January 22, 2014 / 1:36 AM / 7 years ago

Analysis: Fannie, Freddie profits give little reason to shut them down

WASHINGTON (Reuters) - A drive to enact legislation to dismantle Fannie Mae FNMA.OB and Freddie Mac FMCC.OB has stalled after the government-run companies chalked up a string of quarterly profits and groups banking on their survival rallied to their cause.

The Fannie Mae headquarters is seen in Washington November 7, 2013. REUTERS/Gary Cameron

President Barack Obama and lawmakers from both parties have said they want to wind down the two mortgage finance giants, which own or guarantee 60 percent of all U.S. home loans.

The companies almost collapsed in 2008 as a growing number of loans they backed went sour. The government kept them alive with $187.5 billion in taxpayer aid. They have since returned to profitability and paid about $185.2 billion in dividends to the government thanks to a surge in the U.S. housing market.

Experts saw a bipartisan effort in the U.S. Senate as the best shot to dismantle the two state wards. But competing interest groups have pulled lawmakers in opposite directions.

Consumer groups want Democrats to make sure any legislation preserves support for affordable housing. Some Republicans have shown an interest in including protections for private mortgage investors.

The longer the process drags on, the greater the risk of further splintering along party lines. Most experts say without substantial progress before summer, when lawmakers leave town and focus on re-election, there will be no agreement.

“Reform legislation is unlikely to become law this year. In fact, there are clear signals that the effort in the Senate Banking Committee faces a far steeper climb than originally expected,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.


Things looked more promising when Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo, the panel’s top Republican, began working on legislation last year.

Ten senators had already cosponsored a bipartisan bill that would serve as a starting point. The U.S. House of Representatives is brutally partisan, but across-the-aisle efforts sometimes work better in the Senate, and lawmakers appeared upbeat about their chances of success.

The momentum evaporated due to tugs from various interest group, and Fannie Mae and Freddie Mac’s ability to report billions of dollars in quarterly profits since early 2012. Some cosponsors of the earlier bill have been hesitant to sign onto a new housing reform effort, sources familiar with the process told Reuters.

Johnson, however, remains optimistic, even though he and Crapo missed a self-imposed deadline to finish a bill last year.

“We are deep into the drafting and negotiating phase and I feel good about our progress,” the South Dakota Democrat told Reuters. “There is clearly still bipartisan momentum to act, so I remain bullish on our chances of moving a bill forward in committee.”

Crapo declined to comment. Both have stated an intent to craft a system that provides continued access to long-term, fixed-rate mortgages, while limiting the risk taxpayers will ever again be put on the hook for losses.


Many Republicans accuse Fannie Mae and Freddie Mac of sowing the seeds of the financial crisis by fostering loose lending practices in an effort to promote affordable housing.

“Republicans are intent on a ceremonial burial of Fannie and Freddie,” said Josh Rosner, managing director at Graham Fisher & Co. “Politically it is a difficult task. They are essentially trying to reinvent the wheel.”

That animosity is most evident in the House.

In the Senate, lawmakers on both sides of the aisle are conceding that some sort of federal guarantee is needed to keep mortgage costs low and credit widely available, but there is also widespread agreement the companies should not survive in their current form.

The legislative efforts are being met with an intense lobbying campaign.

Hedge funds like Perry Capital and Paulson and Co., large investors in Fannie Mae and Freddie Mac preferred shares, are pushing for the companies to be recapitalized.

According to sources, investors have issued proposals among lawmakers to restructure or even privatize the firms, a path the Obama administration and key lawmakers are adamant must not be followed.

“We understand there are some issues that need to be worked through, but at the end of the day these entities would have no value whatsoever had the government not have stepped in,” Republican Senator Bob Corker said on January 8. “All of that needs to be rectified.”

Shareholders are also trying to persuade the courts to revisit the current requirement that the two companies sweep their profits into the U.S. Treasury.

At the same time, nonprofit housing groups have sued the regulator of Fannie Mae and Freddie Mac, challenging a 2008 decision to suspend payments to affordable housing trust funds.

And affordable housing advocates are pushing Democrats like freshman Senator Elizabeth Warren to ensure their viewpoints are heard. These advocates were concerned the earlier bipartisan bill did not maintain an affordable housing goal.

Warren, who spoke of the importance of making sure any legislation protects affordable housing in a speech in November, is also looking out for small banks and community lenders who fear getting shut out of a new system.

“There are a lot of different moving parts to getting this right,” Warren said in an interview with Reuters. “The impact will be felt throughout America’s middle class. So we’ve got to get the details right.”

Reporting by Margaret Chadbourn and Emily Stephenson; Editing by Tim Ahmann and Andrew Hay

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