Profits at Fannie Mae, a government-sponsored entity (GSE) dedicated to guaranteeing mortgages originated in the United States, have been very positive lately. Instead of reinvesting or distributing the profits among Wall Street investors, however, Fannie Mae will be transferring dividends to the U.S. Treasury.
Fannie Mae has been under government conservatorship since late 2008. At that time, Fannie Mae and its sister GSE Freddie Mac were the subject of a massive financial collapse related to the early 21st century housing bubble in the U.S. To keep Fannie and Freddie afloat, the Treasury granted the ailing GSEs billions of taxpayer-provided funds. Since that time, Fannie and Freddie have become the de facto guarantors of mortgages originated in the U.S.
A few housing analysts and public officials have been very concerned about the risk carried by Fannie and Freddie in their mortgage investment portfolios and their ability to repay taxpayers. Financial audits of these GSEs revealed that they could be facing severe shortfalls that could upset the balance of the delicate housing market economy in the U.S.
Once median prices in the U.S. began to improve in early 2012, revenues and income at Fannie and Freddie began to improve significantly. According to official announcements made by Fannie Mae, the GSE is ready to disburse $59.4 billion in dividends to the Treasury. These profits come from Fannie Mae's stellar performance during the first quarter of 2013, and it represents the fifth consecutively profitable quarter for the formerly troubled GSE.
An Uncertain Future
Under the terms of the bailout, Fannie and Freddie will not be able to use profits to buy down any portion of the debt they owe to the Treasury and American taxpayers. Their forecasts look promising, and thus the Treasury can expect to see similar payments in the future. Nevertheless, Fannie and Freddie do not exactly have a bright destiny to look forward to.
Housing finance reform is expected to take place with or without continuous profits made by the GSEs. Most reform proposals call for a dismantlement of Fannie and Freddie. Few question the wisdom of winding down the operations of the two GSEs; they already carry on too much risk and artificially inflate the real estate economy by allowing too much governmental participation in the housing market. There seems to be no hurry, however, to overhaul Fannie and Freddie at a time when they are enjoying record profits.