Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Mark Warner via ValuePlays
Some thoughts on this at the end….especially on comments from Mark Warner.
Fannie Mae will pay $7.2 billion to the U.S. Treasury next month, reaching a post-bailout milestone that many considered impossible just two years ago: paying out more in dividends than funds put in by taxpayers.
That payment will increase the total dividends that Fannie Mae and its smaller rival Freddie Mac have paid the government to around $192.5 billion. That amount exceeds the $187.5 billion in bailout money that they received from the U.S. Treasury.Option Trading and the Future of Option Alpha with Option Alpha’s Kirk Du Plessis
ValueWalk's Raul Panganiban interviews Kirk Du Plessis, Founder and CEO of Option Alpha, and discuss Option Alpha and his general approach to investing. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Option Alpha's Kirk Du Plessis
The two companies, which were taken over by the government in 2008, became one of the most expensive legacies of the financial crisis. But they’ve returned to profitability over the past two years as home prices have rebounded sharply.
On Friday, Fannie Mae reported annual profit of $84 billion for 2013, making possible its $7.2 billion payment next month. Freddie hasn’t yet reported fourth-quarter earnings but made $40.1 billion through the first three quarters.
“The bottom line is that Fannie Mae is making a profit,” Timothy Mayopoulos, the company’s chief executive, said Friday in a call with reporters. “I’m very, very happy for the taxpayers.”
Fannie’s record haul for 2013 isn’t likely to be repeated, the company said Friday, because it reflected a series of one-time tax benefits and legal settlements. The company’s pre-tax income stood at $38.6 billion, compared with year-earlier income of $17.2 billion.
The milestone is mostly symbolic because Fannie and Freddie aren’t allowed to pay down the $187.5 billion that the government has invested, meaning they can’t exit government control absent action by the Treasury and their regulator or Congress. The companies also can’t retain most of their earnings, which are instead sent to the Treasury as dividend payments.
But the event is significant nevertheless because taxpayers will effectively have been made whole on the controversial bailouts.
The profits contrast with earlier losses the companies were forced to take as the housing market deteriorated from 2008 through 2011. Fannie Mae, for example, lost $72 billion in 2009.
The companies don’t make loans but they buy them from lenders and package them into bonds that are sold to other investors. Fannie Mae and Freddie Mac make money if homeowners pay their mortgages, but they agree to make those bondholders whole when loans default, and they also hold both as investments.
The upshot is that as mortgage delinquencies rose and home prices fell beginning in 2007, the companies had to set aside more cash to cover potential losses. They were taken over in September 2008 when regulators concluded they didn’t have enough capital to withstand the rapidly unfolding housing bust.
Once home prices began to rise in 2012, Fannie Mae and Freddie Mac found themselves losing less money than expected on loans that were going through foreclosure. That helped boost the profits they reported.
Fannie Mae executives said Friday that home-price gains appeared to have cooled during the fourth quarter. Its inventory of foreclosed properties increased for the second straight quarter because it sold fewer of them, and the prices it fetched on those sales fell for the first time in nearly three years.
As prices and interest rates have increased over the past six months, “we’ve seen demand for [foreclosed] properties soften a bit,” said Mr. Mayopoulos.
The company’s fourth-quarter profit of $6.5 billion compared with a year-earlier gain of $7.6 billion.
Fannie Mae and Freddie Mac sent $130 billion to the Treasury last year, the first year in which they were required to send most of their net income to the government as a dividend payment. Previously, they were required to pay a 10% dividend on their Treasury infusions, which would have amounted to nearly $19 billion last year had those terms been in place.
The large payments by Fannie and Freddie have put the government in an awkward position because both Congress and the White House have been slow to address the firms’ fate. Senate lawmakers are finalizing bipartisan legislation to overhaul the entities.
A growing class of shareholders, meanwhile, has sued the Treasury to challenge changes to the bailout terms that force the companies to send all of their profits to the government. They say the new terms amounted to illegal self-dealing between Treasury and the firms’ regulator, which is charged with running the companies during their federal conservatorship. The government has said the lawsuits are without merit and is filing motions to dismiss them.
