Treasury Makes First Move to Insulate Taxpayers from Fannie/Freddie Bailout

With the attention of many focused on the passage of historic tax reform this week, taxpayers also have another reason to celebrate. Yesterday, the US Treasury and the Federal Housing Finance Agency (FHFA) have agreed to allow Fannie Mae and Freddie Mac to retain $3 billion of profits as a safeguard against downturns in their balance sheets. NTU believes this agreement is an important step towards strengthening the Government-Sponsored Enterprises’ (GSEs’) already slim capital cushion.

NTU has long written about the risks Fannie and Freddie pose to taxpayers even after a decade of government conservatorship. The Obama administration’s “net-worth sweep” of skimming their profits has left the GSEs in a precarious position with less reserve capital -- in turn leaving taxpayers exposed to further bailouts at their expense.

As an influential voice in this space, NTU continues to highlight the need for policymakers to address many reforms to get Fannie and Freddie back on the right track and out of government control. While some have asserted that allowing this modest amount of capital retention is tantamount to solidifying the GSEs’ market position at government expense, the cold reality is that a serious market fluctuation could pose problems for taxpayers too, unless additional resources are put in place. FHFA’s decision should be regarded as a near-term remedy while more comprehensive solutions are developed. And with taxpayers explicitly on the hook for over $250 billion of future GSE losses, and trillions more in implicit GSE backing, Congress must make finding those solutions a priority in the 2018 legislative session. Otherwise, the specter of 2008 could return sooner than we think.