The rebound in the real estate market has breathed some life back into Fannie Mae and Freddie Mac, the giant mortgage financiers that have been wards of the state since their near-collapse in 2008. The government should seize the opportunity to put them on a path to recovery, rather than killing institutions that, properly managed, could help stabilize U.S. housing finance for generations to come.
This week, Fannie Mae reported net income of $17.2 billion for 2012, the largest annual profit in company history. Freddie Mac earned $11 billion over the same period. Oddly, not a dime of that money will go toward paying back the $188 billion the federal government has lent the two companies over the past several years. Instead, at the governments behest, about $11 billion will go toward sky-high interest payments on the debt, which the Treasury holds in the form of preferred shares. The onerous payments will leave the mortgage giants thinly capitalized and undermine the investment of U.S. taxpayers, who hold 80 percent of the companies stock.
Fannie Mae and later Freddie Mac made the mortgage market more resilient and helped establish a culture of middle-class home ownership that was regarded as a bedrock of American values. The system worked so well that politicians couldnt leave it alone. Steady demands for greater home ownership and lower mortgage fees gradually gutted what risk acumen Fannie Mae and Freddie Mac could muster. Rather than maintain credit standards in the face of a housing bubble, they blindly repackaged billions of dollars in risky mortgages that by September 2008 forced them into government conservatorship.
The government bailout placed an unusually heavy burden on Fannie Mae and Freddie Mac. The Treasury received a 10 percent interest rate on the preferred shares it received in return for injecting enough money to cover the companies losses. Thats double the 5 percent rate initially paid by other financial institutions that received Treasury funding.
The demise of Fannie Mae and Freddie Mac would mean a drastically different marketplace for mortgage securities dominated by large banks. A better option would be to give Fannie Mae and Freddie Mac a chance to get out from under their debt burden by reducing the interest. The Treasury would receive the same amount of money whether it comes in payment of dividends or principle. How the government acts will be a crucial test of its loyalties. Whose interests is it serving, those of the countrys biggest banks, or those of American taxpayers and homeowners?
James Fenkner is a certified financial analyst living in Santa Barbara, Calif.