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Fannie Mae profits push taxpayers into black on housing bailout

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

By Margaret Chadbourn

WASHINGTON (Reuters) - Fannie Mae said on Friday it would soon send the U.S. Treasury a dividend of $7.2 billion that will make taxpayers whole for the 2008 bailout of the mortgage-financing giant and its sibling company Freddie Mac.

Unlike other companies rescued during the financial crisis, however, the firms will remain under government control until Congress or the courts decide their fate.

"It's good news for taxpayers that Fannie Mae is profitable and sending dividends to the Treasury," Fannie Mae President and Chief Executive Officer Timothy Mayopoulos said on a call with reporters. "But I don't think that our profitability should be interpreted as a reason for delaying housing finance reform."

In announcing the payment, Fannie Mae said it posted net income of $6.5 billion for the three-month period that ended December 31, its eighth straight quarterly profit. It said it expects to remain profitable for the foreseeable future.

For 2013 as a whole, its net income was a record $84.0 billion. That compares to its previous record profit of $17.2 billion a year earlier.

Both Fannie Mae and Freddie Mac benefited last year from a recovering housing market that lifted home prices and kept a lid on loan defaults. Their return to profitability allowed them to reverse write-downs of certain tax-related assets, which led to large one-time windfalls.

The duo, which own or guarantee 60 percent of all U.S. home loans, were seized by the government at the height of the financial crisis as mortgage losses threatened their solvency.

Officials felt they could not let the companies collapse because their role in the housing system was too important: providing liquidity to the mortgage market by buying loans from lenders and repackaging them as securities for investors.

They also feared a failure to honor the guarantees the companies made on loans would lead to an even deeper crisis.

The bailout terms for the companies force them to turn over their profits to the Treasury in the form of dividends on the controlling stake the government took when it bailed them out. They cannot repurchase the government's share.

MILESTONE REPAYMENT TO TAXPAYERS

Before returning to the black last year, Fannie Mae had suffered five years of losses totaling $164 billion, and it had drawn $116.1 billion in taxpayer aid.

Freddie Mac, which lost $94 billion between 2007 and 2011, was supported by $71.3 billion in bailout funds. The company has yet to report fourth quarter results, but has already paid $9 million more in dividends than it received in aid.

Fannie Mae's dividend payment next month means the two companies, after a combined bailout of $187.5 billion, will have paid back about $192.5 billion in dividends. This excludes any payment Freddie Mac may still announce.

Fannie Mae's latest payment marks a milestone of sorts, but it also provides a reminder of how Congress has long postponed a decision on what to do with the two companies.

To avoid having to ever rescue them again, the Obama administration and lawmakers on Capitol Hill have vowed to revamp the housing finance system and do away with Fannie Mae and Freddie Mac as they are currently constituted.

The Senate is working on a bipartisan bill that would ensure there will be a government backstop for the market in times of crisis, an approach favored by the White House. A Republican-backed bill in the U.S. House of Representatives would limit federal mortgage guarantees more sharply.

"Housing reform has always been a heavy lift, but as we move from a climate in which the focus is on the great harm these institutions have done to the economy to one in which it is on the increasing sums they bring to the Treasury, it is a good bit heavier," said Jim Parrott, a senior fellow at the Urban Institute and former senior adviser on President Barack Obama's National Economic Council.

While last year's dividend payments are not expected to be matched this year, the companies are likely to keep paying billions to the Treasury unless there is a sudden downturn in the housing market, Congress shutters them or lawsuits challenging the dividend requirement are successful.

Hedge funds, including Perry Capital LLC and Fairholme Funds Inc., have sued the government. They argue that if profits are being returned to taxpayers, the government's stake should shrink. This would benefit private shareholders who would see the value of their shares rise.

Indeed, the sizable profits have led some big investors to pile into the companies' stock on speculation they could be spun off again as private firms - an outcome that does not have support on Capitol Hill or at the White House.

In a separate suit, low-income housing groups are seeking enforcement of bailout terms that demand some of the profits go into a government trust fund for affordable housing initiatives.

The litigation is expected to drag out for years, as is the congressional effort to remake the housing finance system.

Putting an end to Fannie Mae and Freddie Mac would likely increase the cost of taking out a mortgage, even though the White House insists that any reforms retain some government role to preserve easy access to the 30-year loans that are a staple for middle-class buyers.

(Editing by Chizu Nomiyama and Bernadette Baum)

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