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FHFA OIG Assesses Treasury’s Revised PSPA

Amendments to the Senior Preferred Stock Purchase Agreement (PSPA) between Treasury and the GSEs, ""agreed"":http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx to in August 2012, may lead to faster and greater returns to taxpayers but could also potentially leave the enterprises with largely illiquid portfolios, according to a ""report"":http://origin.www.fhfaoig.gov/Content/Files/WPR-2013-002.pdf from the ""Federal Housing Finance Agency's Office of Inspector General"":http://fhfaoig.gov/ (FHFA OIG).

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The amendments addressed several terms of the PSPAs. One of the most notable changes was the change in dividend structure, which ""ends the circular practice of Treasury providing the Enterprises with money solely for the purpose of the Enterprises paying dividends to Treasury.""

The original agreement required Fannie Mae and Freddie Mac to pay 10 percent dividends on Treasury's investment each year. Combined, this totaled a commitment of about $19 billion per year as of 2012.

""It's hard for me to envision that we would be able to make enough every single quarter to cover the dividend payment,"" the OIG report quoted Fannie Mae's CFO.

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As a result, Treasury was regularly doling out funds to the GSEs in order for them to meet their dividend obligations.

Under the revised agreement, implemented at the start of this year, the GSEs will no longer pay a 10 percent dividend but instead will pay Treasury all of their positive net worth in excess of $3 billion.

The $3 billion buffer will be reduced by $600 million each year until 2018 when it will no longer exist.

The OIG report suggests this structure could bring faster and greater returns to taxpayers while also reassuring investors that Treasury's commitment will be sufficient to keep the enterprises performing.

As of the end of 2012, Treasury had invested $187.5 billion in the GSEs.

Another notable change to the PSPA agreement is the acceleration of the decline in the GSEs' mortgage assets. Previously, the enterprises were required to reduce their assets by 10 percent per year, a goal they remained on track with meeting.

The revised agreement requires the GSEs to reduce their assets by 15 percent per year.

While this stipulation is aimed at reducing the role of the GSEs in the market, the OIG report suggests it could have negative side-effects as the GSEs ""may be required to sell less liquid assets at unfavorable prices.""

The amendments also mandate the GSEs submit annual risk management plans and exempt the enterprises from requiring Treasury's consent on certain fair-market value dispositions.

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