Officials at the U.S. Treasury said nothing to mark the milestone on Friday, but a top adviser last month played down the large profits. Thanks to the one-time legal and accounting gains, recent profits “may significantly overstate the true financial condition” of the companies, especially on a forward-looking basis, said Michael Stegman, the senior Treasury adviser, in a speech last month.
Let’s not forget that these “one time legal accounting gains” that gov’t officials are denigrating now are simply reversals of “one time accounting losses” from the crisis. You can’t force a company to write down an asset and declare it a loss and feign outrage at the loss and then when things improve and that same asset is now written up, dismiss the “gain” as some kind of gimmick. It doesn’t work and is hypocritical at best and outright dishonest at worst.
Some lawmakers have said taxpayers are entitled to outsize returns because the government agreed to accept nearly unlimited losses during the crisis, nursing the companies back to health. “I was a venture capitalist for a lot longer than I’ve been a politician. If I had put $180 billion into Fannie and Freddie back in 2009, I’d expect more than a 1 to 1 return on that,” said Sen. Mark Warner (D., Va.) at a conference last fall. “So once I got a 30-to-1 return…talk to me about Fannie and Freddie making money.”
Mr. Warner, where is the same standard for ever single entity that took TARP money? Didn’t the government lose money on the GM bailout? Where is your outrage over that? I think we can all agree that without TARP there would be a whole lot less banks around today. Why is when they simply pay off a TARP loan touted as a success of the program and here Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is being told “unless we get 30-1 return back you’re a failure”?
Look at AIG, extended $185B in total from the gov’t and paid it all back. If they had failed it was lights out for a whole host of people. Yet, when they paid off the last chunk and the gov’t made a small profit, the chest thumping of gov’t officials was deafening. Why is this different?
Why is Mark Warner applying a market return expectation to Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) but not to AIG, BAC, GS, WFC, C or anyone else who needed aid during the crisis?
I’m gonna say this has everything to do with personal promotion/ambition and nothing to do with what is best. There is no private entity that will loan a consumer hundred of thousands of dollars to buy a home at 4% for 30yrs without insurance. There is also no entity large enough to cover all the loans in the US, if there was the gov’t would have declared it a monopoly and broke it up long ago. This is why the 30yr mortgage does not exist outside the US. Because of that, if you get rid of the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), you get rid of that. Anyone who tells you it can be done is delusional.
Warner has his name on a bill and wants to remake the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). Nothing short of that will satisfy him. He will twist every event that comes along to denigrate what the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s have done in order to get that bill with his name on it passed. Period. You know you have to be wary of someone when the GSE’s do what no one thought they could, make the gov’t whole, and this is viewed in his eyes as a non event. Why? It hinders his bill. Get it? Their success hurts him……
Here is the issue. Warner is a PE guy. But, like so many before, once they get the power in Congress they act as if they can unilaterally enact laws. Under what law or legislation and regulatory statute is a 30 to 1 return on gov’t aid required? Where is it stated? From Wikipedia:
In the early 1980s, Warner served as a staff member to U.S. Senator Christopher Dodd, also a Democrat from Connecticut. He later used his knowledge of federal telecommunication law and policies as a broker of mobile phone franchise licenses, making a significant fortune. According to one source, this knowledge was gained while working as fundraiser for Democrats . As founder and managing director of Columbia Capital, a venture capital firm, he helped found or was an early investor in a number of technology companies. He was one of the early investors in Nextel, co-founded Capital Cellular Corporation, and built up an estimated net worth of more than $200 million.
Warner started his gov’t career under Chris Dodd. Dodd got his name on the Dodd/Frank act and Warner wants his on the Warner/Corker Act. Truth or reality or need be damned. This is blind ambition, nothing more
Now that there are competing plans out there? This out to get more lively.
FTR Bob Corker has been not much better although he does seem to at least realize what the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s have accomplished as he stated he realized some “settlement with security holders would likely be necessary” . He is also open to differing plans
The gov’t has been repaid at a profit……time to stop these games…..
As an FWI, here is actually one reasonable Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) proposal out there.