Fannie Mae, Freddie Mac Results May Ease Wind-Down Push

Fannie Mae and Freddie Mac
Signs for FHA, Fannie Mae and Freddie Mac are displayed for homeowners seeking to modify their mortgages in Denver, Colorado. Photographer: Matthew Staver/Bloomberg

As Fannie Mae ends its second straight quarter without requiring an infusion of aid from the U.S. Treasury, the Washington-based company’s executives yesterday made the case that they’re running a viable long-term business.

With Freddie Mac, Fannie Mae’s sister company, reporting a similar positive result Aug. 7, it’s possible lawmakers will begin to lose their appetite to wind down the two government-sponsored enterprises.

“To date, Congress has consistently only acted when faced with imminent disaster,” said Isaac Boltansky a Washington-based policy analyst at Compass Point Research & Trading LLC. “If the GSEs are not a monster staring them in the face, it doesn’t appear to me as though there’s any impetus for them to act decisively in the near term.”

Fannie Mae this morning reported that rising home prices helped push its net income to $5.1 billion in the second quarter, enough to offset a dividend payment to the Treasury of $2.9 billion. Freddie Mac reported net income of $3 billion in the second quarter and made a dividend payment to the Treasury of $1.8 billion. The company said it would not require U.S. aid for the first time since the first quarter of 2011.

Republicans in Congress have called for an end to the two taxpayer-owned companies, which now own or guarantee about 60 percent of U.S. home loans. Treasury Secretary Timothy F. Geithner has said he will propose a plan to overhaul housing finance that could include dismantling or altering Fannie Mae and McLean, Virginia-based Freddie Mac.

$190 Billion

Fannie Mae and Freddie Mac have taken a total of almost $190 billion in U.S. aid since they went into conservatorship in September 2008 after investments in risky loans pushed them to the brink of insolvency. The companies have paid back about $46 billion in the form of dividends.

Still, in a statement accompanying its second-quarter earnings report yesterday, Fannie Mae Chief Executive Officer Timothy J. Mayopoulos said the company eventually could benefit the Treasury.

“With our high-quality new book of business and diminishing legacy expenses, Fannie Mae has strong potential earnings power that can deliver considerable value to taxpayers in the long term,” he said.

Earnings benefited from home-price increases, a decline in single-family loans more than 90-days delinquent and improved sale prices on the foreclosed homes the company owns, Fannie Mae said in its earnings report.

At the same time, analysts and Fannie Mae’s own officials caution that the recent reversal of fortune doesn’t mean the housing market or the government-sponsored enterprises are without risk.

CFO’s Caution

Fannie Mae Chief Financial Officer Susan McFarland said in an interview that it was possible the company could need to draw from the Treasury in future quarters when home-price increases might not be as strong.

Still, she said, “We are probably in a place now where we are more likely to make money than lose money.”

Fannie Mae and Freddie Mac’s financial results probably reflect the improved credit quality of the loans they own or guarantee more than a housing market turnaround, said Clifford Rossi, a professor at the University of Maryland and former managing director of Citigroup’s consumer lending unit.

“I think this is the kind of market where you’re going to see a fair amount of volatility jumping along as the market comes into equilibrium,” he said in a telephone interview.

Older Loans

Loans originated since January 1, 2009 now make up 59 percent of Fannie Mae’s book of business, the company said in its report yesterday. The company’s losses largely stem from loans originated before then.

“At some point, you would have expected there would have been this turnaround effect due largely to the fact that these older loans are starting to burn off of the portfolio,” Rossi said.

Whatever the reason, Boltansky said, the results probably will slow momentum for dismantling the companies even beyond the end of the year.

“The performance of the enterprises to date show that there’s really no impetus to act in 2012 or really in 2013,” he said.

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