Treasury changes Fannie and Freddie bailout deal

[August 18, 2012]  WASHINGTON (AP) -- The government is changing the terms of its bailout agreement with Fannie Mae and Freddie Mac in a way that will shrink the holdings of the two mortgage giants more quickly and will require payment to the government of all quarterly profits the companies earn.

The Treasury Department announced the changes Friday in an effort to deal with concerns that the companies could at some point exhaust the federal support they were guaranteed when they were taken over by the government in September 2008 during the financial crisis.

The two firms would have to turn over all profits they earn every quarter. They would also be required to accelerate the reduction of their mortgage holdings to hit a cap of $250 billion by 2018, four years earlier than planned.

Under the new arrangement, the firms' portfolios can be no larger than $650 billion each at the end of this year.

The Obama administration unveiled a plan last year to slowly dissolve Fannie and Freddie, with the goal of shrinking the government's role in the mortgage system. The proposal would remake decades of federal policy aimed at supporting Americans' ability to buy homes and could make home loans more expensive. However, Congress hasn't yet decided how far the government's role in mortgages should be reduced.

"With today's announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac while continuing to support the necessary process of repair and recovery of the housing market," said Michael Stegman, who serves as Treasury Secretary Timothy Geithner's counselor on housing policy.

Industry groups including the American Bankers Association and the Mortgage Bankers Association were generally supportive of the administration's action.

"Much more work needs to be done to reform the secondary market (for mortgage-backed securities) but today's announcement helps move this process forward and ensure the taxpayers' investment is ultimately repaid," Frank Keating, president of the banking group, said in a statement.

Republicans in Congress, who have often clashed with Democrats over housing policies, were critical, saying the changes don't answer the more important need to overhaul how the government promotes home ownership.

"Four years after (Fannie and Freddie) were taken over by the federal government, taxpayers are left holding the bag without a plan and without a clue what the future of the secondary mortgage market will look like," said Senate Republican leader Mitch McConnell of Kentucky. "The Obama administration should stop delaying efforts to work with Congress to end these failed institutions, protect American taxpayers and develop a sustainable long-term plan for reform."

House Financial Services Chairman Spencer Bachus, R-Ala., said the administration's move would make it less likely that taxpayers would ever recoup the money spent to bail out Fannie and Freddie. He said the change also "blunts efforts to reform Fannie and Freddie by fostering the false impression they are healthy institutions that should be restored to their previous status."

Fannie and Freddie both buy up mortgages made by lenders and package them into securities that are sold with a guarantee that investors will be paid even if the borrower defaults on the mortgage. The firms back more than half of all U.S. mortgages and the government's support was seen as crucial to keep mortgage markets functioning through the financial crisis.

The government rescued Fannie and Freddie in September 2008 when massive losses on risky mortgages threatened to topple them. The Treasury has pumped nearly $188 billion into the companies. In return for that support, the government has received senior preferred shares of stock that pay a 10 percent dividend.

Currently, Fannie and Freddie make dividend payments to the Treasury every quarter. That has forced them to borrow money from the government and use that money to repay the government in periods when they didn't turn a large enough profit to cover the dividend payments.

The changes announced Friday are aimed at avoiding the threat that Fannie and Freddie could one day exhaust their Treasury support because they did not generate enough profits to pay back their dividends.

Under the new arrangement, the government will simply take all the profits that the firms make in any quarter as a dividend payment. The government will not require a dividend payment in periods when the firms run a loss.

So far, Fannie and Freddie have paid nearly $46 billion in dividends.

Last week Fannie and Freddie reported gains in net income for the second quarter, reflecting improving home prices and the decline in mortgage delinquencies as the housing market has begun to recover. The companies didn't request any additional federal aid for the April-June quarter.

[Associated Press; By MARTIN CRUTSINGER]

Associated Business writer Marcy Gordon contributed to this report.

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