Freddie Mac and Fannie Mae (FNMA:US) will return $39 billion to the U.S Treasury after reporting third-quarter profits, bringing their total payments to within about $2 billion of the cash aid they got after the credit crisis.
The mortgage-finance companies, which were sustained by $187.5 billion in taxpayer money after they were placed under federal conservatorship in 2008, will make dividend payments by next month to boost their total returns to $185.2 billion, they said in separate filings yesterday.
“We are quickly approaching the point where taxpayers will receive a positive return on their investment in this company,” Fannie Mae Chief Executive Officer Timothy J. Mayopoulos said on a conference call with reporters. “That’s obviously very good news for taxpayers.”
Under terms of their conservatorship, the government since last year has been taking all of the companies’ quarterly profits beyond a $3 billion net-worth cap. The money counts as a return on the U.S. investment and not as a repayment of the aid, leaving Fannie Mae and Freddie Mac (FMCC:US) without an avenue for exiting conservatorship and fueling controversy among holders of their junior-preferred and common stock.
Freddie Mac alone will pay $30.4 billion after reporting net income of $30.5 billion for the three-month period that ended Sept. 30, according to its statement. The McLean, Virginia-based company’s results were driven by a decision to reverse writedowns on $23.9 billion in tax credits, considered valuable now that it has returned to profitability.
The company has taken $71.336 billion in aid from Treasury and will have returned $71.345 billion, leaving taxpayers $9 million ahead, according to a statement. The U.S. government has an additional $1 billion liquidation preference in the company.
Donald Layton, Freddie Mac’s chief executive officer, cautioned against interpreting the results as an indicator of future profits.
“It’s a reflection of the housing cycle coming back,” Layton said on a call with reporters. “I would not ever characterize the next few years as ones in which there would be steady earnings necessarily, or in any way promise steady earnings.”
Fannie Mae will pay the Treasury Department $8.6 billion after reporting (FHMA:US) a quarterly profit of $8.7 billion for the three-month period that ended Sept. 30, according to a filing.
After its latest payment, the Washington-based company will have sent the Treasury a total of $113.9 billion, compared with the $116.1 billion of federal aid it has received. The U.S. also has a $1 billion liquidation preference in Fannie Mae, which the company counts as part of the aid it received.
The two government-sponsored enterprises, 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.
The reversal of fortune by the companies, which had been regarded as unlikely to return to profitability, could have an impact on the debate over their future. Lawmakers in both houses of Congress are working on measures to wind them down.
“I think it continues to cool the debate,” Tim Rood, a former Fannie Mae executive and now managing director at Collingwood Group LLC, said in an interview. “And frankly there shouldn’t be any urgency around it. If you just did this for another year or two, you’re going to have gone a long way to pay for the sins and the credit expense of the past.”
Senator Bob Corker, a Tennessee Republican who co-wrote a bipartisan bill that would liquidate the companies, said the results add urgency to efforts to bring private capital back to the mortgage market. Fannie Mae and Freddie Mac back about two-thirds of new home loans.
“While I’m always glad when taxpayers see a return on investment, we can’t forget that Fannie and Freddie wouldn’t be earning one penny today without the government guaranteeing their transactions,” Corker said in a statement. “It is time to move to a modernized 21st century housing-finance system.”
Senator Mark Warner, the Virginia Democrat who co-wrote the bill with Corker, said the earnings news “reinforces the need to apply responsible reforms to restructure Fannie and Freddie and the broader market.”
Shareholders including Perry Capital and Fairholme Funds Inc. have sued the U.S., charging that Treasury is expropriating the value of its investors’ preferred shares.
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