UPDATE 5-Fannie Mae to send $59.4 billion to U.S. Treasury

Thu May 9, 2013 5:09pm EDT

* Fannie earns $8.1 billion pretax income in first quarter

* U.S. taxpayers injected $188 bln into Fannie, Freddie

By Margaret Chadbourn

WASHINGTON, May 9 (Reuters) - Fannie Mae, the nation's biggest mortgage finance company, said on Thursday it will pay $59.4 billion in dividends to the U.S. Treasury after a record profit in the first quarter that reflected a multibillion-dollar tax-related windfall.

The report from Fannie Mae, which recorded pretax income of $8.1 billion, came just a day after its smaller rival and fellow state ward Freddie Mac said it would be making a $7 billion dividend payment to the government.

The latest payments from the two government-controlled companies will slash the net cost of their nearly $188-billion taxpayer-funded bailout to just $55.8 billion. That could drop by another $30.1 billion soon if Freddie Mac follows Fannie Mae in recognizing deferred tax assets it had written down.

The Obama administration and Congress want to eventually wind the companies down, but there is little agreement on what structure should replace them and their return to profitability has undercut the urgency for change.

"There is a risk that policymakers might look at our profitability and conclude that they do not need to take any action with respect to housing finance reform. I believe that would be a mistake," Fannie Mae Chief Executive Timothy Mayopoulos told reporters on a conference call.

Fannie Mae booked a gain of $50.6 billion by reversing a write-down on certain tax assets, which vaulted it to an overall profit of $58.7 billion. In the same three months a year earlier, it had net income of $2.7 billion.

Both its pretax income and net income were records.

Fannie Mae has turned a profit for five straight quarters, while Freddie Mac has been profitable for six. Both have been helped by a turnaround in the housing market driven by record low interest rates engineered by the Federal Reserve.

Given their return to profitability, they have had to consider counting potential tax credits as part of their net worth, a step Fannie Mae took on Thursday.

In anticipation of a sizable dividend payment, Fannie Mae had already sold debt to raise the needed cash.

Fannie Mae and Freddie Mac own or back about half of all U.S. home loans. They buy mortgages and package them into securities, which they issue to investors with a guarantee. They also sell debt to help fund their mortgage purchases.

To help keep mortgage costs down, the Fed has been a big buyer of the securities issued by the two companies.

REVENUE STREAM

The terms of their bailout do not allow the two government-sponsored enterprises (GSEs) to buy back the government's stake, which means they will keep making payments as long as they are profitable without ever recovering the loan amount.

The dividend payment Fannie Mae announced on Thursday will help ease a cash crunch at the U.S. Treasury when a temporary suspension of the debt limit expires on May 18. Analysts predict the Obama administration may be able to continue paying the nation's bills into October.

With the reduction in the government's borrowing needs, analysts say the dividend payments should result in smaller auctions of Treasury debt in the second half of the year.

"Unfortunately, these profits hurt GSE reform because they give the illusion mortgage finance is a great business," said Jim Vogel, head of interest rate strategy at FTN Financial in Memphis, Tennessee.

Government backing on Fannie Mae and Freddie Mac loans has helped keep the mortgage market liquid even as private capital fled during the housing bust. While the housing market is rebounding, very little private capital has flowed back in.

Vogel said private firms simply cannot compete, given the government backing on loans from the two GSEs.

"The business driving Fannie, Freddie profits right now isn't there for the taking by others," he said. "'Profits' are going to blind policymakers to that fact."

Fannie Mae and Freddie Mac shares, which were taken off the New York Stock Exchange in 2010, have shown signs of life in the last few months as some investors have begun to speculate the two entities might eventually escape government control.

Fannie Mae's common shares have surged 243 percent this year, while Freddie Mac shares are up 221 percent. Fannie shares slipped about 3 cents on Thursday to about 87 cents. Freddie closed at 84.5 cents.

Due to the government's conservatorship, both the common and preferred shares of Fannie and Freddie that were issued before the takeover may have little more than speculative value. That's because the resolution of the Treasury's ownership could wipe out the existing equity.

Nevertheless, preferred shares of both are at levels not seen since early September 2008, just before the collapse of Lehman Brothers triggered the financial crisis. Fannie's preferred series S rose 7.8 percent on Thursday to close at $4.95, while Freddie's preferred series Z, both issued in back-to-back $7 billion offerings in December 2007, gained 7.5 percent on Thursday to close at $5.05. Seven months ago, both were trading below $1.

Fannie Mae said its first quarter profit was driven in part by the U.S. housing market's turnaround and lower default rates on soured loans.

Foreclosure activity fell to its lowest level in more than six years in April, according to a report on Thursday from RealtyTrac. A separate report from the Mortgage Bankers Association showed a rise in the mortgage delinquency rate in the first quarter, although Fannie Mae said it saw a decrease in its seriously delinquent loan rate.

Fannie Mae's profit also reflected a $3.6 billion settlement with Bank of America over mortgage-related claims. The company's chief financial officer, David Benson, said the settlement added about $800 million to company's net income in the first quarter and would likely impact future earning periods as well.