WASHINGTON — Fannie Mae and Freddie Mac will be allowed to build capital buffers to protect against losses under an agreement between the Treasury Department and the Federal Housing Finance Agency announced on Thursday.

“Under the modifications announced today, Fannie Mae and Freddie Mac will be allowed to maintain a capital buffer of $3 billion each,” said a Treasury statement.

Fannie and Freddie had been delivering a quarterly dividend to the Treasury as part of an arrangement that was designed to gradually deplete their capital to zero.

Treasury Secretary Steven Mnuchin
“This agreement balances the concerns of the FHFA with compensation for taxpayers," said Treasury Secretary Steven Mnuchin. Bloomberg News

The agreement announced Thursday will change the terms of the deal with Treasury.

“The dividend payment owed to Treasury will be calculated each quarter using the $3 billion capital buffer as a baseline,” said the Treasury statement. “To compensate taxpayers for the dividends they would have received absent these letter agreements, Treasury’s liquidation preference for the Preferred Stock held in Fannie Mae and Freddie Mac will increase by $3 billion as of December 31, 2017.”

FHFA Director Mel Watt had been agitating to allow Fannie and Freddie to keep capital, which he argued was prudent risk management. However, Treasury Secretary Steven Mnuchin had said he expected Watt to continue to deliver the dividends, which went to taxpayer coffers. According to the Treasury statement, "any failure by Fannie Mae or Freddie Mac to declare and pay a full quarterly dividend will result in the automatic, immediate termination of its capital buffer."

“Treasury’s first duty is to ensure that taxpayers are being protected,” Mnuchin said. “This agreement balances the concerns of the FHFA with compensation for taxpayers. The Administration looks forward to working with Congress on comprehensive housing finance reform, a top priority in the year ahead.”