Mortgage lender Fannie Mae announced profits of over $6 billion for the last quarter of 2013, and $84 billion for the entire year. This allows them to pay back $7.2 billion in the form of a divided, making good on the tax-payer bailout received during the height of the 2008 financial crisis. A symbolic achievement, this dividend payment fully offsets the $116.1 billion loan, bringing the total returned to the U.S. Treasury Department to $121.1 billion.
The government rescued Fannie Mae and Freddie Mac, a sibling company, as both teetered dangerously near collapse under the strain of heavy losses brought on by underwriting risky mortgages.
Officials were of the opinion that the pair could not be left to collapse as their role in the housing market was too instrumental in maintaining liquidity – and more importantly, trust – in the wider securities market, which is linked to home lending. Averting an even larger crisis was a prime motivator guiding actions taken at that time.
The steady recovery of the housing market helped Fannie and Freddie reach profitability and their repayments of the federal loans helped make the 2013 federal budget deficit the smallest in five years.
Together they received over $180 billion in funds from taxpayers as they were seized by the federal government. Freddie Mac has since paid back its bailout debt, so now they and Fannie Mae, recording profits for last eight quarters, are under new scrutiny to determine how they should continue as entities. The terms of the bailout prevent either from repurchasing the government’s shareholdings.
Fannie Mae, founded in 1938 as part of the New Deal, and Freddie Mac, founded in 1970, are the only two private companies, rescued during the financial tumult 6 years ago, which remain under government control until legislators decide their fate.
The Obama administration and legislators aim to overhaul the housing finance system as it currently operates and to determine what role the now government-owned mortgage lenders will have to play in that new scenario, if any.
There appears to be consensus that Fannie and Freddie should be liquidated, but no agreement yet on how to do this. Both the House and Senate are working on bills that take different approaches. The Senate’s bipartisan bill, ensuring a government backstop for the market to avert panic during rapid downwards market trends, is an approach looked on favorably by the White House. A House bill would place more restrictions on federal mortgage guarantees.
Matters are complicated by the fact that if Congress should fail to pass meaningful legislation soon, they will need to start over in a future session where Fannie and Freddie would be seen as a source of income rather than as the remnants of a broken financial system in need of reform.
Former economic advisor to the president, James Parrot, recently commented that fundamental reform is now possible because there are no other options, “if we have not achieved broad, structural reform by the time that moment of recognition passes, we may never achieve it.”
Fannie Mae’s profits have allowed it to pay back the bailout money it needed to survive in 2008, but 2014 may be the year it enters into permanent retirement.
By Brian Ryer