* 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 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.
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
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
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.