The U.S. Treasury began rescuing Fannie Mae and Freddie Mac in September 2008, ultimately pumping $187.5 billion into the two mortgage giants. In return, it received new issues of senior preferred stock. So how has its investment turned out?

This is easy to calculate: Tote up Treasury’s stock purchases and the dividends Fannie and Freddie have paid on this stock, then calculate the internal rate of return. As of the first quarter of 2016, the rate of return is 7.68 percent. That’s not too bad, though it is still short of the 10 percent return required by the original bailout deal.

But by the last quarter of 2017, the two companies will likely have paid back cash equivalent to retiring all of the $187.5 billion plus a 10 percent compound return. What should happen then?

Under the current, amended version of the bailout deal agreed to between the Federal Housing Finance Agency and the Treasury Department in 2012, nothing will happen. Fannie and Freddie will keep paying all their quarterly profits to the Treasury forever, and will forever remain part of the government, run by a political appointee and entirely dependent on the taxpayers’ credit.

This does not make sense. But neither does it make sense to allow Fannie and Freddie to go back to being their old government-sponsored enterprise selves with a free guaranty, courtesy of the taxpayer, and far too little capital.

How about this instead: The moment Fannie and Freddie have returned to the government cash equal to all the principal and a full 10 percent annual return, Congress should declare the Treasury’s senior preferred stock as retired, and simultaneously that these companies be treated as systemically important financial institutions.

Fannie and Freddie unquestionably qualify as SIFIs. They are, combined, $5 trillion in size, densely interconnected with the domestic and global financial system, hyper-leveraged, and able to put the entire system, as well as the finances of the U.S. government, at risk.

If Fannie and Freddie were designated as SIFIs, federal regulations would require them to maintain capital at least equal to 5 percent of their total assets. No longer obligated to hand over their profits to the Treasury, they could accumulate capital in the form of retained earnings, or possibly issue new shares.

Until their equity reaches 5 percent of assets, or about $250 billion at today’s balance-sheet size, Fannie and Freddie will be undercapitalized, with the regulatory special attention that implies. But at least their capital won’t be stuck perpetually at zero. Naturally, while undercapitalized, they will be unable to pay dividends on any class of stock or buy back any shares.

Like every bank SIFI, Fannie and Freddie should pay the government for their government guaranty. For banks, these payments take the form of deposit-insurance premiums assessed on the institution’s total liabilities. Deposit insurance, as the Federal Deposit Insurance Corp. stickers in every bank explain, is “backed by the full faith and credit of the United States government.” Fannie and Freddie are also backed by the U.S. government, as vividly demonstrated by their massive bailout. They should pay a fee for this guaranty at the same rate as would any other SIFI bank with the same capital ratio and risk. I estimate that this should be about 0.15 percent a year, or a combined $7.5 billion a year at their current size.

Finally Congress can correct two other mistakes. It can end Fannie and Freddie’s ridiculous exemption—written into their federal charters—from state and local corporate income taxes. And it can belatedly ensure that Fannie and Freddie reflect a private-sector cost of capital in setting their own guarantee fees for mortgage-backed securities. Congress instructed the Federal Housing Finance Authority to do this in the Temporary Payroll Tax Cut Continuation Act of 2011. The agency has yet to obey the law.

The 10 percent moment offers a logical point for a reform that will protect taxpayers from the losses, the extreme overleverage, and the distortions of mortgage credit that the old Fannie and Freddie inflicted on the public.

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