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Another Quarterly Treat for Treasury, Another Trick on Everyone Else

At some point in the future, Fannie Mae and Freddie Mac will retain their quarterly revenues just as other companies do, allocating funds to capital reserves, and other routine functions. For now, however, the money will flow into Treasury and be spent in ways almost impossible to track.

Today Freddie Mac announced its income for the third quarter of 2017 was $4.65 billion. Most of it will go to Treasury. That will bring the total dividends paid to Treasury since Freddie was placed in conservatorship in 2008 to $114.8 billion – $43.5 billion more than Freddie drew in emergency bailout funds at the height of the 2008 financial crisis. Fannie Mae will announce its third quarter earnings on Thursday. When Fannie’s Q2 earnings were announced in August, the company had surrendered $162.7 billion to Treasury since 2008 – $46.6 billion more than it drew in emergency loans. Therefore, the government has bagged a net return of over $90 billion during the course of the conservatorship.

But this is no treat for taxpayers. It is a trick on them as well as on Fannie and Freddie’s shareholders and homebuyers. The revenue stream officials in the Obama Administration created with the Net Worth Sweep in 2012 is draining the GSEs of their lifeblood, capital. Each quarter that the companies post profits allows the recklessness and deception to continue. But when Fannie and Freddie head into next year with no reserve capital and suffer a quarterly loss or two, there will be a reckoning that should have Washington policymakers spooked.

At that point, the state of the conservatorship of Fannie and Freddie will move from a short mention in the Business section to the front page. Taxpayers will not be happy to learn that they need to cover Fannie and Freddie’s losses, especially since Washington has had nine years to restore the companies’ soundness and solvency. The Trump Administration will have to explain why it has perpetuated the Obama Administration’s scheme to bleed Fannie and Freddie and allowed government lawyers to continue to defend the previous Administration’s false narratives and stonewalling in court.

FHFA Director Mel Watt continues with his clarion call about the need to retain earnings and pleas for Congress to build  on GSE reforms FHFA has achieved to design comprehensive housing finance reform. There are indications that Congress might be gearing up for action. The House Financial Services Committee had a hearing on the subject last week and has another hearing scheduled for Thursday. The Senate Banking Committee had another in a series of hearings over the summer. At that session, small lenders rejected possible proposals to marginalize them to the benefit of the nation’s largest banks. Whether Congress can coalesce around a common-sense way of exiting the conservatorship with needed reforms in housing finance policy is an open question. Ideological and partisan antipathy to Fannie and Freddie, along with disregard for shareholder rights, is pervasive among lawmakers. Still, no one in Congress has come up with an alternative approach to maintaining a stable and healthy secondary mortgage market that would serves taxpayers and average Americans pursuing home ownership better than the current model.

Maybe next quarter.