Us Economic AnalysisSettling Up With Fannie and FreddieBy Cristian deRitis in West ChesterMay 24, 2012Print| Bookmark | Questions? | Email Article | Email Alerts | RSSStability in the housing market is improving balance sheets at Fannie Mae and Freddie Mac.The cost of the GSE bailout is likely to total $200 billion, about 10% more than the cost to rescue AIG.New mortgage originations are performing well, making continued profits likely as the economy recovers.A full payback of the bailout by the GSE could take decades. Profits could complicate reform.An improving U.S. housing market combined with falling delinquencies on mortgage loans to give Fannie Mae a profit of $2.7 billion in the first quarter of 2012. As a result, the company didnt need to request additional funds from the U.S. Treasury to remain solvent—the first time that has happened since the crippled mortgage finance giant went into government conservatorship in 2008.
Suffice it to say that Fannie said they were in a “very good position” to get the bailout, so they’re sticking with it even while it becomes the sole law-enforcement agency in the housing industry.But with the loss of AIG and the growing number of mortgage-backed securities and junk bonds, most Fannie Mae and Freddie Mac customers have already lost their homes and are struggling to move assets.Many banks, and many individual homeowners, are still paying back the bank for not doing enough to keep a financial institution solvent.Some of our most experienced financial analysts will tell you that a $200 billion bailout of AIG, or one of its major customers, is a pretty good place to start, even if it is still a lot (and most important) more expensive than the one I mentioned in the prior section. And there are some serious risks.There are many areas that are likely to be hit hard. To some extent, we all know the U.S. economy is the most unequal in the world, because the share of the middle class in all U.S. incomes continues to drop. While many U.S. households did not have much of a stake in the economy in the post-Sandy heyday, they have found another avenue, the “too big to fail” industry of credit and loan sharkage.As a result, banks are now losing their credibility to compete. They will continue to underbid lenders, who still take advantage of their weak markets, until the cost is over the border. As they recover, these banks will become even more profitable for themselves–with the potential for more profits. The banks will not risk losing their money and will now be able to continue to invest in the future.As much as Fannie Mae and Freddie Mac could be on the hook for billions of dollars of lost assets as part of the GSE bailout, they probably should not, as the value they make due to their bad market performance is still too high to justify a bailout. The reason for this is not to simply make profits, but rather to make money that companies have no choice but to create.We need to have our financial markets, and our governments’ financial policies, changed. We have to be willing not to just keep failing, but to make the banks pay up. When banks go broke, they suffer no consequences. As a result, they lose any means to return to profitability (even if they don’t take the risk).We have to use our existing regulatory system to restore confidence in our financial system (despite the economic crash). We better make sure everything is on the line by moving to a new system, better organized, and more fully integrated with regulators; even in times of national recession, there are a great many people working to bring stability to financial markets, and to prevent more problems. It won’t be easy–but it’s worth it.
Suffice it to say that Fannie said they were in a “very good position” to get the bailout, so they’re sticking with it even while it becomes the sole law-enforcement agency in the housing industry.But with the loss of AIG and the growing number of mortgage-backed securities and junk bonds, most Fannie Mae and Freddie Mac customers have already lost their homes and are struggling to move assets.Many banks, and many individual homeowners, are still paying back the bank for not doing enough to keep a financial institution solvent.Some of our most experienced financial analysts will tell you that a $200 billion bailout of AIG, or one of its major customers, is a pretty good place to start, even if it is still a lot (and most important) more expensive than the one I mentioned in the prior section. And there are some serious risks.There are many areas that are likely to be hit hard. To some extent, we all know the U.S. economy is the most unequal in the world, because the share of the middle class in all U.S. incomes continues to drop. While many U.S. households did not have much of a stake in the economy in the post-Sandy heyday, they have found another avenue, the “too big to fail” industry of credit and loan sharkage.As a result, banks are now losing their credibility to compete. They will continue to underbid lenders, who still take advantage of their weak markets, until the cost is over the border. As they recover, these banks will become even more profitable for themselves–with the potential for more profits. The banks will not risk losing their money and will now be able to continue to invest in the future.As much as Fannie Mae and Freddie Mac could be on the hook for billions of dollars of lost assets as part of the GSE bailout, they probably should not, as the value they make due to their bad market performance is still too high to justify a bailout. The reason for this is not to simply make profits, but rather to make money that companies have no choice but to create.We need to have our financial markets, and our governments’ financial policies, changed. We have to be willing not to just keep failing, but to make the banks pay up. When banks go broke, they suffer no consequences. As a result, they lose any means to return to profitability (even if they don’t take the risk).We have to use our existing regulatory system to restore confidence in our financial system (despite the economic crash). We better make sure everything is on the line by moving to a new system, better organized, and more fully integrated with regulators; even in times of national recession, there are a great many people working to bring stability to financial markets, and to prevent more problems. It won’t be easy–but it’s worth it.
