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GSEs will need one-time bailouts

fannieThe government-sponsored enterprises Fannie Mae and Freddie Mac announced last week they will need to take draws on the U.S. Treasury after taking one-time hits as a result of last year’s tax overhaul.

Fannie Mae will need a $3.7 billion draw, its first bailout in six years. Freddie Mac will need a $312 million draw after also taking a one-time hit.

Fannie had to write down $9.9 billion in deferred tax assets, resulting in a $6.5 billion net loss and $6.7 billion comprehensive loss in the fourth quarter. The company, however, was able to apply $3 billion in capital reserves, which will reduce its need for funds from the Treasury.

Meanwhile, Freddie reported a net loss of $2.9 billion and comprehensive loss of $3.3 billion, almost all of which was related to the lower corporate tax rate that lowered the value of its deferred tax assets by $5.4 billion. Freddie was able to offset its losses in a variety of ways, including a legal settlement, resulting in a lesser draw.

Essentially, the value of these tax assets was worth less under the lower corporate tax rate, and GSEs had to write off a significant percentage of what they were anticipating.

The one-time draw was expected. The GSEs’ chief executive officers, the FHFA and analytics firms warned last year that Fannie and Freddie could expect a significant, one-time hit if the corporate tax rate fell.

Fannie and Freddie’s profits are almost entirely swept up by the U.S. Treasury. The government has extended what amounts to a line of credit to the GSEs in case they suffer quarterly losses. With the latest draw, Fannie will have taken $119.8 billion in draws, and paid $166.4 billion in dividends since 2008. Freddie has paid $112.4 billion in dividends and taken $71.3 billion in draws. 

Fannie will still have $113.9 billion available from the Treasury in the event of future quarterly losses. Freddie will have $140.2 billion available.

Fannie’s Chief Executive Officer Tim Mayopoulos said he doubted the one-time draw would roil the bond markets.

“As some folks in the media have already noted, we have been telegraphing for months that this draw was a possibility – both as a result of potential volatility in our business but also specifically with respect to the tax legislation,” Mayopoulos said during a morning call with reporters on Wednesday while responding to a question from Bloomberg News. “So, I don’t think anyone is surprised by this event.”

Mayopoulos said that he expected Fannie to return to profitability in future quarters, and the lower corporate tax rate would ultimately bolster the company’s earnings. 

It is not clear how these draws will play into the debate in Congress on how to reform the housing finance system and end the nine-year conservatorship. The Senate Banking Committee has drafted a preliminary bill that proposes to create several GSE-like entities that purchase and securitize loans. That bill has yet to be released.

Small-lender groups have been worried that if the GSEs are forced to take draws, it will prompt Congress to rush through a bill.

"FHFA Director Mel Watt got it exactly right when he said two years ago this week that one of the greatest risks of a draw would be a 'legislative response adopted in haste,'" said Scott Olson, executive director of the Community Home Lenders Association, in a statement released Wednesday.

 “Of course, Congress should adopt sound GSE reform legislation - but this artificial accounting draw is not a good reason to rush through a potentially bad bill just as a reaction to this development," Olson saidFannie Mae will need to take a $3.7 billion draw on the U.S. Treasury, its first bailout in six years.


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