WASHINGTON (8/20/12)--The gradual winding down of mortgage investment portfolios held by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will be accelerated, the U.S. Treasury announced Friday.
Fannie and Freddie's investment portfolios would be wound down at an annual rate of 15% under the revised Treasury plan. The agency had previously set a 10% annual reduction rate, which would have reduced the amount of mortgage assets held by the GSEs to $250 billion by 2022. The increase to 15% will accelerate this process by four years, according to the Treasury.
All future profits earned by Fannie and Freddie will be paid directly to the Treasury under the new plan. This change will ensure that every dollar generated by the GSEs "will be used to benefit taxpayers for their investment in those firms," and will end "the circular practice of the Treasury advancing funds to the GSEs simply to pay dividends back to Treasury," the agency said.
Fannie and Freddie currently are making quarterly dividend payments to the federal government to repay funds that were used to bail out the two firms. Fannie and Freddie occasionally borrow money from the government if their profits have not been sufficient to cover these dividend payments.
The Treasury will also require the GSEs to submit plans detailing how they will reduce taxpayer exposure to mortgage credit risk on an annual basis.
"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," Counselor to the Secretary of the Treasury for Housing Finance Policy Michael Stegman said Friday. "As we continue to work toward bi-partisan 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," he added.
The Obama administration is considering a range of options for mortgage market reform, including almost completely privatizing the housing finance system, limiting the government's intervention in the mortgage market to times of financial distress, and using a system of reinsurance to backstop private mortgage guarantors to a targeted range of mortgages. Administration officials have said that each proposal would shrink the government's role in the mortgage market.