Fannie Mae to Pay Treasury $59.4 Billion After Record Profit

Fannie Mae (FNMA), the mortgage-financier seized by U.S. regulators in 2008, will pay the Treasury Department $59.4 billion after reporting a record quarterly profit driven by rising home prices and declining delinquencies.

The government-sponsored enterprise, which is operating under U.S. conservatorship, had net income of $8.1 billion for the three-month period that ended March 31, according to a statement released today. The Washington-based company’s net worth, which is used to determine what it owes the U.S., was boosted by a reversal of writedowns on tax credits, which may be valuable now that it’s returned to profitability.

“Even the jaded can’t blink at Fannie’s upcoming payment,” Jim Vogel, a debt strategist at FTN Financial in Memphis, Tennessee, said in a note to clients.

The profits will hurt the pace at which policy makers decide what to do with Fannie Mae and rival Freddie Mac “because they give the illusion” that mortgage finance “is a great business,” Vogel said. “Well, it’s great at this point in the cycle after you’ve wiped out years of accumulated equity and stopped taking much credit risk.”

After its latest payment, Fannie Mae will have sent the Treasury a total of $95 billion, compared with the $117.1 billion of capital infusions that the company has received. Freddie Mac, which yesterday reported a $4.6 billion profit, will have paid $36 billion, after drawing $72 billion of aid, and Chief Executive Officer Don Layton said it may release $30.1 billion of tax-credit writedowns as soon as next quarter.

Photographer: Andrew Harrer/Bloomberg

Fannie Mae’s net worth was boosted by release of a valuation allowance on deferred-tax assets, the company said. Close

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Photographer: Andrew Harrer/Bloomberg

Fannie Mae’s net worth was boosted by release of a valuation allowance on deferred-tax assets, the company said.

Debt Ceiling

The coming large payments from the companies will probably help delay the amount of time the U.S. government has until running out of room under its debt ceiling to sometime in October, the Bipartisan Policy Center said today in a posting on its website. The Washington-based group had said April 26 that the limit was likely to be reached between mid-August and mid-October, most likely from early September to early October.

Still, based on the terms of their bailouts the companies continue to owe the Treasury the amount that they’ve been provided, and the agreements offer no way to repay.

The companies have returned to profitability as the housing market recovered and they raised mortgage-guarantee fees, with Fannie Mae’s net income last year exceeding that of companies such as Wal-Mart Stores Inc. (WMT), General Electric Co. (GE) and Berkshire Hathaway Inc. (BRK/A), according to data compiled by Bloomberg.

Prices Climb

U.S. home prices climbed at the fastest pace since May 2006, rising 9.3 percent in February from a year earlier, according to an April 30 report by the S&P/Case-Shiller index of property values.

Freddie Mac and Fannie Mae were seized in September 2008, shortly before the failure of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc. (AIG), as their rising losses threatened to deepen a global financial crisis. The two companies this year ceased paying 10 percent dividends that have returned $65 billion to Treasury and will instead turn over any profits above a permitted capital reserve.

Payments to Treasury by the two companies through fiscal year 2023 are projected to exceed by $51 billion the aid they have received under conservatorship, according to President Barack Obama’s spending plan released last month. Last year’s budget saw a $28 billion loss through 2022.

Fannie Mae and Freddie Mac, which were created by the federal government before becoming publicly traded companies, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest.

Hedge Funds

Hedge funds including Paulson & Co. have been pushing Congress to abandon plans to wind down Fannie Mae and Freddie Mac as investors buy up preferred stock that has been soaring after being considered probably worthless, people with knowledge of the discussions have said.

One series of Fannie Mae’s preferred shares rose 7.8 percent today to $4.95, the highest since the firm’s seizure. The notes, which have a face amount of $25, have tripled this year. Fannie Mae’s riskier common stock fell 3 percent to 87 cents, and is up from 26 cents on Dec. 31.

Fannie Mae executives are telling employees that the company’s future is uncertain, Chief Executive Officer Tim Mayopoulos said on a conference call with reporters. And, its strong earnings may be delaying how long it will take for lawmakers to provide more clarity, he said.

“There’s a risk that policy makers look at our profitability and conclude they don’t need to take action with respect to housing finance reform,” he said. “That would be a mistake.”

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Gregory Mott at gmott1@bloomberg.net

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