Fannie Mae close to climbing out of TARP hole

posted at 12:01 pm on August 8, 2013 by Ed Morrissey

That is, if you don’t consider lost interest and opportunity costs for taxpayer money.  Thanks to an improving housing market, one of the two GSEs crippled in the 2008 financial crisis and bailed out by taxpayers turned a nice profit in the second quarter of $10.1 billion — all of which will go to the Treasury, bringing their balance close to 10% of the bailout principal:

Driven by a recovery in the U.S. housing market, Fannie Mae, the giant mortgage finance company, netted profits of $10.1 billion in the second quarter of 2013, its sixth consecutive quarter with positive results. The company, which has operated under federal conservatorship since 2008, reported its earnings Thursday.

Fannie Mae cited “a significant increase in home prices in the quarter” for its profit, which nearly doubled that of last year’s second quarter.

The strong showing leaves Fannie Mae with a net worth of $13.2 billion. Because federal rules require it to maintain a reserve of $3 billion, the company will pay $10.2 billion to the U.S. government this September. Fannie Mae says the payment will bring the total it has delivered to around $105 billion, following a federal rescue in 2008.

To survive the mortgage crisis that came to a head in the autumn of 2008, Fannie Mae received more than $116 billion from the U.S. government.

Freddie Mac also did well in Q2, scoring a $5 billion profit.  NPR doesn’t mention how much Freddie will pay back in September, but Trade the News says most of that will go back to the Treasury, bringing their principal down to about $30 billion. The credit for the profit goes to both the recovering housing market and higher fees for its services, which allow the GSEs to withstand potential losses with more capital.

This comes as Barack Obama has finally focused attention on the final disposition of the GSEs.  Despite widespread and bipartisan desire to rid the federal government of any role in their continued operations, the White House has gone almost three years without a mention, since passing the Dodd-Frank that ignored the issue.  Almost any reform that gets the government out of the mortgage business would be an improvement — but is that what Obama is proposing?  Yes and no, as I write in my column for The Fiscal Times today:

That the White House has finally taken some notice of the lingering wrecks of the 2008 collapse is encouraging.  However, Obama proposes to get rid of Fannie and Freddie while transferring the government’s ability to distort the mortgage markets to the FHA.  “We’ve got to keep housing affordable for first-time homebuyers,” Obama said, “[a]nd that means we’ve got to strengthen the FHA so it gives today’s families the same kind of chance it gave my grandparents to buy a home.”

The FHA began that process in 2009 as borrowers flocked to its doors after the GSEs went into government receivership, and the results are less than encouraging.  FHA’s former chief credit officer Edward Pinto wrote last November that the FHA’s capital position turned negative nearly overnight, and that the FHA itself might need its own taxpayer bailout.  The FY2012 actuarial study showed that the single-family program’s valuation dropped $23 billion in a year when the housing markets improved significantly, a serious red flag about the stability of its operation.

“If it were a private company,” Pinto warned, “it would be shut down.”  Strengthening the FHA sounds suspiciously like a bailout to keep the path of intervention open in order to keep pursuing the kind of home-ownership political goals that shipwrecked Fannie and Freddie.

Obama also wants to keep government in the business of guaranteeing mortgage-backed securities (MBSs), the lever for the financial disaster of 2008 and the shipwreck of Fannie and Freddie.  Supposedly, this would be financed by voluntary fees collected from investors, but Heritage wonders why this should be a government business at all.  “But if a reinsurance guarantee is self-funding,” Heritage’s John Ligon and James Gattuso ask, “then why is the government needed?”  Better yet, why should the government take the role of assessing risks in MBSs? They failed spectacularly at it once before, because Congress and two administrations were more concerned with expanding the housing market and incentivizing more risk-taking in lending than they were about the stability of the securities undergirding the market — which allowed the infection of the housing bubble to slam the financial sector with full force, and guaranteed a government bailout.

Let the private sector deal with MBSs issued by private lenders:

Anyone who believes that the revenue from the sale of guarantees would sit around in a lockbox to avoid taxpayer bailouts isn’t paying much attention to the Social Security fund.

Rather than simply swap Fannie and Freddie for the FHA and continue to have the government guarantee loans, we need to unwind the government’s ability to intervene in mortgage lending altogether.  Private lenders should assume the risks of their own investments, which should incentivize them to be more careful than they were in the last decade, when they assumed – correctly – that the federal government would take ownership of GSEs in a crisis.

Putting GSE reform back on the table is a good step, but it’s only a step.  Real reform will get the government out of the role of dictating lending outcomes, and keep it in the legitimate role of regulating the market even-handedly and preventing fraud and theft.  Let’s not have a shell game where spinning off Fannie and Freddie is only a dodge to shift the levers of intervention to the FHA and an investor-guarantee agency that allow politicians to game the housing market in the future.


