Fannie, Freddie Permitted to Hold ‘Limited’ Capital Buffer

The American Banker writes that Fannie Mae and Freddie Mac will be allowed to rebuild capital buffers to protect against losses, according to an agreement announced by the Federal Housing Finance Agency (FHFA) and the United States Department of the Treasury on Thursday, December 21st. Previously, the terms of the Preferred Stock Purchase Agreement that provided a taxpayer-funded backstop to the GSEs required that the GSEs wind down their capital buffers to $0 in 2018. A statement from Treasury on the announcement reads "under the modifications announced today, Fannie Mae and Freddie Mac will be allowed to maintain a capital buffer of $3 billion each."

Rueters also covered the announcement, noting the implications of the recent tax overhaul would have on the GSEs. With the reduction in the corporate tax rate, the value of the tax-deferred assets they each hold would be written down. According to Reuters, FHFA and Treasury noted that GSEs will need the $3 billion buffer, in addition to future draws of Federal government funds, in order to be able to cover the cost of that write-down. FHFA Director Mel Watt released a statement saying that "while it is apparent that a draw will be necessary for each Enterprise if tax legislation results in a reduction to the corporate tax rate, FHFA considers the $3 billion capital reserve sufficient to cover other fluctuations in income in the normal course of each Enterprise's business."

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