Suffice it to say that Fannie said they were in a “very good position” to get the bailout, so they’re sticking with it even while it becomes the sole law-enforcement agency in the housing industry.But with the loss of AIG and the growing number of mortgage-backed securities and junk bonds, most Fannie Mae and Freddie Mac customers have already lost their homes and are struggling to move assets.Many banks, and many individual homeowners, are still paying back the bank for not doing enough to keep a financial institution solvent.Some of our most experienced financial analysts will tell you that a $200 billion bailout of AIG, or one of its major customers, is a pretty good place to start, even if it is still a lot (and most important) more expensive than the one I mentioned in the prior section. And there are some serious risks.There are many areas that are likely to be hit hard. To some extent, we all know the U.S. economy is the most unequal in the world, because the share of the middle class in all U.S. incomes continues to drop. While many U.S. households did not have much of a stake in the economy in the post-Sandy heyday, they have found another avenue, the “too big to fail” industry of credit and loan sharkage.As a result, banks are now losing their credibility to compete. They will continue to underbid lenders, who still take advantage of their weak markets, until the cost is over the border. As they recover, these banks will become even more profitable for themselves–with the potential for more profits. The banks will not risk losing their money and will now be able to continue to invest in the future.As much as Fannie Mae and Freddie Mac could be on the hook for billions of dollars of lost assets as part of the GSE bailout, they probably should not, as the value they make due to their bad market performance is still too high to justify a bailout. The reason for this is not to simply make profits, but rather to make money that companies have no choice but to create.We need to have our financial markets, and our governments’ financial policies, changed. We have to be willing not to just keep failing, but to make the banks pay up. When banks go broke, they suffer no consequences. As a result, they lose any means to return to profitability (even if they don’t take the risk).We have to use our existing regulatory system to restore confidence in our financial system (despite the economic crash). We better make sure everything is on the line by moving to a new system, better organized, and more fully integrated with regulators; even in times of national recession, there are a great many people working to bring stability to financial markets, and to prevent more problems. It won’t be easy–but it’s worth it.
The other so-called government-sponsored enterprise, Freddie Mac, has also been operating at close to breakeven for two consecutive quarters, requiring only small capital injections from the Treasury to keep it solvent.
While this recent profitably could be easily reversed, it is an encouraging sign that the mortgage mess and the associated bailouts of Fannie Mae and Freddie Mac could be near an end. If so, the next question is whether the two mortgage finance institutions will ever be able to repay taxpayers for bailing them out.
As a condition of their conservatorships, the government gained a 79.9% ownership stake in Fannie and Freddie. In return, the institutions have been allowed to draw on the U.S. Treasury to maintain their solvency, receiving cash transfers once per quarter. To compensate taxpayers, the companies are required to pay a 10% annual dividend on these funds. As of the first quarter of 2012, the GSEs have drawn a total of $189.5 billion and have paid dividends of $41.1 billion, for a net bailout cost so far of $148.5 billion.
How much time to pay back?The firms future profitability, however, will depend heavily on the direction and speed of house prices as well as the health of the broader economy and any reforms Congress makes to the housing finance system.
Assuming optimistically that the GSEs will require no more assistance from the Treasury, and that the enterprises will earn enough from now on to make their quarterly dividend payments, we could expect the two companies to repay their bailout costs in full by the end of 2019.
In its latest budget proposal, the Obama administration projected that Fannie and Freddie would receive $221 billion from