Kill the cash cow? Lawmakers intent on dismantling Fannie, Freddie even as they return billions

by Ryan Smith07 Nov 2013

Fannie Mae and Freddie Mac continue to pump money into the U.S. Treasury even as lawmakers plot their demise. The two government-sponsored enterprises reported today that they will return a total of $39bn in third-quarter profits to the Treasury.

Fannie and Freddie were placed under government conservatorship in 2008 after teetering on the brink of collapse in the wake of the financial meltdown. But after being bailed out to the tune of more than $187bn, the companies have consistently returned billions of dollars to the Treasury each quarter.

Freddie will return $30.4bn to the government after posting third-quarter profits of $30.5bn, according to a Bloomberg report. That payment will boost the amount Freddie has paid to the Treasury to $71.345bn, more than the $71.336bn it received in the bailout. Fannie, meanwhile, will return $8.7bn in Q3 profits to the Treasury. With that payment, Fannie will have paid back $113.9bn of the $116.1bn it received in bailout funds, according to Reuters. Fannie has posted a profit for seven consecutive quarters; Freddie, eight.

And even after the bailout funds are repaid, the money will keep rolling in. The government didn’t exactly loan the GSEs $187.5bn – it took shares of “senior preferred stock.” Which means that Fannie and Freddie will still owe the government all their profits as dividend payments, according to a Wall Street Journal report.

But lawmakers in Washington want to kill the cash cows – an action which could not only cut off a predictable quarterly infusion of cash to the Treasury, but hike mortgage rates and strangle competition in the mortgage market, according to industry experts. Of particular concern to those in the know is the Protecting American Taxpayers and Homeowners (PATH) Act, which would essentially bury Fannie and Freddie without providing a replacement. The act passed the House Financial Services Committee in July without a single Democratic vote, much to the consternation of housing industry leaders.

“We don't think that bill will get anywhere, but it passed in committee,” National Association of Realtors Chief Economist Lawrence Yun said last month. “We believe that bill is highly ideological rather than practical.”

Yun, speaking at the National Association of Mortgage Professionals (NAMB) conference in Las Vegas, said the legislation would hurt consumers and possibly strangle business for brokers and smaller banks. With giant banks the only ones with assets plentiful enough to cover the risks involved, mortgage lending would get harder and harder for smaller businesses.

“On the PATH Act, we’re trying to make sure it never gets passed,” he said. “…If PATH is passed and becomes a law, interest rates will rise and the large banks will dominate the market -- and there will still be taxpayer risk because of the FDIC.”

What do you think? Is it time to bury Fannie and Freddie, or are lawmakers trying to kill a pair of geese that are laying golden eggs?

 

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