftly criticised the deal, arguing taxpayers should not be doing more to prop up the mortgage finance firms. "I'm very disappointed at FHFA and Treasury's decision to roll back these vital taxpayer protections," said Representative Jeb Hensarling of Texas, chairman of the House Financial Services Committee and a long-time critics of the mortgage giants.

Last year, before he was confirmed as Treasury secretary, Mr 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". On Thursday, he signalled that, with the tax overhaul out of the way, he would renew his focus on Fannie and Freddie next year.


A version of this article appeared in the print edition of The Straits Times on December 23, 2017, with the headline 'US mortgage giants to each receive $4b capital cushion'. Print Edition | Subscribe