NEW YORK, NY (KWR) November 21, 2011 - Fannie Mae and Freddie Mac have been through a lot - they were and remain the big fish in U.S. mortgage markets, and went from being independently-run businesses to being fully nationalized and have struggled ever since 2008 to return to profitability. The cost to U.S. taxpayers has been substantial, coming in close to $170 billion. And they continue to need help.
In early November, Fannie Mae's Q3 2011 "earnings" call showed the Government Sponsored Enterprise (GSE) posted a widening loss, reflecting ongoing problems in the U.S. housing sector. Fannie Mae lost $5.1 billion in the quarter, compared with a year-ago loss of $1.3 billion. It also announced it was seeking an additional $7.8 billion in U.S. government assistance. The sad commentary is this was Fannie Mae's 16th loss in the past 17 quarters. It does not appear the government life support program will be removed any time soon. Indeed, the government estimates it could cost up to $51 billion more to support the companies through 2014, after subtracting dividend payments. Fannie Mae's request for more taxpayer money through the Treasury Department includes the $2.5 billion needed to cover required quarterly dividends paid to the government. Hmmm. The total cost to U.S. taxpayers since Fannie Mae was rescued from its near-brush with failure is a little over $94 billion.
Things are not much better over at Freddie Mac. The other major mortgage player's Q3 2011 "earnings" were noteworthy for their $6 billion loss, compared with a loss of $4.1 billion in the same quarter of 2010. Like Fannie, Freddie also requested additional taxpayer help - to the tune of $6 billion. It is estimated U.S. taxpayer money used to support Freddie totals $75 billion.
The challenge for the two GSEs is that their results are strongly related to their past mistakes. The loans made from 2005 through 2008 are a major source of losses. Both institutions are selling tens of thousands of properties that they are taking back through foreclosure. The problem is they are taking larger losses on those sales because of falling home prices. There is a little hope that mortgage delinquencies have stopped rising.
While the tide of red ink does not sit well with taxpayers, Fannie and Freddie still play a critical role in the deeply troubled U.S. mortgage and housing market. The two institutions own or guarantee about half of all U.S. mortgages. This is close to 31 million home loans worth more than $5 trillion. Together with other federal agencies, the GSEs backed around 90% of new mortgages over the past year.
Despite the key role played by Fannie and Freddie, the costs related to their ongoing survival and fiscal pressures on the U.S. government might push the agenda of what their ultimate end game will be. There is growing sentiment in Congress to wind the two GSEs down, but that battle is most likely to be fought in the post-November 2012 election period. In the short- term, more attention is likely to be focused on the bonuses of Fannie and Freddie executives, which in 2011 are budgeted at $12.8 million for 10 executives. The bonuses were approved by the Federal Housing Finance Agency, the government regulator for the two agencies. According to press sources, Ed Haldeman, who announced last week that he is quitting as Freddie's CEO, received a base salary of $900,000 in 2010 and a $2.3 million bonus. Fannie's CEO, Michael Williams, received a $2.87 million bonus in 2010. Indeed, a measure has been introduced into the Senate to ban federal money from being used to pay bonuses for these executives and a U.S. Senate Banking Committee will hold a hearing over the bonuses.
Fannie Mae and Freddie Mac now sit in a limbo-like situation. Their role in the housing market cannot be eliminated overnight, considering the fact that they remain and are positioned as a key barrier to prevent another deep plunge in that part of the economy. That buys them some time, as does the upcoming U.S. presidential campaign. The likelihood is that no one really wants to touch Fannie and Freddie reform in an election year. Yet, the two agencies conveniently remain a flashpoint for indignation over government spending and executive pay largesse, especially considering the string of losses and the need for new cash. Sadly, the agencies future remain transfixed by the difficult nature of an anemic economic recovery and the political winds blowing in Washington.