The US Treasury said on Friday it is changing the way Fannie Mae and Freddie Mac will repay taxpayers in a move the Obama administration said would accelerate the winding down of the government-owned mortgage financiers.
The finance companies, which buy mortgages from lenders and repackage them as securities for investors, will now be required to hand over all their profits to the US Treasury instead of the 10 percent dividend repayment required under the terms of their government bailout.
The change comes as the Treasury's unlimited support for the companies gets set to expire at the end of the year. Fannie Mae and Freddie Mac have drawn down a total of $188 billion in taxpayer funds to stay afloat since they were taken over by the government in 2008.
Over the past three years, the companies have had to repeatedly tap the Treasury lifeline in order to make the required quarterly repayments -- a situation that had Fannie Mae and Freddie Mac taking government funds to repay the government.
"The market's worry is that Fannie and Freddie will exhaust this Treasury capital and default on bond payments," the Washington Research Group said in a note to clients. "Just the fear of this could drive up their borrowing costs, which would require them to seek government capital more quickly," it said.
With the housing market showing signs of improvement and Fannie Mae and Freddie Mac reducing their portfolios of loans with poor credit quality, the government-owned companies posted strong profits in the second quarter of this year.
The Treasury said this change would ensure that "every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms."
The companies will also be required to reduce their investment portfolios at an annual rate of 15 percent instead of the previous 10 percent. That will put them on track to cut their portfolios to the $250 billion target in 2018, four years earlier than previously scheduled, the Treasury said.
