Treasury reworks Fannie, Freddie bailout

By Peter Schroeder - 08/17/12 08:58 AM ET

The Treasury Department announced Friday that it was modifying the bailout of Fannie Mae and Freddie Mac in an effort to speed up their wind-down and ensure taxpayers receive a cut of their profits.

The reworking of the roughly four-year-old federal lifeline is intended to assuage investors worried about the strength of federal support for the government-sponsored enterprises (GSEs) and ensure mortgage credit remains flowing in the market.

Under the new arrangement, the GSEs would be required to shrink their investment portfolios by 15 percent a year, up from the 10 percent previously required. This new rate would reduce the GSEs' investment portfolios to the $250 billion target set by the government four years earlier than originally envisioned, according to the Treasury.

Furthermore, the new arrangement changes how taxpayers are paid back for extending nearly $200 billion in support to the entities after they faced collapse during the housing crisis.

The government said it will take all of the quarterly profits from Fannie and Freddie. Previously, the government required Fannie and Freddie to make regular dividend payments to the Treasury to pay back the bailout. However, that arrangement meant that when the GSEs suffered rough quarters and had little profit, they actually had to borrow from the government in order to pay the money to the Treasury.

“With today’s announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” said Michael Stegman, housing finance counselor to the Treasury secretary. “As we continue to work toward bipartisan housing finance reform, we are committed to putting in place measures right now that support continued access to mortgage credit for American families, promote a responsible transition and protect taxpayer interests.”

The change comes as the GSEs are actually beginning to post robust profits. Earlier this month, Fannie and Freddie reported a net income of $2.8 billion and $1.1 billion, respectively, in the second quarter of the year.

By taking a regular cut of agency profits, the Treasury also ensures that the GSEs are not required to pay hefty fixed amounts to the government while at the same time shrinking their portfolios, which could have created a worrying situation for investors.

Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which oversees the GSEs, praised the changes.

"These changes provide certainty to Fannie Mae, Freddie Mac and market participants as they continue to perform their critical mission of providing liquidity and stability to the country’s housing market," he said. "The steps today are also important as Congress and policymakers contemplate the future of Fannie Mae and Freddie Mac.”