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WASHINGTON May 11 Fannie Mae and Freddie Mac
could be forced to retain earnings to stabilize their operations
and maintain investor confidence, the head of the U.S. agency
regulating the mortgage firms said on Thursday.
Melvin Watt, director of the U.S. Federal Housing Finance
Agency, told the Senate Banking Committee he could order Fannie
and Freddie to retain future profits as a way to shore up their
"We cannot risk the loss of investor confidence," he said.
"FHFA's actions would be taken solely to avoid a draw during
Fannie and Freddie were private companies with a government
mandate to finance the housing market until its 2008 collapse.
At that time, the Treasury Department took control of the firms
with an injection of taxpayer cash.
For more than eight years, Fannie and Freddie have been
under government control, or conservatorship.
The $188 billion taxpayer investment in Fannie and Freddie
has yielded nearly $266 billion in returns. But the companies
now have little wealth of their own and lawmakers cannot agree
on what to do next.
Watt, who was appointed by former President Barack Obama,
said the option of seeking billions of dollars more from the
Treasury Department might rattle financial markets. "I cannot
afford to take that risk," he told senators.
Watt said retaining profits "is something that I would
prefer not to do" but that some action was likely before the end
of the year.
Republican lawmakers urged Watt to continue to transfer the
companies' earnings to the Treasury Department.
"Given Watt’s remarks, we believe that FHFA and Treasury
will allow Fannie and Freddie to recapitalize via retaining
some of their earnings. This will increase their capital
buffers," TD Securities analysts Gennadiy Goldberg and Priya
Misra wrote in a research note. "However we continue to expect
broader GSE reform to remain slow going."
If they were to keep some of their profits, it would reduce
the dividend payments to the government, Goldberg and Misra
In late Thursday trading, Fannie's common stock
was up 1.87 percent at $2.73, while Freddie shares
were up 1.55 percent at $2.62.
The risk premiums on the mortgage agencies' debt over
Treasuries were little changed on the day.
(Reporting by Patrick Rucker in Washington and Richard Leong in
New York; Editing by Paul Simao and Dan Grebler)