How Does the U.S. Quit Housing When Fannie, Freddie Rake in Billions?

The Fannie Mae headquarters in Washington, D.C., on April 2 Photograph by Andrew Harrer/Bloomberg

Wonders, they never cease. Fannie Mae, one of the two big government-seized mortgage guarantors, just posted a record profit of $17.2 billion for 2012. Its cousin, Freddie Mac, earned $11 billion last year. That’s just over four years since they essentially failed. (Combined, Aunt Fannie and Uncle Freddie, as wags like to call them, racked up more than $22 billion in losses in 2011, before the big snapback in the housing sector.)

The windfall puts a new twist on Uncle Sam’s tricky business of somehow weaning the all-important, $5-trillion mortgage finance-guarantee business from government conservatorship.

Fannie and Freddie package lenders’ mortgages into popular securities whose payments they backstop. They did this so much, and for so many bad loans, that they were seized by regulators in the dark depths of 2008. Since then, they have drawn $188 billion from the Treasury Department. Lawmakers, for all their perturbed bluster about the government overseeing this critical layer of the housing industry, have yet to establish a firm timetable for private-sectorizing the two firms.

Now, however, the status quo is no longer as unsavory as throwing hundreds of billions of dollars of taxpayer money at public enterprises that consistently post billions in losses. Fannie and Freddie have so far sent back in excess of $50 billion to the Treasury; they are allowed to retain only $3 billion in net worth, with profits above that accruing to taxpayers. Until recently, it was widely thought that the companies had no imminent path to profitability. Then the housing market took a turn for the better—very much so, it seems.

“I had to pinch myself,” remarked former Treasury Secretary Hank Paulson to Bloomberg TV’s Judy Woodruff about Fannie’s record profit. “I could hardly believe what I was reading. But this really troubles me if anyone is going to look at that and say, ‘now we shouldn’t reform them,’ because if we start again—today the government is guaranteeing 90 percent of the mortgages. 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.”

The long and short of White House and Congress’s dilemma: Persistent outsize gains for Fannie and Freddie suddenly represent an embarrassment of riches for Washington, which never wanted to be this involved in the housing finance business. Fine, but then how would the government disengage without messing with the very good thing that is the housing recovery?

It’s only fair to ask whether the mortgage-finance pair ever had a chance of snapping back so smartly without the clout and capitalization of public backing? All of which might well give Washington enough cover to keep punting on an exit.

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