The new capital buffer deal has a limited life. At current earnings rates, Fannie will reach the $25 billion buffer cap in about two years, Freddie a little later.
Analyst Richard Bove thinks the new net worth sweep agreement is just a gimmick because the liquidation preference on Treasury’s preferred stock will offset any increase in the GSEs’ capital buffers.
Departing GSE executive David Lowman: “With over six years at Freddie Mac, I want to take advantage of opportunities presented by the rapidly evolving mortgage finance marketplace and its adjacent industries."
Fannie and Freddie will be able to retain all their second-quarter profits, rather than forward them to Treasury. Combined, the GSEs will add $5.2 billion to their net worth this month.
SOFR-linked debt is vulnerable to much higher rate volatility than those referencing LIBOR. This risk was highlighted last month when surging repo rates sent SOFR briefly to a record 5.25%.
The creation of a U.S. sovereign wealth fund could grease the skids for an end to the conservatorships of Fannie Mae and Freddie Mac.
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