Fannie, Freddie near payback of $188 billion owed to taxpayers

Government-controlled mortgage giants Fannie Mae and Freddie Mac produced nearly $40 billion in third-quarter profits, inching ever closer to matching the investment of taxpayers. 

The housing market’s recovery has accelerated over the past year and double-digit annual price increases have boosted Fannie’s and Freddie’s profits and enabled them to pay back nearly all of the $188 billion needed to keep them afloat during the 2008 financial crisis back to the Treasury. 

But while the totals show that the firms have technically covered the bailout amount, the agreement and math are a bit trickier. 

Essentially, the dividends go into the Treasury’s coffers but because Fannie and Freddie can’t buy back the government-owned senior preferred stock, they are still stuck with owing all $188 billion. 

Notably, though, it was difficult to conceive not too long ago that Fannie and Freddie would ever produce profits anywhere near the $188 billion.

Fannie will send $8.6 billion in earnings to the Treasury Department next month, while Freddie will pay $30.4 billion for the July-September period, the firms reported on Thursday. 

Fannie, which posted its seventh straight profitable quarter, has repaid about $114 billion in dividends, just shy of the $117 billion it received from taxpayers following the 2008 financial crisis.

Freddie had its eighth straight quarter of profits and will pay a dividend of $30.4 billion to the Treasury, putting it just over the amount it owes taxpayers, about $71.3 billion.

The firm’s profits were boosted by an accounting move that provided a more than $23 billion tax windfall.

Fannie and Freddie are expecting to stay on a positive track into the near future even though housing price increases are expected to slow down and cut into profits. 

Despite the positive results, lawmakers who are leading the charge on legislation to overhaul the housing finance system argue that, while the profits are good to see, Congress can’t skirt around crafting a bill that reduces the government’s role and spurs more private investment in the market.

“While I’m always glad when taxpayers see a return on investment, we can’t forget that Fannie and Freddie wouldn’t be earning one penny today without the government guaranteeing their transactions,” said Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee, who has co-authored legislation to overhaul the housing finance system. 

In June, Corker and Sen. Mark Warner (D-Va.) introduced bipartisan legislation that would reduce the government’s role in the market while preserving a government guarantee that ensures the continuation of the popular 30-year fixed mortgage.

“While I’m pleased to see these GSEs [government-sponsored enterprises] returning to profitability and repaying the Treasury, we need to continue moving forward on common-sense reforms,” Warner said.

“Our bipartisan reform legislation protects taxpayers during future economic downturns, while also responsibly preserving the availability of the 30-year fixed-rate mortgage for homebuyers.”

The government backs about 90 percent of mortgages.

The Senate Banking panel is holding a series of hearings designed to help lawmakers reach a bipartisan agreement on a housing finance measure that could gain committee and floor approval. 

The push for housing finance reform has ramped up in the past several weeks with lawmakers in the House and the Senate agreeing that a bill needs to get through Congress.

House and Senate bills share many similarities, but the lower chamber’s measure shifts most of the burden into private hands.

Opponents of the House Financial Services Committee’s measure argue that it means the elimination of the 30-year mortgage because the framework of the bill would make the loan too expensive.

“There are serious doubts on whether a private housing finance system would be capable of supporting this type of product without some government backing,” Rick Judson, National Association of Home Builders (NAHB) chairman and a home builder from Charlotte, N.C. told the Senate Banking Committee on Thursday.

“At a minimum, the cost and terms of 30-year mortgages would be significantly less favorable under a totally private system and many fewer families would be eligible for home loans.”

But House Financial Services Committee leaders argue that their bill preserves the 30-year mortgage and that it can and has survived without a government guarantee. 

Fannie and Freddie, which back about half of all mortgages, about $5 trillion worth, don’t lend to borrowers but instead buy up mortgages, guarantee them against default and sell them to investors.

This story was updated at 3:30 p.m.