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November 7, 2013 5:12 pm
Fannie Mae and Freddie Mac will have paid a total of $185.3bn in dividends to the US government by the end of this year, putting the mortgage finance groups on track to make payouts that will soon exceed the US government bailout they received.
The figure includes $30.4bn in dividend payments Freddie announced with its third-quarter results on Thursday, with Fannie making a further $8.6bn payout to the government.
The government injected $188bn into Fannie and Freddie in 2008, which put them into conservatorship. But the groups are now in turnround, helped by rising home prices and improved loan quality, as the number of bad mortgages from the housing market bubble declines.
That will allow Fannie to pay $114bn in dividends to the Treasury by the end of the year, which is $2bn short of what it had received from the government by the end of September. Freddie will have given $71.3bn to the US government by the end of the year, which is slightly more than it received from Treasury.
The dividends, however, do not count as a repayment. As part of the bailout, the Treasury received senior preferred shares in Fannie and Freddie that originally paid a 10 per cent dividend. The dividend payments are required by the US government but do not count toward repayment of the bailout.
Fannie and Freddie’s rebound has prompted a call by hedge funds and other housing finance market participants to maintain the existence of the mortgage groups. However, lawmakers in Congress have pushed for a wind down of the groups, although there are big differences on the extent to which the US government would remain involved in the housing market.
“While I’m always glad when taxpayers see a return on investment, we can’t forget that Fannie and Freddie wouldn’t be earning one penny today without the government guaranteeing their transactions,” said Republican Senator Bob Corker, one of the authors of a bill to reform the mortgage groups. “I don’t know of any other company in America that gets that kind of deal”.
While I’m always glad when taxpayers see a return on investment, we can’t forget that Fannie and Freddie wouldn’t be earning one penny today without the government guaranteeing their transactions
- Bob Corker, Republican Senator
Fannie and Freddie do not make home loans, but they buy mortgages from lenders and package them into securities. They make money by charging fees to guarantee payments to investors in case a borrower defaults.
Fannie reported net income of $8.7bn in the third quarter, and made an $8.6bn payout to the Treasury for that period. Fannie’s income included money it received from Bank of America, which was part of an $8.5bn settlement to resolve an investigation into foreclosure practices.
“We’re confident we will pay more in dividend payments than withdrawals,” said Fannie chief executive Timothy Mayopoulos.
Loan quality improved during the quarter, with mortgages Fannie purchased or guaranteed since the beginning of 2009 making up 75 per cent of the group’s single-family home book. The serious delinquency rate fell to 2.55 per cent, compared to 5.47 per cent at the end of March 2010.
Rising interest rates have hurt the mortgage income of large banks, but Mr Mayopoulos said that does not have a big impact on Fannie’s revenues. Instead, if home prices plateau or drop, it could hit Fannie’s earnings from the release of loan loss reserves.
Freddie had net income of $30.5bn in the third quarter, with about $24bn of that coming from a valuation allowance on deferred tax assets. In the third quarter, Freddie will pay $30.4bn to the US government.
Its book of business from single-family home mortgages since the 2008 financial crisis rose to 52 per cent, while single-family home serious delinquency rate fell to 2.58 per cent, from nearly 2.8 per cent in June.
Multimillion settlements with Wells Fargo and other banks to resolve repurchase liabilities on mortgages contributed $900m to Freddie’s pre-tax income in the third quarter.
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