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Mortgage-finance companies benefit from market

March 21st, 2013

Earlier this week, The Wall Street Journal reported that the nation’s two federally chartered and stockholder-owned mortgage-finance companies, known as Fannie Mae and Freddie Mac, are “likely to show large profits in the coming quarters.” This is implied from the gradual recovery of the housing market, as the prices of homes have risen and mortgage deliquencies have fallen.

Their profitability may now allow the “government-controlled mortage-finance companies” to repay funds that the U.S. Treasury has injected into the firms in order to keep them solvent when they were seized in 2008 amid the housing market colapse.

Fannie Mae, or the Federal National Mortgage Association, was charted by the U.S. Congress in 1938 to guarantee mortgages granted to low- or middle-income households. According to investopedia.com, Fannie Mae is able to do this by buying mortgages, repackaging them and selling them as mortgage-backed securities.

Freddie Mac, or the Federal Home Loan Mortgage Corporation, provides the same services as Fannie Mae. It also shares the same “implicit guarantee of federal backing” of these mortgages that Fannie Mae offers. Freddie Mac was established in 1970 to provide competition for Fannie Mae.

In 2008, both of these mortgage-finance companies were placed under federal control in fear that they would go bankrupt and collapse. The financial stability of these governement-sponsored enterprises was in question as a result of the mortgage crisis, an overexposure to this market, and what is referred to as the collapse of the housing bubble.

So far, Fannie and Freddie have received nearly $188 billion from the U.S. Treasury in rescue funds, according to The WSJ. The mortgage-finance companies have paid back $58 billion of these funds in the form of dividends, as their profits have been retained by the governement.

As Fannie Mae’s annual report is coming due, a potential move to repay as much as $61.5 billion more in rescue funds to the U.S. Treasury has been disclosed in a regulatory filing. The potential payment results largely from an accounting change. The timing of this accounting move is what continues to be debated between Fannie and its accountants, according to The WSJ.

If Fannie Mae concludes it is likely to have taxable income, they may be able to reverse some of the $61.5 billion in losses they have recorded amid their “federal conservatorship,” according to The WSJ.  The WSJ reports that Fannie reported “$9.6 billion in net income for the first three quarters of 2012,” compared with “losses of $14.5 billion for the same period in the previous quarter.”

Mark Calabria, director of financial regulation studies at the Cato Institute, stated in an interview with The WSJ, “While not truly representing a marketable asset, Fannie is likely to present its tax losses as a financial gain and use it as proof that they have turned a corner and should be allowed to continue as a company in their current state.”

The views on the potential (and surprising)repayment of most of the rescue funds to the U.S. Treasury by Fannie and Freddie differ in regard to economic and political implications.  Critics are worried that such a large payment to the U.S. Treasury would exaggerate the financial health of the firms and could remove the incentive to replace or wind down the firms. Regardless, any profits by the firms will be swept away as dividend payments on preferred shares owned by the government.

Information from The Wall Street Journal and investopedia.com was used in this report.