Fannie Mae profits complicate housing-finance overhaul

BloombergApril 1, 2013 

— The prospect of steady profits at U.S.-owned mortgage financiers Fannie Mae and Freddie Mac is complicating legislative efforts to shrink the federal role in securitizing home loans.

Fannie Mae executives are due this week to release the company’s earnings report for the last quarter of 2012, a filing delayed by an unanticipated problem: The Washington-based mortgage financier is making money and expects to remain steadily profitable.

Fannie Mae and McLean, Va.-based Freddie Mac, once thought to be the only financial-crisis bailout recipients that would generate a net loss for taxpayers, are poised to begin funneling healthy quarterly revenue back to the U.S Treasury as the housing market rebounds. The reversal of fortune is creating political and administrative headaches in Washington, where few expected the turnaround and the future of mortgage financing remains undecided.

“The good news is they’re actually starting to make money again,” Sen. Mark Warner, D-Va., said in an interview on “Capitol Gains” with Bloomberg Television’s Peter Cook that aired March 24. “Bad news is if they make too much money, there may be a sense of, ‘Well, let’s not mess with them anymore.’ We need housing finance reform.”

Regulators who took the nearly bankrupt enterprises into conservatorship in 2008 didn’t create an avenue for the companies to regain independence because lawmakers were expected to wind them down and replace them before they returned to profitability.

Congress and President Barack Obama’s administration have taken only baby steps toward an overhaul of housing finance, which remains heavily dependent on federal support. Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest. They’ve drawn $187.5 billion from Treasury and have sent back more than $50 billion in the form of dividends, which count as a return on the government’s investment and not as a repayment.

While proposals for overhauling mortgage finance have ranged from abolishing Fannie Mae and Freddie Mac to keeping them intact, most of the blueprints under discussion would replace the two companies with some form of government backing for home loans that would only kick in after significant losses to private capital. In the absence of a plan from lawmakers, the companies’ overseer, the Federal Housing Finance Agency, has been requiring them to shrink their footprint and explore some merged operations.

If the Obama administration and lawmakers continue to delay action on an overhaul, the two companies may find themselves in a long-term limbo in which they remain under U.S. control even if they eventually pay more to Treasury than they ever received in aid.

Under the terms of an agreement with Treasury that went into effect this year, the enterprises will be allowed to retain only $3 billion in net worth. Any profits beyond that amount will go to taxpayers.

“They have no ability to recapitalize their business,” Tim Rood, a managing director at Washington-based Collingwood Group, a financial services consulting firm. “They could spin off $100 billion next year and it wouldn’t make a stitch of difference.”

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