Henry Paulson, who took Fannie Mae (FNMA) and Freddie Mac (FMCC) into federal conservatorship in 2008, said he’s worried that the companies’ return to profitability may be seen as reason to scrap an overhaul of U.S. mortgage finance.
“I had to pinch myself,” the former Treasury secretary said of his reaction to news that Washington-based Fannie Mae generated record profits last year. “I could hardly believe what I was reading.”
Paulson, who made the comments in an interview airing this weekend on Bloomberg Television’s “Conversations with Judy Woodruff,” said the turnaround shouldn’t deter Congress and President Barack Obama’s administration from making changes that may include unwinding the government-sponsored enterprises.
Fannie Mae, which was seized along with Freddie Mac in September 2008 amid soaring losses on risky loans during the credit crisis, reported net income of $17.2 billion for 2012 in an April 2 statement. McLean, Virginia-based Freddie Mac said in February that it earned $11 billion last year.
The change in fortune for the two companies reflects recovery in the housing market and is a good thing for taxpayers because the government’s losses may end or be less than projected, said Paulson, 67, who was chairman and chief executive officer of Goldman Sachs Group Inc (GS) before serving as Treasury secretary under President George W. Bush.
“Today, the government is guaranteeing 90 percent of the mortgages,” he said. “If the government keeps doing this, and markets aren’t allowed to work, we’ll be right back where we were in 2007 and 2008. We’ll have people buying houses that they can’t afford to buy.”
Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest. They have drawn $187.5 billion in Treasury aid since they were taken into conservatorship in 2008 and have sent back $65.2 billion in dividends, which count as a return on the government’s investment and not as a repayment.
Paulson also said he was concerned by reports that the Obama administration is encouraging banks to lend to borrowers with lower credit scores.
“How crazy is that?” he said. “You know, I was hearing the same thing in 2005 and 2006.”
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