When it comes to investing in the stock market, there are various options available to investors. One such option is preferred stock, which is a type of stock that provides shareholders with a fixed dividend payment and priority over common stockholders in the event of liquidation. If you`re considering investing in preferred stock and the Federal Housing Finance Agency (FHFA) is involved, it`s important to understand the preferred stock purchase agreement (PSPA).

A preferred stock purchase agreement is a legal document that outlines the terms and conditions of the purchase of preferred stock between two parties. In the case of the FHFA, the agency oversees the conservatorship of Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that provide liquidity to the U.S. mortgage market. As part of their conservatorship, the FHFA has the authority to purchase preferred stock in Fannie Mae and Freddie Mac.

The preferred stock purchase agreement between the FHFA and the GSEs outlines the terms of the purchase, including the price, number of shares, and dividend rate. It`s important to note that the PSPA is a legal contract, which means that both parties are bound by the terms outlined in the agreement.

One key aspect of the PSPA is the dividend rate, which is the rate at which the preferred stockholders are entitled to receive dividends. In the case of Fannie Mae and Freddie Mac, the PSPA specifies that the dividend rate is 10% per year. This means that preferred stockholders are entitled to receive a fixed dividend payment of 10% of the face value of their shares each year.

Another important aspect of the PSPA is the liquidation preference, which determines the order in which shareholders are paid in the event of liquidation. In the case of Fannie Mae and Freddie Mac, the preferred stockholders have a senior liquidation preference, which means that they would be paid before common stockholders in the event of liquidation.

In summary, the preferred stock purchase agreement between the FHFA and Fannie Mae/Freddie Mac is an important legal document that outlines the terms and conditions of the purchase of preferred stock. Investors considering investing in preferred stock should be aware of the terms outlined in the PSPA, including the dividend rate and liquidation preference. By understanding these terms, investors can make informed decisions about whether investing in preferred stock is right for them.