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Sunday, 31 August 2014

Fannie goes moo

Fannie's record profit sets U.S. reform back further

Nothing breeds complacency like money. And so it may be with Fannie Mae’s record profits and U.S. housing reform. The failed housing agency earned $17.2 billion in its latest fiscal year, two-thirds of which it handed to the federal government. A recovering housing market should keep Fannie profitable for some time. That’s good for Uncle Sam’s finances but terrible for fixing a broken home-finance system.

More than 40 percent of last year’s earnings came in the final three months of the year, with Bank of America making a big assist with a $1.3 billion payment to settle a dispute over bad mortgages. Fannie’s $7.6 billion of quarterly profit, however, is peanuts next to what Fannie could report next quarter. It’s sitting on $59 billion worth of deferred tax assets. The company could realize these as a gain as early as this quarter.

Say Fannie books the entire tax credit at once, and repeats its fourth-quarter profit. That would net taxpayers $63.5 billion, after accounting for the $3 billion capital reserve cushion it needs to keep on its books. Add that to the $36 billion the company has already paid in dividends since 2008, and taxpayers are only $17 billion away from breaking even on their $116 billion emergency investment in the failed firm starting in 2008.

Fannie, however, is not paying back the government. Unlike AIG, Citigroup or other banks that received bailout dollars, Fannie and Freddie Mac can’t earn their way back to the private sector. They can’t redeem the senior preferred stock the government issued as part of its conservatorship. That’s by design, since lawmakers have said they want to eventually wind down the two behemoths.

But here’s the rub. Such an arrangement turns them into pure cash cows once they cross their break-even points. They’re likely to remain profitable given tighter lending standards and the recovery in housing. More critically, the downside of having government so involved in the $10 trillion mortgage market is obscured by the fact that the liabilities for Fannie and its sister firm Freddie don’t show up on the government’s balance sheet. That will make them even harder to give up.

Housing reform has never been much of a priority for President Barack Obama’s White House or for Congress, despite the havoc dodgy mortgages wrought on the financial system. With the money gushing in over the next few years, the status quo looks safer than, well, houses.

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On April 2, Fannie Mae reported a record $17.2 billion in net income for 2012 and it expects to remain profitable “for the foreseeable future.” The company paid the U.S. Treasury $11.6 billion in dividends on the $116.1 billion of the government’s senior preferred stock used to keep the housing finance agency solvent after its failure in September 2008. In the previous year, Fannie lost $16.9 billion.

Beginning in 2013, Fannie Mae and Freddie Mac, also rescued by the federal government, will give their quarterly profits directly to the U.S. Treasury rather than pay a 10 percent dividend on the preferred stock.

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