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Plus, is Obama playing a shell game with Fannie/Freddie reform?

Yes.

Plus, all, open your eyes, wide. He and the Congress are ALL playing a shell game with obama’care’.

They all want it to fail and then have it all go to single payer. Wake up, fools.

Schadenfreude on August 8, 2013 at 12:04 PM

You know, I could climb out of every bad-decision hole I ever fell into if I could just re-write those pesky records. Just saying.

platypus on August 8, 2013 at 12:07 PM

That is, if you don’t consider lost interest and opportunity costs for taxpayer money.

Hey, since they don’t count it for the UAW bailout then they shouldn’t count it for Fannie and Freddie either.

Happy Nomad on August 8, 2013 at 12:07 PM

Obama also wants to keep government in the business of guaranteeing mortgage-backed securities (MBSs), the lever for the financial disaster of 2008 and the shipwreck of Fannie and Freddie.

Of course he does, the ’08 disaster wasn’t disastrous enough. It was only a taste of what’s to come if Barry’s plan works out as expected.

It won’t be just a shipwreck to be recovered and repaired next time, it’ll be a complete sinking, with no recovery possible.

hawkeye54 on August 8, 2013 at 12:09 PM

is Obama playing a shell game with Fannie/Freddie reform?

Yes, he wants to move it where it’s no longer transparent, but its subject to his imperial whims and executive orders.

faraway on August 8, 2013 at 12:09 PM

Of course it’s a shell game. Now instead of 14 trillion in debt we are only 13.999 trillion in the hole (until the next bail-out). Yay!

HotAirian on August 8, 2013 at 12:10 PM

Let’s not have a shell game where spinning off Fannie and Freddie is only a dodge to shift the levers of intervention to the FHA

Yep, that’s all it is. A shell game.

WisRich on August 8, 2013 at 12:13 PM

The Fed floods the market with cheap loans, and the housing market simultaneously rebounds. Who’d have thunk it?

And suddenly Obama is talking about selling off the now nearly sound Fannie and Freddie. I will bet you that it will be sold to some cronies, now that its balance sheet is so attractive.

And the FHA will continue to channel taxpayer money to defaulting homeowners.

The administration is criminal.

And the GOP is pretty dumb not to even speak out this.

PattyJ on August 8, 2013 at 12:20 PM

And all it took was a trillion taxpayer bucks. Wow, incredible.

Bishop on August 8, 2013 at 12:21 PM

would you rather we got no money back. Hindsight is always 20/20.

i wasn’t necessarily for the interventions the government took at end of 2008 and beginning of 2009 but I also had no better ideas.

it’s easy to second guess now.

gerrym51 on August 8, 2013 at 12:28 PM

…kiss my Fannie!

KOOLAID2 on August 8, 2013 at 12:30 PM

Fannie Mae cited “a significant increase in home prices in the quarter” for its profit, which nearly doubled that of last year’s second quarter.

Home prices are being held up by nothing other than the Fed keeping interest rates artificially low – the lowest in history. A house that is worth $300,000 at 3.8% is only worth about $150,000 at 8% (which is where mortgage rates are going to have to go when the Fed finally loses control of interest rates, which will happen and will happen very suddenly). The fact that housing prices have merely stayed stable while interest rates have gone underground shows how brittle the real estate market remains and how this illusion of stable prices cannot be maintained very much longer.

Of course, when interest rates finally do return to normal (and they will swing way past normal in the correction) not only will the housing market be hit (as the cost of carrying a home more than doubles, thereby killing the sale prices) but the feral government (which now has our gigantic national debt concentrated in the shortest term debt ever in history and will have to roll over much of it at ever increasing rates) will be brought to a total standstill as the debt service rockets from the, now insane, short term rates of less than 1% back to the more normal cost of carrying that debt. Debt service will blow up from around $250 billion.year to over a trillion, thereby sucking up most of the receipts … and without the ability to continue the insane and outrageous debt financing of that.

Yeah … Fannie is close … so close. Okey doke.

ThePrimordialOrderedPair on August 8, 2013 at 12:35 PM

Megan bumping Hannity at 9:00? WOW.

AmeriCuda on August 8, 2013 at 12:40 PM

Fannie and Freddie now practically own the mortgage market but this is just the beginning….

In a move some claim is tantamount to social engineering, the Department of Housing and Urban Development is imposing a new rule that would allow the feds to track diversity in America’s neighborhoods and then……..push policies to change those it deems discriminatory.

The policy is called, “Affirmatively Furthering Fair Housing.” It will require HUD to gather data on segregation and discrimination in every single neighborhood and try to remedy it.

HUD Secretary Shaun Donovan unveiled the federal rule at the NAACP convention in July.

