FHFA, Treasury Discuss GSE Capital Buffer

According to Bloomberg, the Federal Housing Finance Agency (FHFA) is in deep discussions with the White House over a $7.7 billion payment Fannie Mae and Freddie Mac owe to the Treasury Department under the terms of the preferred stock purchase agreement (PSPA) put in place at the time of the conservatorship. FHFA officials have said they want to retain $2 billion to $3 billion as a buffer against losses. Under the terms of Conservatorship, the current capital buffer at the GSEs is $600 million, and will decline to zero in 2018, meaning that any future quarter where the GSEs experience a loss would automatically trigger a draw from Treasury. FHFA wants to retain a limited capital buffer to avoid such a draw, with FHFA Director Watt stating in a Congressional hearing in October that "we reasonably foresee that [a draw] could erode investor confidence. This could stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit." Meanwhile, Treasury Secretary Steven Mnuchin has previously stated that he expects the companies to pay the dividends as scheduled.

The article notes that in exchange for modifying the terms of the PSPA and the payments due to Treasury, Administration officials have requested a stop to a recently-announced increase in the GSEs' conforming loan limit.

SFIG maintains that lowering the existing conforming loan limits should be one of the first steps taken by the FHFA in increasing private capital's role in the U.S. housing market.

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