Treasury Finally Gives Up Fannie, Freddie Dividend Charade

NEW YORK ( TheStreet) -- The U.S. government will finally scrap the original bailout agreements with Fannie Mae ( FNMA) and Freddie Mac ( FMCC) that had the U.S. Treasury Department demanding dividends from the housing agencies there were often funded with taxpayer dollars.

The Treasury said that it would modify its bailout agreements with Fannie and Freddie to "make sure that every dollar of earnings each firm generates is used to benefit taxpayers, and support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market." While the tough-sounding language about "every dollar of earnings" is in tune with the political climate, the government's move actually eases pressure on Fannie and Freddie, since the high dividend will no longer be "tacked onto the principal."

The Treasury's move is likely to ease the concerns of investors who rely on the government's guarantee when purchasing the debt continually issued Fannie and Freddie to fund mortgage purchases.

Michael Stegman, counselor to Treasury Secretary Tim Geithner for housing policy, said that "as we continue to work toward bi-partisan housing finance reform, we are committed to putting in place measures right now that support continued access to mortgage credit for American families, promote a responsible transition, and protect taxpayer interests."

When Fannie Mae and Freddie Mac were taken under government conservatorship by the Federal Housing Finance Agency in September 2008, part of the bailout agreement included having the bloated housing giants paying 10% dividends on the preferred shares held by Treasury. As of June 30, the government held $117.1 billion in Fannie Mae preferred shares, requiring annual dividends of $11.7 billion and $72.3 billion in Freddie Mac preferred shares requiring annual dividends of $7.2 billion.

Neither company requested a draw for further government aid for the second quarter, but both companies said that they expected to make some further draws to cover the preferred dividends.

Fannie said in its second-quarter 10-Q filing that the annual dividend on government-held preferred shares "exceeds our reported annual net income for every year since our inception," adding that "we do not expect to generate net income or comprehensive income in excess of our annual dividend obligation to Treasury over the long term," and that "our dividend obligation to Treasury will increasingly drive our future draws under the senior preferred stock purchase agreement."

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