“Unfortunately, in too many of our hardest hit communities, no matter how hard a child or her parents work, the life chances of that child, even her lifespan, is determined by the zip code she grows up in. This is simply wrong (And we are going to fix it….no matter what!!!),” he said.

Data from this discrimination database would be used with zoning laws, housing finance policy, infrastructure planning and transportation to alleviate alleged discrimination and segregation.

http://www.foxnews.com/politics/2013/08/08/obama-administration-using-housing-department-to-compel-diversity-in/#ixzz2bOi7DX2o

Now, with this and other rules coming down over the next three 1/2 years you think you’re going to be able to escape those that want to destroy their own communities with drugs and violence?

BWHWHAHAHAHAHAHAHAHAHA.

Hello Communist States of North America.

PappyD61 on August 8, 2013 at 12:59 PM

And all it took was a trillion taxpayer bucks. Wow, incredible.

Bishop on August 8, 2013 at 12:21 PM

Well, there’s that and there’s the fact that the feds will spend the so called $10B “profit” via borrowing in about two calendar days.

Difficultas_Est_Imperium on August 8, 2013 at 1:02 PM

O T :

Megan bumping Hannity at 9:00? WOW.

AmeriCuda on August 8, 2013 at 12:40 PM

.
I don’t wish any misfortune to Megan Kelly or FOX, but I can’t believe this is going to work.

BUT . . . . . . . I’ve been wrong before.

listens2glenn on August 8, 2013 at 1:08 PM

You think this whole housing thing is on the mend? HAHAHAHAHAHAHA.

http://www.forbes.com/sites/halahtouryalai/2013/03/28/risk-is-back-americas-big-banks-are-knee-deep-in-derivatives/

So, a few years later, now that the dust has settled from the global meltdown crisis, the question remains, “Where do we stand now with derivatives risk?” Well, I’ve been reading the annual reports of several of the largest U.S. banks (JPMorgan, Citibank, Bank of America, and Goldman Sachs) and I’m sorry to report that these institutions are still chock-full of derivatives. Here are the figures, according to the latest report from the U.S. Comptroller of the Currency’s office:

JP Morgan Chase
Citibank
Bank of America
Goldman Sachs

According to the same source, the total notional amount of derivatives held by U.S. commercial banks and savings associations, as of 12/31/12, was a staggering $223 trillion, while the four largest U.S. banks shown above hold 93% of these contracts. To put these overwhelming numbers into perspective, the U.S. economy only generates about $15.5 trillion in gross national product per annum; so, we’re talking over 14 years’ worth of GNP tied up in notional derivatives exposure, with the four main banks soaking up over 13 years’ worth of the total. In terms of product type, 80% of the total notional derivatives exposure is in interest rate swap contracts.

Think it’s all good for the housing market and Fannie and Freddie?

PappyD61 on August 8, 2013 at 1:11 PM

HUD knows where you live and will force housing diversity in your neighborhood…

d1carter on August 8, 2013 at 12:24 PM

Do what I did, and claim ‘mixed race’ on the census. If we all do that, their governmentalized race huckster programs fall apart.

slickwillie2001 on August 8, 2013 at 1:21 PM

This is OT, but why aren’t the GOP, conservative talking-heads, and the Tea Party Folks screaming this from the mountaintops:

In Feb 2009, BHO pushed through the Stimulus Act totalling $831,000,000,000. The plan was to jump-start the economy. In Feb 2009, the unadjusted employment force (those employed) was 140,105,000. There were 13,699,000 unemployed. Rather than spend the money on infrastructure that wasn’t built, green energy that isn’t economical, and other worthless program, if the US Government would have just given the 13,699,000 unemployed the median income for 2009 (about $30,000), it would have only cost $410,000,000,000 and everyone would be employed. We would have saved $421,000,000,000. Of, course we’d need a new government agency administering whatever we are paying them $30,000 a year to do. :-(

The dirty secret that no one talks about is once the Stimulus $$$ was added to the federal budget, it was there to stay, year after year. So the 2010, 2011, 2012, and 2013 budgets all had Stimulus level billions kept to the budget. We didn’t go back to 2008 spending levels. We stayed at the 2009 level then added more expenditures. And what do we have to show for it? The total of employed has only risen by 5,008,000, not much different than the increase in the labor force (3,396,000). The number of unemployed has only droped 1,613,000.

Remember, if we had given every unemployed $30,000 a year, we would have employed every unemployed American. Bottom line, the Stimulus was a total failure at “stimulating” the economy and we have nothing to show for the $4 TRILLION in Stimulus and follow-on spending that BHO and the Dems pushed through Congress when they controlled both the House and the Senate.

Again, those on the right should be repeating this day after day after day until the LIV catch on that the Stimulus was a scam to fatten the coffers of the unions and BHO’s cronies.

GAlpha10 on August 8, 2013 at 1:26 PM

Plus, is Obama playing a shell game with Fannie/Freddie reform?

