The move suspends a yearslong arrangement in which the mortgage-finance giants handed nearly all of their profits to the Treasury. It also marks an initial major step in allowing the companies to build up capital so they can eventually operate as private companies again.
Under the agreement, the companies are allowed to retain over a year’s worth of profits—$25 billion for Fannie Mae and $20 billion for Freddie Mac, the Treasury and Federal Housing Finance Agency said Monday.
“These modifications are an important step toward implementing Treasury’s recommended reforms that will define a limited role for the Federal Government in the housing finance system and protect taxpayers against future bailouts,” Treasury Secretary Steven Mnuchin said in a statement.
Fannie and Freddie are central players in the housing market, buying about half of all U.S. mortgages from lenders and packaging them for issuance as securities. The government took control of them during the 2008 financial crisis in a bid to stabilize the housing market as mortgage defaults mounted. How the government addresses the companies’ future could resolve the last major problem from the crisis.
At present, the companies hold just $3 billion each in capital, and the agreement under consideration would substantially increase that figure. The move starts a process of the companies raising a combined $100 billion-plus that they will likely need to hold before they can return to private hands. The precise amount is to be worked out over the coming months by their federal regulator.