Us Economic Analysis

Settling Up With Fannie and Freddie

By Cristian deRitis in West ChesterMay 24, 2012

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Stability in the housing market is improving balance sheets at Fannie Mae and Freddie Mac.

The cost of the GSE bailout is likely to total $200 billion, about 10% more than the cost to rescue AIG.

New mortgage originations are performing well, making continued profits likely as the economy recovers.

A full payback of the bailout by the GSE could take decades. Profits could complicate reform.

An improving U.S. housing market combined with falling delinquencies on mortgage loans to give Fannie Mae a profit of $2.7 billion in the first quarter of 2012. As a result, the company didn't need to request additional funds from the U.S. Treasury to remain solvent—the first time that has happened since the crippled mortgage finance giant went into government conservatorship in 2008.

The other so-called government-sponsored enterprise, Freddie Mac, has also been operating at close to breakeven for two consecutive quarters, requiring only small capital injections from the Treasury to keep it solvent.

While this recent profitably could be easily reversed, it is an encouraging sign that the mortgage mess and the associated bailouts of Fannie Mae and Freddie Mac could be near an end. If so, the next question is whether the two mortgage finance institutions will ever be able to repay taxpayers for bailing them out.

As a condition of their conservatorships, the government gained a 79.9% ownership stake in Fannie and Freddie. In return, the institutions have been allowed to draw on the U.S. Treasury to maintain their solvency, receiving cash transfers once per quarter. To compensate taxpayers, the companies are required to pay a 10% annual dividend on these funds. As of the first quarter of 2012, the GSEs have drawn a total of $189.5 billion and have paid dividends of $41.1 billion, for a net bailout cost so far of $148.5 billion.

How much time to pay back?

The firms' future profitability, however, will depend heavily on the direction and speed of house prices as well as the health of the broader economy and any reforms Congress makes to the housing finance system.

Assuming optimistically that the GSEs will require no more assistance from the Treasury, and that the enterprises will earn enough from now on to make their quarterly dividend payments, we could expect the two companies to repay their bailout costs in full by the end of 2019.

In its latest budget proposal, the Obama administration projected that Fannie and Freddie would receive $221 billion from