One unintended consequence of the tax reform bill being considered by Congress is that it will increase the probability of a GSE draw on Treasury.
At issue is the reduction of the corporate tax rate from 35 percent to 21 percent, which will trigger a write-down of 40 percent on the tax-deferred assets the GSEs’ hold on their balance sheets. That write down will cause a draw on their line of credit from the Treasury. The draw will be a one-time event that will not reduce the GSEs’ capacity to continue serving the housing market.
The Treasury draw is prompted because at the same time the GSEs will be forced to write down their tax-deferred assets, their net worth falls to zero under the terms of the Preferred Stock Purchase Agreement (PSPA). Anticipating a zero-capital cushion for the GSEs in 2018, NMHC/NAA have been working with legislators for over a year to eliminate concerns around operational risk and to minimize unjustified reactions.
The exact amount of the write-off will be based on the GSE’s balance sheets and reported net income when tax reform goes into effect, currently expected to be the first quarter of 2018. For example, at of the end of the third quarter of 2017 Fannie Mae reported $30.4 billion in tax deferred assets and Freddie Mac reported $14.6 billion, resulting in a write-off of $12.6 billion and $5.8 billion respectively. There remains sufficient capital under the PSPA to fund the draws so there will not be any impact to the GSE’s ongoing businesses.