WASHINGTON -- The government is changing the terms of its bailout agreement with Fannie Mae and Freddie Mac in a way that will shrink the holdings of the two mortgage giants more quickly and will require payment to the government of all quarterly profits the companies earn.
The Treasury Department announced the changes Friday in an effort to deal with concerns that the companies could at some point exhaust the federal support they were guaranteed when they were taken over by the government in September, 2008, during the financial crisis.
The two firms would have to turn over all profits they earn every quarter. They also would be required to accelerate the reduction of their mortgage holdings to hit a cap of $250 billion by 2018, four years earlier than planned.
Under the new arrangement, the firms' portfolios can be no larger than $650 billion each at the end of this year.
The Obama Administration unveiled a plan last year to slowly dissolve Fannie and Freddie, with the goal of shrinking the government's role in the mortgage system. The American Bankers Association applauded the move, saying it was consistent with the ABA's goal of reducing the government's presence in the housing market.
The government rescued Fannie and Freddie in September, 2008, when massive losses on risky mortgages threatened to topple them. The Treasury has pumped nearly $188 billion into the firms, and the government has received senior preferred shares of stock that pay a 10 percent dividend.
Fannie and Freddie make dividend payments to the Treasury every quarter. That has forced them to borrow money from the government and use that money to repay the government in periods when they didn't turn a large enough profit to cover the dividend payments.
The changes are aimed at avoiding the threat that Fannie and Freddie could one day exhaust their Treasury support because they did not generate enough profits to pay back their dividends.