What’s Up With Fannie Mae & Freddie Mac
Fannie Mae and Freddie Mac may stop paying billions of dollars in dividends to the US government, but if not now when?
Friday, the US mortgage-finance (OTCMKT:FMCC) giants paid a combined $5.1-B to the US Treasury thus extending for another Quarter the government’s sweep of their profits. The latest payments bring the total turned over since Y 2008 to nearly $276-B, according to their regulator, the Federal Housing Finance Agency.
There could be change in the offing.
FHFA Director Mel Watt said in a letter to lawmakers Friday that he is working with the US Treasury on alternatives for the 2 mortgage giants, whose capital buffers are being wound down under the terms of their taxpayer bailouts.
“FHFA is exploring with the Department of the Treasury a number of options,” Director Watt wrote to 6 US Senators.
Speculation that Fannie and Freddie might skip the payments rose in recent months after Mr. Watt told lawmakers that he was considering directing the companies to keep capital. Such a move would be in defiance of Treasury Secretary Steven Mnuchin and other Trump Administration officials.
Fannie and Freddie currently send almost all profits to the US Treasury and have capital buffers of $600-M each. Those buffers are set to fall to Zero next year.
From that mark, any loss at one of the companies would require them to draw on about $258-B in bailout money remaining under the bailout agreements.
Mr. Watt has expressed concern that a draw on those funds could lead to a disruption in the mortgage market.
Secretary Mnuchin and some Senators countered that the government’s line of credit is sufficient and the dividends should continue.
Some Democratic Senators wrote letters to Messrs Watt and Mnuchin earlier this month, asking them to let Fannie and Freddie build capital.
In his response Friday, Mr. Watt reiterated his concern about the dwindling buffers and said FHFA was “committed to working with Secretary Mnuchin to address the issue.”
Some shareholders of the companies want Mr. Watt and The Trump Administration to let Fannie and Freddie recapitalize completely and exit government control. For his part, Director Watt has said any capital buildup would be small and only to protect against minor losses.
The Trump Plan for cutting in the federal corporate tax rate from 35 to 20% could lead to more than $15-B in losses at Fannie and Freddie. That’s because the 2 companies have more than $46-B in “deferred tax assets” that would lose value if rates are cut.
Fannie’s and Freddie’s tax assets would drop in value by $19.8-B if the tax rate fell to 20% according to some analysts. Based on the companies’ average Quarterly earnings over the last couple years, that could mean a 1-time taxpayer bailout of more than $15-B.
Lawmakers could agree to exempt Fannie and Freddie from the tax cut. If they do not, it would likely take more than 1 Quarter’s worth of earnings to protect against a bailout.
Director Watt is scheduled to testify for the House Financial Services Committee this coming Tuesday.
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