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WASHINGTON, May 11 (Reuters) - 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 accounts.
"We cannot risk the loss of investor confidence," he said. "FHFA's actions would be taken solely to avoid a draw during conservatorship."
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 added.
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