By Jim Enright.
July 23, 2013: In September 2008, Freddie Mac and Fannie Mae were placed into conservatorship in order to help restore confidence in the company and to minimize risk that could contribute directly to the current instability in the market.
When the companies were headed downhill back in 2008, the government took them into conservatorship. This allowed the GSE’s to draw funds from the Treasury to stay afloat. In return, the government took senior preferred shares of the companies. The government gave $187 billion to Fannie (FNMA) and Freddie (FHLMC), after their collapse in 2008, in return for special preferred stock.
At year-end 2012, the Treasury had received $65 billion in dividends, leaving a balance of $122 billion. The administration estimates that if the two remain in conservatorship for 10 more years, the Treasury will get its money back—plus $50 billion—assuming housing's recovery continues.
As conservator, the FHFA has full powers to control the assets and operations of the firms. The formal statement issues: Dividends to common and preferred shareholders are suspended, but the U.S. Treasury has put in place a set of financing agreements to ensure that the GSEs continue to meet their obligations to holders of bonds that they have issued or guaranteed. This step was taken because a default by either of the two firms, which have been battered by the downturn in housing and credit markets, could have caused severe disruptions in global financial markets, made home mortgages more difficult and expensive to obtain, and had negative repercussions throughout the economy.
Fannie Mae and Freddie Mac now have to pay nearly all of their profits, save a small capital cushion, to the government in dividends. This doesn't pay back the draw; it’s just a dividend. The difference this quarter is that the dividend is huge. Thanks to the company’s new profitability, Fannie Mae is able to take a tax credit from years ago worth over $50 billion, according to its earnings release:
As a result of actions to strengthen its financial performance and continued improvement in the housing market, Fannie Mae's financial results have improved significantly over the past five quarters. Based on analysis of all relevant factors, Fannie Mae determined that the release of the valuation allowance on its deferred tax assets was appropriate.
Therefore, Fannie Mae will pay the Treasury $59 billion by the end of this quarter, bringing its total tally of dividend payments to $95 billion—close to the $117 billion it originally drew. Guy Cecala of Inside Mortgage Finance comments on the subject:
"And while it may sound like crazy talk, we probably also need to at least discuss whether Fannie and Freddie should be taken out of conservatorship once they pay back the money Treasury advanced them and they are in fact solvent," he added. "Unfortunately, the current Treasury agreement treats them as wards of the state regardless of how much money they return to the government or how much money they earn."
Questions? Contact Jim Enright here.
Here’s a mortgage calculator with taxes, homeowners insurance, mortgage insurance, and with principal, interest, taxes, homeowners insurance, mortgage insurance, and even homeowners dues.
Best Mortgage Broker Reviews for Raleigh Durham, NC
Jim Enright, Mortgage Strategist
919-569-5930
www.MortgageChoice.com
Comments(1)