House Financial Services Committee Reports Bill on GSE Dividends, Housing Trust Fund

Earlier today, the House Financial Services Committee passed the Jumpstart GSE Reform Act, H.R. 4560, a bill introduced by Representative French Hill (R-AR) that prohibits Fannie Mae and Freddie Mac (the GSEs) from making contributions to the Housing Trust Fund (HTF) and Capital Magnet Fund (CMF) for any year that they fail to transfer all of their profits each quarter to Treasury, as the existing preferred stock purchase agreements (PSPA) between the GSEs and Treasury require.

Under the PSPAs, as amended in 2012, Fannie Mae and Freddie Mac are required to transfer all net revenue earned each quarter to Treasury as dividends for the preferred shares in each firm Treasury purchased during the economic crisis. The PSPAs also require both GSEs to reduce their capital reserves to zero by January 1, 2018.

This legislation appears to be a response to recent comments from FHFA Director Mel Watt suggesting that he may direct the GSEs to withhold all or a portion of their net revenue to Treasury so that the firms can maintain a capital buffer to avoid drawing down funds from Treasury in case they experience losses. During a Financial Services Committee hearing in October, Watt said that he was working with the Treasury Department to explore options that would allow Fannie Mae and Freddie Mac to retain capital after December 31.

Congressional Republicans have expressed strong opposition to suspending or reducing the GSEs dividend payments to Treasury. H.R. 4560 discourages FHFA from modifying the dividend payments, as it would prohibit Fannie Mae and Freddie Mac from contributing to the HTF and CMF if they do not pay their dividends to Treasury in full. The bill also states that any changes to key terms of the PSPAs will not change the requirements of the bill, which appears to preclude Treasury and FHFA from restructuring the PSPAs to allow the GSEs to retain a portion of their dividends while maintaining their contributions to the HTF and CMF.

During debate on the bill Tuesday night, Hill and Committee Chairman Jeb Hensarling (R-TX) stated that the purpose of the bill is to ensure that FHFA does not suspend or reduce the GSEs’ dividend payments to Treasury. They argued that they were simply ensuring that the GSEs carry out their obligations under the PSPAs deal negotiated by the Obama Administration in 2012. Hill said that, "If Fannie and Freddie can’t meet their mandatory obligations, they shouldn’t be paying their discretionary obligations."

Ranking Minority Member Maxine Waters (D-CA) opposed the bill and introduced an amendment to remove the provisions regarding the HTF and CMF, which the Committee rejected.