Housing Finance: Recent Policy Developments
March 20, 2018
Housing Finance: Recent Policy Developments
Several recent developments have affected the financial
The second amendments (December 24, 2009) adjust
condition of Fannie Mae and Freddie Mac. In February
the maximum that Treasury would invest in Fannie Mae
2018, Fannie Mae announced that one-time tax adjustments
and in Freddie Mac based on previous draws and their
due to the 2017 tax revisions (P.L. 115-97) would require it
financial conditions at the end of 2012.
to request $3.7 billion in support from Treasury, and
Freddie Mac requested $312 million from Treasury. This
The third amendments (August 17, 2012) require Fannie
followed a December 2017 decision by the Federal Housing
Mae and Freddie Mac to cap their mortgage holdings at
Finance Agency (FHFA) and the Treasury to allow Fannie
$250 billion by the end of 2018. It, also, changed the
Mae and Freddie Mac each to retain a “capital reserve
dividend each pays quarterly to Treasury from 10%
amount” (or net worth) of $3 billion. Prior to this
annually on Treasury’s investment to all of its net worth
announcement, the capital reserve amount was scheduled to
except for a “capital reserve amount,” which was
be zero effective January 1, 2018. The $3 billion net worth
scheduled to become zero at the start of 2018.
will reduce the likelihood that Fannie Mae and Freddie Mac
will need additional Treasury support, but it does not
FHFA said,
eliminate it.
Replacing the current fixed dividend in the
This In Focus analyzes recent developments and several
agreements with a variable dividend based on net
housing finance issues stemming from them.
worth helps ensure stability, fully captures financial
Context
benefits for taxpayers, and eliminates the need for
Fannie Mae and Freddie Mac to borrow from the
Fannie Mae and Freddie Mac (known as government-
Treasury Department to pay dividends.
sponsored enterprises or GSEs because of their
congressional charters) buy home mortgages and pool them
The fourth amendments (December 21, 2017), officially
into mortgage-backed securities (MBS), which are sold to
called letter agreements, allow Fannie Mae and Freddie
investors. One source of profit is the guarantee fee that they
Mac each to retain a net worth of $3 billion. The $3
charge sellers for guaranteeing investors timely payment of
billion is much less than either GSE’s net worth prior to
principal and interest. Their other source of profit comes
conservatorship. At the end of 2007, approximately
from retaining some MBS as portfolio investments. The
eight months before entering conservatorship, Fannie
GSEs retain the credit risk (i.e., the risk associated with a
Mae had a net worth of $44 billion and Freddie Mac had
borrower defaulting) on all of the mortgages they purchase.
a net worth of $27 billion.
In addition, the value of the MBS that they retain fluctuates
when interest rates change.
The move to allow the GSEs to retain a net worth of $3
billion has been a source of significant debate. Supporters
In September 2008, Fannie Mae and Freddie Mac were in
of the fourth amendments argue that the policy change
weak financial condition and they entered conservatorship,
would avoid minor draws on the lines of support with
which means that FHFA (their regulator) became their
Treasury that stem from normal market movements and
conservator and manager. The goal of conservatorship is to
thereby avoid upsetting financial markets. FHFA has stated
keep a financial business operating while restructuring it to
that it “considers the $3 billion capital reserve sufficient to
improve its financial strength. Part of the initial
cover other fluctuations in income in the normal course of
conservatorship agreement included a contract to sell
each Enterprise’s business. We, therefore, contemplate that
Treasury enough senior preferred stock as necessary to
going forward Enterprise dividends will be declared and
maintain a positive net worth at Fannie Mae and Freddie
paid beyond the $3 billion capital reserve in the absence of
Mac, and to pay a 10% dividend on that stock. To date,
exigent circumstances.” Opponents of the fourth
Treasury has purchased a combined $187 billion of senior
amendments argue that, because of the significant amount
preferred stock from Fannie Mae and Freddie Mac. The
of financial resources available to the GSEs, minor future
GSEs have paid dividends of $279 billion to Treasury.
draws would not upset the markets. Instead, the argument
goes, the buildup of capital diverts money to the GSEs that
The original contracts have been amended four times.
should go to compensate taxpayers and potentially makes it
Changes include the following:
easier for the GSEs to be returned to private shareholders, a
move opposed by many reform advocates.
The first amendments (May 6, 2009) double the
maximum amount that Treasury would invest in Fannie
2018 Events
Mae and in Freddie Mac to $200 billion each.
The GSEs and the mortgage market face several changes in
2018.
