Lingering limbo

23 March 2015 By Daniel Indiviglio

A watchdog says the U.S. mortgage guarantors could lose $190 bln in a crisis. They lack capital cushions because Congress is stripping their cash. Changing that would require a policy rethink and could embolden undeserving equity holders. But the status quo is not sustainable.

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The U.S. Federal Housing Finance Agency’s inspector general warned in a report on March 18 that mortgage guarantors Fannie Mae and Freddie Mac could need a bailout in the future. The two firms were rescued in 2008, ultimately requiring $187.5 billion from the U.S. Treasury to stay afloat.

The watchdog’s report cited several problems with the current arrangement the government has with Fannie and Freddie, known as conservatorship. Due to the Congress-imposed requirement that the firms shrink their portfolios, future income streams will be smaller. More significant earnings in recent years were also largely due to non-recurring tax-related items. Meanwhile, the companies are not allowed to accumulate substantial capital cushions to absorb future losses. In the report, the FHFA inspector general notes that an April 2014 stress test analyzing a situation akin to the recent financial crisis, Fannie and Freddie would need between $84 billion and $190 billion in additional Treasury funding to stay afloat.

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