The Treasury Department is changing the way it gets payback from Fannie Mae and Freddie Mac to 1) make more sense, and 2) wind down the “government sponsorship” part of the government-sponsored enterprises.
Here’s how it goes in, as usual, broad strokes.
The government bailed out Fannie and Freddie, which had been hammered by all the bad loans they had purchased from various banks (the lenders who hadn’t bothered to make sure borrowers could actually pay back their loans).
The Treasury Department created a “preferred stock purchase agreement,” in which it effectively bought Fannie and Freddie, putting them under receivership. The GSE’s, in turn, were supposed to pay back Treasury with a 10 percent annual dividend: $11.7 billion each year for Fannie; $7.2 billion for Freddie.
Problem: F&F don’t make enough money (yet) to pay that. So they had to borrow money. From the Treasury.
Yes, that’s right. Treasury lent money to Fannie and Freddie that was then used to pay Treasury. (The press release referred to it as “the circular practice of the Treasury advancing funds to the GSEs simply to pay dividends back to Treasury.”)
So the new agreement has two parts.
First, a “profit sweep”: Whatever profit F&F make goes right to Treasury. (That’s you and me.)
Second, Fannie and Freddie will have to reduce their investments in mortgages and mortgage-backed securities by 15 percent per year. (The original agreement was for a 10 percent reduction.)
The changes make sense: Remove the circular payback system, and wind down the GSEs sooner. But… that’s on paper. In reality, it’s not clear that Fannie and Freddie will make any profit for the foreseeable future. Nor is it clear who will buy the 15 percent of their portfolios each year.
But if nothing else, it’s no worse than the current situation, and it makes a bit more sense.
It’s not, however, a long-term solution. As Bloomberg explains, we’re still waiting for that:
Republicans in Congress have called for an end to Fannie Mae and Freddie Mac. Treasury Secretary Timothy F. Geithner has said he will propose a housing finance overhaul that may include dismantling the firms. Geithner said at the beginning of this year that the administration would release a wind-down plan by the spring. No plan has been released.
Wait and see.
“I am altering the deal. Pray I don’t alter it any further.” –Vader