Fannie and Freddie Reform Threatened by Profits

by 03 Apr 2013

The financial outlook of Fannie Mae and Freddie Mac, the two government-sponsored entities (GSEs) currently providing financial guarantees to three quarters of all residential mortgages in the United States, is looking better each day. This would be great news under normal circumstances, but it also creates a problem for those seeking to reform the GSEs.

Fannie and Freddie were bailed out with taxpayer funds along with major mortgage lenders back in 2008. By 2011, various financial analysts and lawmakers were concerned that the GSEs were taking on too much mortgage risk and thus create a deep loss to taxpayers. This prompted members of Congress and the White House to begin thinking about a way to reduce the role of the GSEs as mortgage guarantors in an effort to soften the blow of their second failure.

Recent earning reports by the GSEs are painting a different story with regard to their future. Not only are Fannie and Freddie actually returning handsome profits, they are also expected to continue doing so. According to a recent article by Clea Benson of Bloomberg Businessweek, the GSEs have paid out $50 billion in dividends, which essentially represents a return on investment for the U.S. government.

Slowing Down Reform

The only earnest attempt to reform the GSEs came in the form of a recent announcement by the Federal Housing Finance Administration (FHFA), which indicated that Fannie and Freddie might soon be consolidated into a single entity. A few reform proposals have come forward, but they have not materialized into action.

The newfound profitability of the GSEs might exclude them from the immediate issue of housing finance reform, which has seen unprecedented bipartisan effort in Congress. The proposed reform of Fannie and Freddie is actually a point of contention, which might be softened by the financial performance of the GSEs. As long as Fannie and Freddie remain profitable, their overhaul could be put on ice until they show signs of financial strain.

Improving Portfolio Performance

In February, Freddie Mac reported that its serious delinquency rate declined to 3.15 percent. This is the lowest level of serious delinquency recorded since 2009, which points to an improvement in Freddie’s portfolio. Fannie Mae has not yet reported its level of delinquency for February, but under normal circumstances it should be at about one percent.

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