Treasury pinches Fannie and Freddie

The U.S. Treasury on Friday tightened its grip on Fannie Mae and Freddie Mac, locking in all of the mortgage firms' future profits and requiring them to wind down their assets in an accelerated way.

The new provisions are meant to relieve pressure on both the bailed-out mortgage giants and taxpayers, and are being viewed as an important step in restoring the role of the private sector in the housing market.

As part of the provisions, Fannie Mae and Freddie Mac will hand over every dollar of profit that they make. Previously, the government-sponsored entities had to pay a fixed 10 percent dividend on the government aid, which totaled almost $19 billion a year.

The previous dividend requirement was criticized after Fannie and Freddie last week reported a combined $8.1 billion quarterly profit. On an annualized basis, that would leave them a net profit after the $19 billion government repayment, violating the spirit of the bailout.

But housing experts said the quarterly profits were not representative, and the new rules amount to acknowledgment that Fannie and Freddie are unable to pay dividends to the government in the long run.

"Even in the roaring '90s, Fannie and Freddie didn't make $19 billion," said Guy Lebas, chief economist of Philadelphia securities brokerage firm Janney Montgomery Scott L.L.C. "The second quarter was an exception. The fixed 10 percent deal was unsustainable."

Bob Eisenbeis, chief monetary economist of Cumberland Advisors, an investment management firm based in Florida, agreed: "Before, there was no payment through the provisions in place. It was phony accounting. [The new provision] is a step in the right direction."

Under the new agreement, Fannie and Freddie will have to wind down their mortgage portfolios by 15 percent a year, compared with 10 percent under the previous agreement.

As a result, the U.S. government will soon be a smaller player in the housing market, decreasing the risk to the taxpayer and paving the way for an increased role for the private sector, Eisenbeis said.

An additional $95 billion of packaged mortgages will return to the private sector in the next 12 months, according to Janney Montgomery Scott.

The American Bankers Association lauded the Treasury's moves, calling them consistent with a plan for a "reduced government presence in the housing market." But it also warned that further steps were needed to restore confidence in the secondary market, where mortgages are packaged and traded.