August 7, 2014 2:58 pm

Fannie and Freddie deliver $5.6bn payback

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The headquarters of mortgage lender Freddie Mac is seen in Mclean, Virginia, near Washington, September 8, 2008. Fannie Mae's and Freddie Mac's stocks took a dive while their debt soared Monday, as investors bet the U.S. government's takeover of the mortgage finance firms would wipe out shareholders but fully guarantee their bonds. REUTERS/Jason Reed (UNITED STATES)©Reuters

Mortgage finance groups Fannie Mae and Freddie Mac reported solid earnings in the second quarter that will allow them to pay $5.6bn to the US government, despite an absence of the big legal settlements with banks that helped drive previous profits.

Fannie Mae reported net income of $3.7bn while its smaller rival Freddie Mac had $1.4bn, which marked a decline from a year ago but reflected a more normalised operating environment since one-time events, such as legal settlements from alleged mis-selling of mortgage securities, did not play a big part.

In September, when their next dividend payment is due, Fannie Mae will send the US government $3.7bn in dividends while Freddie Mac will pay $1.9bn.

Those payments bring the total paid to the US Treasury to $218.7bn, compared with the $188bn they received in a government bailout in 2008.

“I’m proud that we have met and exceeded that mark,” Fannie Mae chief executive Tim Mayopoulos said of the dividend payments surpassing the bailout amount.

The strong performance of Fannie and Freddie has fuelled debate over the future of the companies, which are overseen by the US government. A change in their bailout terms in 2012 requires them to send to the US government all of their profits, which do not count as repayment for their bailout.

That change has been opposed by Fannie and Freddie shareholders, some of whom have sued the government including Bruce Berkowitz’s Fairholme Funds. Congress has also been grappling with bills to eventually eliminate Fannie and Freddie, but the issue may not be taken up until next year after the midterm elections.

The housing market recovery has lagged behind, a worry cited by Federal Reserve chairwoman Janet Yellen. Home prices have continued to rebound, but the pace of the increase has slowed from last year. At the same time, home sales have declined even though interest rates are lower. Refinancings have also fallen, but loan quality has improved.

Fannie Mae’s net interest income rose to $4.9 billion compared with the first quarter of 2014, reflecting lower interest rate expenses, which offset a decline in the company’s mortgage portfolio. Freddie Mac’s net interest income remained unchanged from the first quarter, coming in at $3.5bn.

Fannie Mae, which does not provide forward earnings guidance, expected to see stable revenues similar to the second quarter. Still, Freddie Mac warned, as Fannie Mae has done before, that its past level of earnings were not sustainable because they were partly due to one-time tax benefits and legal settlements.

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