Fannie Mae reported robust first quarter earnings earlier this morning, with comprehensive income of $3.9 billion. Courtesy of the Net Worth Sweep, by June of this year Fannie expects to pay Treasury a dividend payment of $938 million. With this latest installment, Fannie will then have paid back Treasury and taxpayers its original bailout funds of $116.1 BILLION, plus an additional $50.3 BILLION.
Freddie Mac, on the other hand, will not be sending a dividend payment to Treasury after reporting strong first quarter earnings of $2.2 billion. In part due to an accounting change in the corporate tax overhaul measure enacted last year, Freddie posted a $3.3 billion loss in the last quarter of 2017. In order to rebuild its $3 billion capital buffer, an agreement was reached between Treasury and FHFA late last year which allowed the GSEs to retain some capital. This provided a short-term way to protect taxpayers from expected quarterly losses. As a result, Freddie will withhold all quarterly earnings to restore its $3 billion line of credit to Treasury.
The fourth quarter loss forced both Fannie Mae and Freddie Mac to take a draw from Treasury for the first time since 2012. While the GSEs will largely benefit from the tax bill in the long run, the 2017 quarterly losses revealed how vulnerable taxpayers are so long as the GSEs, deliberately stripped of buffer capital, remain wards of the state. In fact, the GSEs could be at risk for another taxpayer funded bailout as long as the Trump Administration delays needed reform and allows the Obama Treasury Department’s Net Worth Sweep to remain in place.
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While the GSEs appear to be “in the clear” for now, taxpayers beware. All it will take is a slight market downturn and negative quarterly earnings, and the entities will be right back in front of Treasury’s (read: taxpayers’) door asking for additional bailout funds.
Earlier this week Treasury Secretary Steve Mnuchin, a once and future advocate for “getting the GSEs out of conservatorship,” seemed to take a few steps back when admitting on Fox Business GSE reform would not be happening this year. The reluctance to act on GSE reform at a time when taxpayers are at risk and access to affordable housing for first-time homebuyers is declining is unacceptable. The fact that the situation could be about to get worse is alarming, to say the least. Earlier this week at the Milken Institute Global Conference, Fannie Mae CEO Tim Mayopoulos expressed his own concern over the GSEs’ lack of capital and the risk this poses to taxpayers:
“But the fact is, Fannie and Freddie are currently operating with extremely little capital. And so we haven’t really provided the long term buffer for that. So taxpayers are still exposed.”
A warning cry doesn’t get much clearer than that. The GSEs are in their tenth year of government-run conservatorship, a supposed temporary solution to the financial crisis in 2008. Treasury has been siphoning their earnings since 2012. The longer Washington ignores this and delays comprehensive, long term housing finance reform, the more likely it is that affordable housing, taxpayer protection, and economic growth are at risk of a faulty downturn.
For now, the status quo remains. Taxpayers and shareholders, who have long waited for wrongs to be made right, are still in limbo. No one in Washington has answers to fundamental questions about the future of affordable housing, the 30-year mortgage, and basic rights of shareholders. The Trump Administration’s only response for now is to hope that the GSEs continue to report net positive quarterly earnings they can add to a federal government slush fund.