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1 1 (March 20, 2018)

handle is hein.crs/govchvw0001 and id is 1 raw text is: FF.ri E.$~ & March 20, 2018 Housing Finance: Recent Policy Developments Several recent developments have affected the financial condition of Fannie Mae and Freddie Mac. In February 2018, Fannie Mae announced that one-time tax adjustments due to the 2017 tax revisions (P.L. 115-97) would require it to request $3.7 billion in support from Treasury, and Freddie Mac requested $312 million from Treasury. This followed a December 2017 decision by the Federal Housing Finance Agency (FHFA) and the Treasury to allow Fannie Mae and Freddie Mac each to retain a capital reserve amount (or net worth) of $3 billion. Prior to this announcement, the capital reserve amount was scheduled to be zero effective January 1, 2018. The $3 billion net worth will reduce the likelihood that Fannie Mae and Freddie Mac will need additional Treasury support, but it does not eliminate it. This In Focus analyzes recent developments and several housing finance issues stemming from them. Fannie Mae and Freddie Mac (known as government- sponsored enterprises or GSEs because of their congressional charters) buy home mortgages and pool them into mortgage-backed securities (MBS), which are sold to investors. One source of profit is the guarantee fee that they charge sellers for guaranteeing investors timely payment of principal and interest. Their other source of profit comes from retaining some MBS as portfolio investments. The GSEs retain the credit risk (i.e., the risk associated with a borrower defaulting) on all of the mortgages they purchase. In addition, the value of the MBS that they retain fluctuates when interest rates change. In September 2008, Fannie Mae and Freddie Mac were in weak financial condition and they entered conservatorship, which means that FHFA (their regulator) became their conservator and manager. The goal of conservatorship is to keep a financial business operating while restructuring it to improve its financial strength. Part of the initial conservatorship agreement included a contract to sell Treasury enough senior preferred stock as necessary to maintain a positive net worth at Fannie Mae and Freddie Mac, and to pay a 10% dividend on that stock. To date, Treasury has purchased a combined $187 billion of senior preferred stock from Fannie Mae and Freddie Mac. The GSEs have paid dividends of $279 billion to Treasury. The original contracts have been amended four times. Changes include the following: * The first amendments (May 6, 2009) double the maximum amount that Treasury would invest in Fannie Mae and in Freddie Mac to $200 billion each. * The second amendments (December 24, 2009) adjust the maximum that Treasury would invest in Fannie Mae and in Freddie Mac based on previous draws and their financial conditions at the end of 2012. * The third amendments (August 17, 2012) require Fannie Mae and Freddie Mac to cap their mortgage holdings at $250 billion by the end of 2018. It, also, changed the dividend each pays quarterly to Treasury from 10% annually on Treasury's investment to all of its net worth except for a capital reserve amount, which was scheduled to become zero at the start of 2018. FHFA said, Replacing the current fixed dividend in the agreements with a variable dividend based on net worth helps ensure stability, fully captures financial benefits for taxpayers, and eliminates the need for Fannie Mae and Freddie Mac to borrow from the Treasury Department to pay dividends. * The fourth amendments (December 21, 2017), officially called letter agreements, allow Fannie Mae and Freddie Mac each to retain a net worth of $3 billion. The $3 billion is much less than either GSE's net worth prior to conservatorship. At the end of 2007, approximately eight months before entering conservatorship, Fannie Mae had a net worth of $44 billion and Freddie Mac had a net worth of $27 billion. The move to allow the GSEs to retain a net worth of $3 billion has been a source of significant debate. Supporters of the fourth amendments argue that the policy change would avoid minor draws on the lines of support with Treasury that stem from normal market movements and thereby avoid upsetting financial markets. FHFA has stated that it considers the $3 billion capital reserve sufficient to cover other fluctuations in income in the normal course of each Enterprise's business. We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances. Opponents of the fourth amendments argue that, because of the significant amount of financial resources available to the GSEs, minor future draws would not upset the markets. Instead, the argument goes, the buildup of capital diverts money to the GSEs that should go to compensate taxpayers and potentially makes it easier for the GSEs to be returned to private shareholders, a move opposed by many reform advocates. \' , ' tx' : The GSEs and the mortgage market face several changes in 2018. K~:> p\w -- , gn'a', goo mppm qq\ a , q 'S I 11LULANJILiN,

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