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Fannie Mae, Freddie Mac allowed to boost capital reserves to $45B total

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Fannie Mae, Freddie Mac allowed to boost capital reserves to $45B total

The U.S. Treasury Department and the Federal Housing Finance Agency allowed Fannie Mae and Freddie Mac to increase capital reserves by a combined $45 billion, as the White House works to remove the government-sponsored enterprises from conservatorship.

Fannie Mae will now be allowed to retain $25 billion of earnings, while Freddie Mac will be permitted to retain $20 billion. Previously, the GSEs were each allowed to retain $3 billion in earnings each, and the excess was paid to Treasury.

To compensate for the loss of dividends that Treasury would have received before the modifications, the liquidation preferences for Treasury's preferred Fannie and Freddie stock will gradually increase by the amount of additional capital reserves until they reach $22 billion for Fannie and $17 billion for Freddie.

In a release, Treasury Secretary Steven Mnuchin said the reform is an important step toward releasing the two GSEs from conservatorship, which they were placed in when they nearly collapsed during the financial crisis after guaranteeing trillions of dollars in subprime mortgages.

​"The Enterprises are leveraged nearly 1,000-to-one, ensuring they would fail during an economic downturn — exposing taxpayers once again," FHFA Director Mark Calabria said in a separate statement. "This letter agreement between Treasury and FHFA, which allows the Enterprises to retain capital of up to $45 billion combined, is an important milestone on the path to reform."

The Trump administration's blueprint for GSE reform includes a number of other conditions that must be met before Fannie and Freddie can be released from conservatorship, including the FHFA prescribing regulatory capital requirements and the approval of capital restoration plans for Fannie and Freddie.