Watt’s Actions on GSE Dividends Raise Questions About GSE Reform

Morning Consult writes that FHFA Director Mel Watt's testimony before the Senate Banking Committee last week may have implications for GSE reform.

Under the current terms of the Preferred Stock Purchase Agreement between the FHFA, which acts as the conservator of Fannie Mae and Freddie Mac, and Treasury, the GSEs are required to pay all quarterly profits to the Treasury Department. Additionally, the GSEs are required by legislation to reduce their capital buffer to zero by next year. In his testimony, Watt stated that FHFA may look at retaining some of the quarterly earnings of the GSEs as a means to avoid a draw from Treasury in a future quarter where the GSEs experience a loss. "The Enterprises need some kind of buffer to shield against short-term operating losses," Watt said in his prepared statement. He further stated that a quarterly draw from Treasury "could erode investor confidence…stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit for borrowers.

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