On August 17, 2012, the Treasury Department issued a press release announcing steps it would be taking to “expedite the wind down of Fannie Mae and Freddie Mac.” A series of media reports have followed, some more sensational than others, including one from Bloomberg declaring the agencies “walking dead.” Given the volume of misinformation in the public domain on this topic, NMHC wanted to briefly clarify the implications of the Treasury announcement for the multifamily industry.
The Treasury announcement essentially modifies two principal elements of the bailout. First, it suspended the GSEs’ 10% dividend payments and instead now requires Fannie and Freddie to turn over all its net profits to the federal government. Importantly, this sweep of profits will only take place AFTER the GSEs make required contributions to their capital reserves, pay any credit default expenses to creditors and cover all operating and administrative expenses (which include compensation, benefits, and retirement payments). As a result, the revised profit sharing agreement should have no material impact on the day-to-day operations of the Enterprises and should not affect multifamily access to credit.
The second primary action was to accelerate the wind down of the GSEs’ portfolios of mortgage assets. Per the terms of the new agreement, the Enterprises must now shed 15% of their portfolios per year (up from 10%) to reach the previously stated goal of $250 billion per company. (The combined portfolios are currently approximately $1.26 trillion.) Notably, however, the agreements with both Enterprises require that the portfolios not be reduced below $250 billion to ensure they can still engage in their core business of aggregation and securitization.
At this point, we do not believe the Treasury action should materially affect the ability of the GSEs to provide liquidity to our sector. Although the Treasury press release repeatedly uses the term “wind down,” neither Treasury nor FHFA are eliminating lines of business, staff or strategic initiatives. The only areas subject to a “wind down” are the GSEs’ investment portfolios, but that should not affect their core businesses. The companies are still 79.9% owned by the federal government and still issue securities that are de facto explicitly guaranteed by the government. They continue to have the access to borrowing in the public markets that will enable them to support the multifamily industry in a robust way, and this is not likely to change until other sources of capital can step up and begin to replace them.
Although this latest action shouldn’t threaten multifamily access to GSE capital in the short term, we remain vigilant because further administrative or legislative activity certainly could. NMHC will continue to make the case for a “do no harm” approach to housing finance reform that recognizes the fact that the multifamily programs at Fannie and Freddie are not broken and did not contribute to the housing collapse.