Freddie Mac Senior Preferred Stock Purchase Agreement: What You Need to Know
Freddie Mac is one of the largest mortgage finance companies in the United States, and it`s government-sponsored to ensure access to affordable housing for every American. In 2008, the company was hit hard by the housing crisis, and the U.S. government had to step in to help it recover. As a result, the Senior Preferred Stock Purchase Agreement (PSPA) was created.
What is the Freddie Mac Senior Preferred Stock Purchase Agreement?
The PSPA is an agreement between Freddie Mac and the U.S. government, which was signed in September 2008. Under this agreement, the U.S. Treasury Department agreed to purchase Senior Preferred Stock from Freddie Mac worth $100 billion, which helped the company to stabilize its operations during the financial crisis.
When the PSPA was signed, Freddie Mac was facing significant losses and was unable to secure funding from the private market. The agreement was meant to provide the company with the necessary capital to remain operational and support the U.S. mortgage market.
How does the PSPA work?
Under the PSPA, the U.S. Treasury Department purchased senior preferred stock from Freddie Mac. This allowed the U.S. government to become a shareholder in the company and effectively take control of its operations.
In return for the capital injection, Freddie Mac agreed to pay a 10% dividend on the senior preferred stock to the U.S. government. The dividend payment was meant to help the U.S. government recover its investment and provide a return on the capital used to purchase the senior preferred stock.
In addition to the dividend payment, the U.S. government also received warrants to purchase up to 79.9% of the common stock of Freddie Mac at a nominal price. These warrants allowed the U.S. government to benefit from any future recovery in the company`s value.
What happened to the PSPA?
The PSPA played a critical role in stabilizing Freddie Mac during the financial crisis. The agreement allowed the company to continue providing liquidity to the U.S. mortgage market, which was critical for the U.S. economy`s recovery.
However, the PSPA remained in place long after the financial crisis had ended. In 2012, the U.S. government modified the agreement to change the dividend payment structure and convert the senior preferred stock into a new form of preferred stock known as “Net Worth Sweep.” The modified agreement required Freddie Mac to pay all of its net worth to the U.S. Treasury Department, effectively wiping out the company`s ability to rebuild its capital reserves.
In 2019, the U.S. government announced that it would allow Freddie Mac to retain its earnings and rebuild its capital reserves. This decision effectively ended the Net Worth Sweep and signaled that the PSPA was no longer necessary to support the company.
Conclusion
The PSPA was a critical agreement that helped Freddie Mac survive the financial crisis and continue to provide liquidity to the U.S. mortgage market. While the agreement remained in place for many years after the financial crisis, it ultimately served its purpose and helped stabilize the U.S. economy. Today, Freddie Mac is a healthy company that continues to support the U.S. housing market and help millions of Americans achieve the dream of homeownership.