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Fannie Mae's Bailout Payments

U.S. Treasury Dividends


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By Swagato Chakravorty
Friday, May 10th, 2013

Fannie Mae (OTCBB: FNMA) stated yesterday that it is all set to pay $59.4 billion in dividends to the U.S. Treasury.

fannie maeFannie Mae is the biggest domestic mortgage finance company, and it's going to be able to make this payment due in large part to record-setting profits in Q1. According to Reuters, Fannie Mae (which is actually under U.S. government control) cited pre-tax income for the quarter as $8.1 billion, while other write-downs enabled a gain of $50.6 billion on top of that.

Net income stands at $58.7 billion. Let’s recall that in the same period back in 2012, profit was noted as $2.7 billion.

In total, Fannie Mae has received $116.1 billion in the form of taxpayer funds since 2008. As of this June, some $95 billion will have been returned to the Treasury, and the net cost of the company’s bailout will go down to just $21.1 billion.

In further encouraging news, this quarter marks Fannie Mae’s fifth straight profit-making quarter. And its sibling company, Freddie Mac, has just returned to profitability and is deliberating over certain tax assets.

That company received $71 billion courtesy of the American taxpayers, and as of June it will have returned $36.6 billion. That means the net cost for Freddie Mac’s bailout will be brought down to $34.7 billion.

Government Control

One problem – or condition, depending on your perspective – is that regardless of how much profit either Fannie or Freddie make, they cannot buy back the government’s stake. This effectively ensures payments to the government in perpetuity, unless the laws governing the arrangement change.

Although Freddie and Fannie either own or stand guarantee for nearly half of all domestic home loans, the Obama administration and Congress appear set on shutting them down eventually. Certain hedge funds and other private investors have recently begun speaking out against this. They want a move toward privatization, and the recent profit-making numbers posted by the two companies are their strongest argument.

However, during Fannie’s conference call regarding its quarterly numbers, CEO Timothy Mayapoulos did state that the recent good numbers should not be read as a general statement as to the health of the overall housing market.

Forbes quotes:

“I think there is a risk policymakers might look at our profitability and conclude they don’t need to take action with respect to housing finance reform. I think that would be a mistake.”

Federal Debt Limit, U.S. Housing Market

One consequence of Fannie’s repayment almost certainly will be that the deadline by which the federal debt limit would need to be raised (again) gets pushed back near October.

Congress had temporarily suspended the debt limit as 2013 began, but that expires next weekend. After that, the Obama administration will need to get Congress to approve a raising of the federal limit or risk facing a national default.

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A number of other factors, including higher-than-expected federal tax revenue and reduced spending across the board (you can thank the sequester for that), mean the government can continue making payments for a longer time than anticipated earlier. Therefore, instead of debt-limit drama this summer, we’re going to have to wait until fall for D.C. to lose its collective head all over again.

Rising housing prices…falling foreclosure rates – clearly, there is a definite trend of improvement in the U.S. housing market. Savvy buyers are realizing the rock-bottom prices likely won’t be around too much longer, and they are making their investments now.

However, a clearer solution to Fannie and Freddie’s longer-term future needs to be figured out. Thus far, the administration and Congress have indicated no support for the privatization notion. On the other hand, that camp is gaining strength by the day.

Should Fannie and Freddie be wound down? The day may come when President Obama will need to make a definitive statement one way or the other.

In the meantime, though, it’s heartening to see their dramatic recovery and to take it as one more indication of the resurgence in the U.S. housing market. However, as Fannie CEO Mayapoulos pointed out, it’d be a mistake to interpret these signs as a cue to relax housing finance reform completely. That sector does need extensive restructuring, and it’s still a work in progress. 

 

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