Fannie, Freddie will retain $45B in capital in first step toward privatization

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WASHINGTON—Mortgage giants Fannie Mae and Freddie Mac will be permitted to retain a combined $45 billion worth of earnings, the Federal Housing Finance Agency announced Monday, after holding only small capital cushions of $3 billion each for seven years.

The move to alter the government's preferred stock purchase agreements is the first major one under FHFA Director Mark Calabria's tenure to wind down the conservatorship of the government-sponsored enterprises.

"The enterprises are leveraged nearly 1,000-to-one, ensuring they would fail during an economic downturn— exposing taxpayers once again," said Calabria in a statement. "FHFA commits to working with Treasury in the coming months to amend the share agreements and further advance broader housing finance reform."

Calabria has repeatedly said that one of his top priorities as FHFA chief is to build up Fannie and Freddie’s capital arsenal, and has noted that the first step of that process would be to suspend the 2012 provision of the government's stock agreement with Fannie and Freddie resulting in the net-worth sweep.

The net worth sweep required Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers for the bailout during the financial crisis, which left the two GSEs with a very thin capital buffer relative to their earnings.

Calabria also said earlier this month that he is also exploring different avenues for building capital outside of retained earnings. He said it would “probably take a decade” to collect the kind of capital needed to exit conservatorship just through profit alone.

In the following months, FHFA will work with Treasury to limit the government's role in housing finance, increase marketplace competition and focus on affordable housing and sustainable homeownership, FHFA said in a release.

"The status quo is not an option," said Calabria. "Now is the time to act."

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