(Adds Freddie Mac CEO comment, delinquency rate decline)
By Lindsay Dunsmuir
Nov 6 (Reuters) - Government-controlled mortgage finance firms Fannie Mae and Freddie Mac said on Thursday they will pay U.S. taxpayers $6.8 billion after reporting third-quarter profit that modestly rose from the second quarter.
Once they have made the latest payments in December, the two companies will have returned $225.5 billion to taxpayers, in exchange for about $188 billion in taxpayer aid they received after being placed under the government’s wing at the height of the financial crisis.
Fannie Mae, the bigger of the two and the nation’s largest source of mortgage funds, earned a net income of $3.9 billion in the third quarter, up from $3.7 billion in the second quarter.
The increase was driven by higher net interest income, an increasing portion of which is derived from guaranty fees, and about $1.2 billion in settlement payments from Goldman Sachs and HSBC related to Fannie’s investments in private-label mortgage securities sold by the two banks before the credit crisis.
Slowing home-price appreciation was the primary drag on Fannie’s profit growth. The firm reported credit-related income of $836 million, the lowest since having negative credit-related income in the third quarter of 2012.
Based on its own home price index, Fannie estimated that U.S. home prices increased just 1.2 percent in the third quarter and are up just 5.3 percent in the year to date, after gaining 8.2 percent in 2013.
On a year-over-year basis, Fannie’s net income was down from $8.7 billion a year earlier.
Freddie Mac generated net income of $2.1 billion versus $1.4 billion in the second quarter. Like Fannie, Freddie also posted higher net interest income and benefited from $1.2 billion in legal settlements in the same litigation, which had been brought by the U.S. Federal Housing Finance Agency, which regulates both companies.
In an interview, Freddie Mac Chief Executive Donald Layton said the Federal Reserve’s winding down of its quantitative easing program didn’t have the negative effect on the MBS market that many had anticipated.
Both companies reported a further decline in the rate of serious delinquencies.
Freddie’s profit fell dramatically from a year earlier, when one-time tax benefits drove its net income to nearly $30.5 billion.
Neither Fannie Mae or Freddie Mac lends money directly to home buyers. Rather, the two companies buy mortgages from lenders and repackage them into securities they sell to investors with a guarantee.
Their businesses collapsed during the financial crisis and the two were seized by the U.S. government in 2008. Under their bailout terms, the two firms must turn their profits over to the Treasury as dividends on the government’s controlling stake.
Fannie Mae’s dividend to the U.S. Treasury was larger than the $3.7 billion it paid in the prior quarter, while Freddie’s was up from $1.9 billion.
Those dividends swelled in early 2014 and late 2013 due to one-off events like legal settlements.
Private shareholders in Fannie Mae and Freddie Mac have sued the government over the dividend policy, claiming Washington is expropriating the value of their preferred shares. A federal court dismissed a suit by one of the largest shareholders in September, but other legal challenges could drag on for years.
Fannie Mae and Freddie Mac have been a minor cash cow for the Treasury in recent years, paying back all their bailout funds and more. But their obligation to turn over all their profits to the Treasury has helped keep them undercapitalized, analysts say, and a severe downturn in the housing market could eventually lead them to require further bailouts.
The Obama administration has argued for replacing the firms with a new entity, but lawmakers might not address housing reform even after Tuesday’s congressional elections, in which Republicans seized control of the Senate.
Editing by Bernadette Baum