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Housing Finance: Recent Policy Developments
Reduced Mortgage Portfolio
reported large losses during the recession and have reported
Historically the GSEs’ portfolios have been large and a
charges or adjustments to the value of the deferred tax
major source of profits. For example, at the end of 2008,
assets. For example, Citigroup reported a $22-billion charge
these portfolios were valued at approximately $800 billion
for the fourth quarter because of the reduced value.
each. The initial support agreements required each GSE to
cap its portfolio at $850 billion at the end of 2009, and to
Even though the reduced corporate tax rate reduced each of
reduce their portfolios annually until they reached a cap of
the GSEs’ net worth in the short run, other things being
$250 billion by the end of 2021. The first amendments
equal it will increase net income in the long run, which is
increased the maximum 2009 retained portfolios to $900
after taxes.
billion and allowed the GSEs until 2022 to reach the $250
billion maximum. The second amendments were designed
Possible Impact on Affordable Housing Funds
to clarify some of the language concerning the GSEs’
By law, the GSEs must support certain aspects of affordable
retained portfolios. The third amendments, which were
housing. One of the requirements is that the GSEs make
signed in 2012, reduced the 2012 maximum to $650 billion
annual contributions to the Housing Trust Fund and the
(from $900 billion) and moved the $250 billion maximum
Capital Magnet Fund based on the unpaid principal balance
to 2018. At the end of 2016, Freddie Mac had a retained
of mortgages purchased during a year. (A portion of the
investment portfolio of $298 billion, and Fannie Mae had
contributions are also set aside for the HOPE Reserve Fund
one of $272 billion. In addition, FHFA has told the GSEs to
to pay for any losses under the Hope for Homeowners
reduce their portfolios to no more than 90% of the
program, a foreclosure prevention program that ended
contractual amounts.
several years ago.) When the GSEs entered
conservatorship, FHFA suspended their contributions, but
The GSEs’ portfolios have been an important source of
in 2015, FHFA cited improved financial health and directed
profits. Because of their close relationship to the federal
the GSEs to start making the payments. For 2017, Fannie
government, the GSEs are able to sell bonds at an interest
Mae’s payments to the two funds are calculated to be $323
rate slightly more than the Treasury bonds. They have taken
million and Freddie Mac’s should be $175 million.
advantage of this to sell bonds to finance their portfolios of
MBS. With this source of profits reduced in size, future
When FHFA directed the GSEs to resume making
draws on Treasury may be more likely (all else equal).The
payments to the three affordable housing funds, it
smaller portfolios, however, reduce the GSEs exposure to
announced that in the event of a future draw on Treasury,
adverse interest rate movements.
these payments would be suspended, but reserved the right
to modify this directive. On February 7, 2018, Director
Accounting for Reduced Corporate Income Tax
Watt notified Fannie Mae and Freddie Mac that because
Rates
their draws on their Treasury support did not “relate to any
The 2017 tax revision (P.L. 115-97) reduces the value of
financial instability on the part of the Enterprise” that they
certain deferred tax assets held by the GSEs. Some of their
should make their payments to the Housing Trust Fund and
deferred tax assets resulted from losses in previous years.
the Capital Magnet Fund. While supported by affordable
At the end of 2016, Fannie Mae reported that it held $36
housing advocates, the move has been criticized by those
billion in deferred tax assets, and Freddie Mac reported that
who believe this contradicts Director Watt’s earlier
it held $16 billion. For 2017, Fannie Mae wrote down their
statement, and that the money should go to Treasury as part
deferred assets by $9.9 billion, and Freddie Mac wrote
of the GSEs’ dividend sweep.
down their tax assets by $5.4 billion as a result of the
reduced tax rates. The reduced value of the deferred tax
On December 13, 2017, the House Committee on Financial
assets reduced their net worth which, as mentioned earlier,
Services ordered reported H.R. 4560, the GSE Jumpstart
resulted in the GSEs each having a negative net worth at the
Reauthorization Act of 2017. If this bill becomes law, the
end of 2017. Pursuant to their agreements with Treasury to
GSEs would be required to suspend payments to the
prevent them from having a negative net worth, Fannie
affordable housing funds for any year that the GSEs reduce
requested $3.7 billion in support from Treasury and Freddie
their dividend sweeps to build net worth, which FHFA has
Mac requested $312 million from Treasury.
ordered the GSEs not to do.
Similar to Fannie Mae and Freddie Mac, many other
N. Eric Weiss, Specialist in Financial Economics
financial companies are affected by the change in corporate
tax rate. The reduction in the corporate tax rate has reduced
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the value of deferred tax assets. Many financial companies
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Housing Finance: Recent Policy Developments
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