Fannie Mae, Freddie Mac to repay U.S. sooner

WASHINGTON Wed Mar 20, 2013 12:10am EDT

A view shows the Fannie Mae logo at its headquarters in Washington March 30, 2012. REUTERS/Jonathan Ernst

A view shows the Fannie Mae logo at its headquarters in Washington March 30, 2012.

Credit: Reuters/Jonathan Ernst

Related Topics

WASHINGTON (Reuters) - Revamped terms of Fannie Mae and Freddie Mac's taxpayer-funded bailout that went into effect this year will allow the mortgage finance firms to repay the Treasury sooner than would have otherwise been the case, a federal watchdog said on Wednesday.

Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) were seized by the government at the height of the financial crisis in 2008 as mortgage losses threatened their solvency. Since then, they have drawn about $188 billion in taxpayer funds to stay afloat, while paying about $58 billion to the Treasury in dividends.

The two companies have now returned to profitability, and under the new terms, their earnings are swept into the Treasury as a dividend payment for the government's stake in the firms. If they are not profitable, no sweep is made.

Previously, the companies, which buy mortgages from lenders and repackage them as securities for investors, were required to make a 10 percent dividend payment even if they had a loss. At times, they had to borrow from the Treasury just to make the payment. Now, they simply will not be able to retain any profits.

"Ending the circularity of draws from Treasury to pay dividends will prevent the erosion of Treasury's commitment level," the Federal Housing Finance Agency's Inspector General said in a report.

"The change in the dividend structure also will affect quarterly payments to Treasury, potentially resulting in the enterprises returning more money to federal taxpayers sooner."

The two so-called government-sponsored enterprises, or GSEs, will also see changes in quarterly payments to Treasury under an accounting method where they start recording potential tax credits, known as deferred tax assets, as part of their net worth, the report concluded.

The new bailout terms, which were announced in August, were intended to move up plans to shut the companies down, but they do little to address how that might be achieved or how the government's footprint in the mortgage finance market might shrink. Fannie Mae, Freddie Mac and the Federal Housing Administration finance nine out of every ten new home loans.

Fannie Mae has already raised the possibility that it could soon be required to send about $61.5 billion to the U.S. Treasury if it begins to account for deferred tax assets. The company has delayed filing its earnings report for the fourth quarter to further study the accounting issue, but said it expects to post a significant profit.

"Indeed, because of accounting treatment, sustained profitability of the (GSEs) could result in a one-time large dividend payments to Treasury from each," the report stated.

Freddie Mac has said that in future periods it will assess the need for a reduction of its deferred tax asset valuation allowances, which could have a material effect on its financial position. The company, in its annual report, said that current conditions didn't require it to reverse any of its $31.7 billion in deferred tax assets as of the end of 2012.

(Reporting By Margaret Chadbourn)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
thoma wrote:
Good. Now what about the preferreds. Before the crash I wanted to lighten up on stocks, was influence by Greenspan’s ” irrational exuberance” pre stock market crash. My genius Merrill Lynch financial advisor put large share of my pension plan in Freddie Preferreds because they were “backed by government”. Shortly after Barney Frank reinforced that notion- but on hindsight it was cheerleading without the skirts. I am still waiting and have those shares, worth buttons,. The idea was that if you could afford to have Freddie preferreds you could afford to lose them. Plenty of less successful and therefore more deserving citizens who could use a bailout and that was one way of financing it. Sounds like Cyprus but worse and it was here in the USA.

Mar 20, 2013 3:24am EDT  --  Report as abuse
thoma wrote:
Good. Now what about the preferreds. Before the crash I wanted to lighten up on stocks, was influence by Greenspan’s ” irrational exuberance” pre stock market crash. My genius Merrill Lynch financial advisor put large share of my pension plan in Freddie Preferreds because they were “backed by government”. Shortly after Barney Frank reinforced that notion- but on hindsight it was cheerleading without the skirts. I am still waiting and have those shares, worth buttons,. The idea was that if you could afford to have Freddie preferreds you could afford to lose them. Plenty of less successful and therefore more deserving citizens who could use a bailout and that was one way of financing it. Sounds like Cyprus but worse and it was here in the USA.

Mar 20, 2013 3:24am EDT  --  Report as abuse
Harry079 wrote:
“The two companies have now returned to profitability, and under the new terms, their earnings are swept into the Treasury as a dividend payment”

With the Federal Reserve buying $40 billion a month in Mortgage Backed Securities it make one wonder how much MBS’s are available to investors.

The Fed is also buying the majority of Treasury Bonds put up for sale each month to a tune of $45 billion.

So it’s kind of like having a yard sale where a family member buys everything for a certain price then rents out the items to other family members who pay a monthly fee for their use. Once the family member gets back his original investment he splits the monthy fees with you and you slowly to start repurchase the items until you have them all back.

Now you understand how the Federal Reserve, Treasury, Fannie/Freddie claim they make profits.

Mar 23, 2013 9:39pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.