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GSE profits could put reform on back burner

The government-sponsored enterprises Freddie Mac and Fannie Mae both turned significant profits in the first quarter and are expected to return a combined $5 billion to taxpayers in June. The solid showing means that the GSEs aren’t likely to draw political flak over the next few months that might spur Congress to move more quickly on housing-finance reform.

On Friday, Fannie Mae reported net and comprehensive income of $2.8 billion, all of which is expected to be returned to the U.S. Treasury in June. On Thursday, Freddie Mac reported earnings of $2.2 billion. In both cases, the quarter’s earnings were less affected by changes in spreads and interest rates. In the fourth quarter of last year, both GSEs realized significant paper gains after a big post-election jump in interest rates, which increased the value of their derivatives used to hedge against risk. In the first quarter, rates were essentially flat.

fannieFannie’s net income, for example, fell from $5 billion in the fourth quarter.

In a morning conference call, Fannie Chief Executive Office Tim Mayopoulos said the underlying business has been strong. The volume of single-family loans that were purchased and guaranteed by the GSEs increased year over year in the first quarter, but the number of refinance loans has begun to fall.

In recent weeks, several mortgage trade groups have published GSE reform plans, anticipating that Congress and the Trump administration will try to end the federal government’s near-decade long conservatorship of Fannie and Freddie. But Republicans first have to tackle tax and regulatory reform, and now there’s a renewed push to repeal and replace Obamacare that is heading to the U.S. Senate. Some analysts say that there would be a greater sense of urgency to do GSE reform if Fannie and Freddie were regularly posting losses and taking bailouts.

After June's scheduled dividend payment, Fannie Mae and Freddie Mac have sent $162.7 billion and $108.2 billion, respectively, into the government’s coffers, which is $83.5 billion more combined than they received in bailouts after the 2008 financial crisis.

Mayopoulos said that future earnings could be volatile, which might necessitate a draw. The GSEs capital buffers have been purposely wound down to $600 million, and will go to zero in 2018. The government has extended an additional $258.1 billion combined in credit that could be drawn on in the event of losses.

“While we expect to remain profitable on an annual basis for the foreseeable future, we could experience a net worth deficit in a future quarter,” Mayopoulos said. “As we have discussed before, this is due to our limited and declining capital reserves and the potential for significant volatility in our financial results due to factors that we don’t control, such as interest rates and home prices.”

Freddie reported comprehensive and net income of $2.2 billion in the quarter, which was almost entirely reflective of actual performance and not by paper gains. 

“It was a very solid quarter and the numbers are starting to speak for themselves,” Freddie Chief Executive Officer Donald Layton said on Thursday during his call with reporters.

The original version of this story contained incorrect figures for the overall dividend payments made by Fannie Mae and Freddie Mac. 


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