WRAPUP 2-Fannie Mae, Freddie Mac post profits driven by legal settlements

Thu May 8, 2014 10:22am EDT

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By Margaret Chadbourn

WASHINGTON May 8 (Reuters) - Government-controlled mortgage finance firms Fannie Mae and Freddie Mac will send the U.S. Treasury dividends totaling $10.2 billion after posting quarterly profits driven mainly by income from legal settlements.

Fannie Mae posted net income of $5.3 billion for the three months ended March 31, which included $4.1 billion from settlements of litigation over mortgage-backed securities.

Freddie Mac earned a net income of $4.0 billion in the same period, reflecting $4.9 billion from litigation over mortgage-backed securities it had acquired.

"Our recent level of earnings is not sustainable over the long term," said Donald Layton, Freddie Mac's chief executive officer. "Our results have been dominated for more than a year by one time and cyclical recovery items."

Fannie Mae and Freddie Mac's regulator, the Federal Housing Finance Agency, sued large banks and financial institutions over mortgages sold to the companies leading up to the housing crisis. The FHFA alleged Fannie Mae and Freddie Mac had been misled about the soundness of the underlying mortgages.

The companies, which own or guarantee 60 percent of all U.S. home loans, were placed in conservatorship in September 2008 as soured loans threatened their solvency.

Fannie Mae and Freddie Mac will have returned $213.1 billion to taxpayers by the end of June in return for the $187.5 billion in aid they received after being placed under the government's wing at the height of the financial crisis.

"While the company expects its annual net income to remain strong over the next few years, the company expects its annual net income to be substantially lower than its net income for 2013," Fannie Mae said in a statement.

Under their bailout terms, Fannie and Freddie must turn their profits over to the Treasury as dividends on the controlling stake the government took when it seized them. They cannot repurchase the government's share.

To avoid the need for any future taxpayer rescues, the Obama administration and lawmakers on Capitol Hill have vowed to wind down the companies and totally revamp the housing finance system they dominate.

The duo do not lend directly to home buyers. Instead, they buy them from lenders and package them into securities that are sold to investors with a guarantee. In doing so, they help keep the mortgage market liquid.

The Senate Banking Committee will vote on a bill next week that would establish a government backstop for the mortgage market, but one that would only kick in after private investors took a big hit.

The bill, which is supported by the White House, has yet to garner the broad support it needs to ensure final passage. A Republican-backed bill in the U.S. House of Representatives would limit federal mortgage guarantees more sharply. (Reporting by Margaret Chadbourn; Editing by Sofina Mirza-Reid)

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