Under the terms of the Housing and Economic Recovery Act of 2008, which created the conservatorship of Fannie Mae and Freddie Mac, the U.S. Treasury received preferred stock paying a quarterly dividend of 10% of the companies’ profits, and 79% of the common stock in the form of warrants. Since being advanced the money at the outset of conservatorship, Freddie Mac, like Fannie Mae, has been consistently profitable. After the so-called Third Amendment changed the terms of the conservatorship in 2012, 100 percent of the profits of Freddie have been paid to Treasury. Eventually, the government sponsored enterprises received $187.5 billion in public funds – $71 billion of which went to Freddie.
With the next scheduled payment of $2.2 billion, Freddie will have paid a total $108.2 billion in dividends to Treasury. Anyone with third grade math competency can see this is more than the GSE received from Treasury – a net of $36.9 billion. Cast in more sophisticated terms, on a “cash in-cash out” basis, Freddie repaid the government long ago.
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Even if you stuck to the governmental accounting designed to cripple the GSEs, the money would still have been paid back by now. Part of the logic of the Net Worth Sweep was the interest payments that would come due would mean the GSEs would remain tethered to the government – in a “death spiral” of dependence. (The billions in GSE profits that continue to roll into Treasury show the absurdity of this claim.) But, if Freddie had stuck to the original 10% dividend rate, its next dividend payment would have put its returns to Treasury at $1 billion more than it drew to begin with.
All of this comes as the GSEs’ capital buffers inch toward zero. Under the Net Worth Sweep, Treasury lays claim to all of the GSEs’ net worth over a capital buffer which is being whittled away by $600 million each year until 2018 when the buffer will be gone. Should the GSEs have a bad quarter at that point, taxpayers would need to provide more money. On Monday, Bob Ryan, the acting deputy director of the division of conservatorship at the Federal Housing Finance Agency, declared at the Mortgage Bankers Association’s National Secondary Market Conference, “I think the biggest and most significant risk is the continually declining capital buffer.”
As future quarters remove any question about whether the GSEs have paid taxpayers back and are operating profitably it will be harder to justify the deliberate plundering of their remaining capital reserves. This could be catalyst for Secretary Mnuchin to encourage FHFA Director Mel Watt to use his authority provided by HERA to end the Sweep.