Yes, loan guarantees are the new game and a dangerous one at that. What’s most aggravating is that the left lauds loan guarantees as involving the private sector and invoking capitalism while jokingly saying it doesn’t seem very socialist, but it’s entirely socialistic–the losses are explicitly socialized. I’ll be amazed if loan guarantees don’t end up proving to be cesspools of corruption as well.

theperfecteconomist on August 8, 2013 at 1:28 PM

I am really confused. (and I seem to be the only one willing to admit it!)

While dodd-frank did not address freddie and fannie it does contain the consumer finance protection bureau(CFPB). This group is supposed to be setting lending rules for ALL loans.

How can the federal govt, or any private firm, NOT follow the rules of the CFPB?

I do not think ANYONE knows how, or even IF, the ‘stories’ being told by Obama can exist.

Freddy on August 8, 2013 at 1:31 PM

Meh, get them out of GSEs or FHA or other gov’t housing loans and they will stick their noses back in the tent through the CFPB’s crappy regulations as they are already starting.

deepdiver on August 8, 2013 at 1:54 PM

These “profits” are also why technically for a limited time our debt spending is decreasing and why idiot liberals have been proclaiming that we don’t really have a debt problem.

gwelf on August 8, 2013 at 1:58 PM

Wow, it’s only taken five years with a total monopoly for Fannie and Freddie to get close to paying back the bailout! Aren’t we just lucky taxpayers.

rockmom on August 8, 2013 at 2:02 PM

New governemnt mortgage entities:

Barack Mac

Obama Mae

BobMbx on August 8, 2013 at 2:30 PM

The FHA began that process in 2009 as borrowers flocked to its doors after the GSEs went into government receivership, and the results are less than encouraging. FHA’s former chief credit officer Edward Pinto wrote last November that the FHA’s capital position turned negative nearly overnight, and that the FHA itself might need its own taxpayer bailout. The FY2012 actuarial study showed that the single-family program’s valuation dropped $23 billion in a year when the housing markets improved significantly, a serious red flag about the stability of its operation.

So, might this be part of the reason that Fannie and Freddie are turning a profit now? Since they aren’t allowed to back new crappy loans, and the old crappy loans were basically covered by the bailout, they’d have to be comatose to not turn a profit on their remaining portfolio.

But the underlying problem of government intervention by backing MBSs still exists. It has just been transferred to new ownership.

In other words–SSDD.

nukemhill on August 8, 2013 at 3:24 PM

How can the federal govt, or any private firm, NOT follow the rules of the CFPB?

Freddy on August 8, 2013 at 1:31 PM

The downfall of the left will always be their ability to abandon the rules, and they think this is a positive. They truly follow the rule of “the end justifies the means”, and that means they will abandon any rule if it’s for a good enough cause. That means, in practical terms, that if you come up with a good enough sob story then you can convince them to toss babies into ovens.

DFCtomm on August 8, 2013 at 4:02 PM

The F&F have rebounded on low interest rates being offered to gold plated borrowers – as the article noted, the FHA is currently underwriting everyone else and is cratering. As the people with strong balance sheets – the upper middle class and above – exhaust the refinancing and moving to bigger homes phase of the housing recovery, we are already seeing the entire market slowdown. Everyone else is getting higher commercial adjustibles and FHA backed loans. SO the well off get govt backed low rates, and everyone else gets screwed.

SOund familiar? Verb, Bayam, UE and all the rest. The democrats hate the little guy and create programs only the wealthy can use, allowing them to accumulate assets and widden the disparity between wealthy and not. But they do want his vote, SO that they can continue to skim money off the top of their helping their donor base.

An offical extortion racket on the backs of the middle and lower classes. Gotta love the modern day left! And their mindless supporters spewing talking points they know nothing about.

Zomcon JEM on August 8, 2013 at 4:52 PM

Remember (Democrat) Senator Chris Dodd (A-HOLE CT) and his sordid ties with Countrywide Mortgage?

Just the other day I was talking with a banking friend who had a wild story, one that the Democrat Media would never expose.

First of all, some background-back after the late 1980s S & L scandal, the Adults in Charge in Congress (Democrats) insisted that the appraisers who do the bank valuations be educated, certified, licensed, continuing educated to death, etc.

Back to the story the banker told me-in this one Countrywide case, they got a certified appraiser to crank out 400 appraisals a month at $400 a pop. That is 20 appraisals a day, with a gross per-day income of $8,000.

When the “regulators” years later checked the “work files”, they found that the dude had looked at one property at 12:00 PM on a given day, and then magically looked at another property across town on the very same day at 12:01 PM.

Needless to say, all of said individual’s “work” was a fraud…and yet chances are the perp will probably never serve a day in jail.

Del Dolemonte on August 9, 2013 at 12:24 AM