WASHINGTON, D.C. – Testifying under oath before the Senate on Thursday, Mel Watt, the Director of the Federal Housing Finance Agency, testified that Fannie Mae and Freddie Mac will end the so-called “Net Worth Sweep” (NWS) in the third-quarter, to retain Fannie and Freddie earnings to rebuild capital.
Fannie and Freddie have paid back nearly $266 on the $188 billion the Treasury invested in the GSEs in 2008, completely repaying the principal and are very close to repaying in full the 10 percent dividend the Obama administration had negotiated under the 2008 Senior Preferred Stock Purchase Agreements (PSPAs).
If the NWS continues, Watt testified by the end of the year Fannie and Freddie’s capital buffer will be zero, with the result neither GSE “will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.”
Watt made clear that under the authority given him as Fannie/Freddie conservator under the Housing and Economic Reform Act of 2008 (HERA), he plans to begin retaining Fannie and Freddie earnings this quarter, effectively ending the NWS immediately.
Watt explained his goal was to rebuild capital within Fannie and Freddie, to avoid the need to ask Congress for additional capital should future quarters cause a capital crisis.
In response to a question asked by the Committee Chair Michael Crapo (R-Idaho), Watt made clear as head of FHFA, he has the authority as GSE conservator to suspend the NWS on his own, without the approval of the Secretary of the Treasury.
Watt further specified he is willing to renegotiate the PSPA agreement to allow the GSEs to recapitalize, but he was opposed to the Treasury recapitalizing the GSEs by selling to the GSEs more preferred stock.
Watt made clear his decision as conservator to retain GSE earnings was not meant to institute a policy of “recapitalize and release” that would ensure the continued existence of Fannie and Freddie in the reform of housing finance that Congress anticipates addressing the near future.
Watt also made clear his opinion was the 30-year fixed-rate mortgage critical to first-time home purchaers would not continue to exist without a government guarantee.