Treasury Official Says Fannie Mae, Freddie Mac Won’t Build Up Capital

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A U.S. Treasury Department official suggested on Thursday that the Obama administration wouldn’t allow Fannie Mae and Freddie Mac to rebuild capital. In a speech at a Goldman Sachs housing-finance conference, Dr. Michael Stegman, the Treasury’s counselor to the secretary for housing finance policy, spelled out what the Obama administration would like to see happen since it looks like a comprehensive housing-finance overhaul is unlikely.

Stegman’s speech is in essence a tacit admission by the White House that legislation to reform the housing-finance system is a long shot at best. The speech also made it clear that the administration had no intentions of allowing the firms recapitalize, dashing the hopes of some investors.

Statement from Treasury’s Michael Stegman

“Let me remind you, both recapitalization of [Fannie Mae and Freddie Mac ] and draws against the existing Treasury backstop due to potential future losses would come at taxpayers’ expense,” Stegman noted. He also pointed out that Fannie and Freddie still have a large credit line to draw on if their capital buffers run short.

Next steps for Fannie Mae and Freddie Mac

In his speech, Stegman discussed several steps that the White House wants Fannie Mae and Freddie Mac to take in the near future. For example, he noted that the GSEs large mortgage investment portfolios could be wound down more expeditiously.

Both firms have also developed new types of securities that they sell to private investors in an effort to reduce their mortgage credit risk, and Stegman said he would like to see more of these risk transfer activities.

Fannie and Freddie both reported unexpectedly poor earnings for the fourth quarter. Fannie reported earnings of $1.3 billion, while Freddie said it earned $227 million.

The deal with the Treasury Department requires the GSEs to shrink their capital buffers every year. For now, each GSE has a buffer of $1.8 billion, but the buffers will be reduced to zero by 2018. Of note, the smaller the buffer, the higher the probability that a major loss could mean Fannie Mae or Freddie Mac might require more cash from the U.S. Treasury.

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