Will Fannie and Freddie Draw From the Treasury? Much Ado About Nothing …
Policymakers in Washington have recently expressed growing concerns about the (planned) dwindling of capital levels at Fannie Mae and Freddie Mac – the two government-sponsored enterprises (GSEs) that help finance the vast majority of U.S. mortgages. In particular, they worry how the mortgage market may react if the GSEs “draw” additional funds from the Treasury (perhaps after an unprofitable quarter) once their capital levels have dropped to zero.
While we can understand policymakers’ concerns, we at PIMCO – currently one of the largest non-government investors in GSE-issued mortgage-backed securities (MBS) – believe a draw on the Treasury by Fannie or Freddie would not be a market event, nor would it reduce our demand for these securities. Instead, we believe the policy focus should be on what agency MBS investors really care about: making the government guarantee explicit.
Some background: GSEs through the crisis
Fannie and Freddie were put into conservatorship in September 2008 due to concerns about their solvency and the potential consequences on the housing market and broader economy should they fail. For several years, the GSEs drew funds from the Treasury in order to continue providing liquidity to investors – and, by extension, access to mortgage credit for homebuyers – before becoming profitable again in 2012.
At that point, the Federal Housing Finance Authority (FHFA), the GSEs’ conservator, agreed to remit all of Fannie and Freddie’s profits ($276 billion to date) to the Treasury department above a specified capital threshold. That threshold was $3 billion in 2013 and will decline to zero by the end of 2017 under the legal agreement governing the conservatorship.
Concerns about ‘zero capital’ may be missing the point
So why, despite policymakers’ concerns, can we say with some confidence that a draw on the Treasury by Fannie or Freddie would have no impact on our investment behavior or our interest in agency MBS on behalf of our clients?
For one thing, Fannie and Freddie have a collective credit line at the Treasury of $258 billion that they can draw on at any time. To put that amount in context, during and right after the financial crisis – the housing market’s most significant downturn in modern history – the two entities drew a total of $188 billion from the Treasury, far less than the funds currently available to them.