Another Strong Quarter For the GSEs, Another Profitable Pay-Out to Treasury
- August 6, 2015
Fannie Mae and Freddie Mac both boasted healthy second quarters this year, according to earnings reports released this week. Fannie boasted $4.6 billion in net income while Freddie showed an impressive $4.2 billion for the same.
The Wall Street Journal noted that “an interest-rate increase helped drive a 27% rise in [Fannie’s] second-quarter profits” while Politico Pro reported earlier this week that Freddie reversed losses from derivatives holdings into gains” with the second quarter of this year showing a vast improvement from the same period last year when Freddie had just $1.36 billion in profit. Or, as HousingWire notes, an “astounding 702% increase in just one quarter.”
No doubt, U.S. Treasury officials cheered over the combined $8.3 billion the companies will turn over to the agency in September as part of the ongoing Third Amendment Sweep. That payment will bring the total amount Treasury has siphoned from the enterprises to a whopping $239 billion, which more than repays the $187.5 billion they received in bailout funds a few years ago. After the September payment, Fannie will have paid Treasury $142.5 billion (she received $116.1 billion) and Freddie will have paid $96.5 billion (he took $71 billion in bailout funds).
As we awaited the companies’ earnings reports, we thought back to what Fannie’s chief economist said at the release of the first quarter earnings this year:
“The first half of this year performed a lot better than what was originally expected, giving extra momentum to the start of the second half of the year.
“‘Our second-half outlook is little changed overall, but we have upgraded our full-year outlook due to the upward revision to first-quarter GDP and our more optimistic view for the second quarter,’ said Fannie Mae Chief Economist Doug Duncan in Fannie’s July Economic Report.”
That strong outlook combined with Freddie’s profits in the second quarter must surely be a shock to some of the naysayers who predicted that the GSEs would not be profitable, chief among them Mortgage Bankers CEO Dave Stevens and Treasury’s Michael Stegman, who is counselor to the Secretary for housing finance policy.
During a March CNBC interview, Stevens said that the GSEs epic profits were one-time events and predicted they would return to “more normalized” earnings:
“But that’s certainly not sustainable for two companies that have virtually no capital and are dependent, ultimately, on these lines of credit that Treasury holds,” he said.
The Washington Post, in an article from February 2014 noting that both GSEs had fully repaid the taxpayers’ for their generous bailout in 2008, reported this from Stegman:
“Besides, the companies’ recent financial performance may ‘overstate’ their financial health, Stegman said. He cited several one-time gains that benefited Fannie and Freddie, including $10 billion from settlements in lawsuits involving mortgage-backed securities.”
Clearly there’s something going on that’s letting the GSEs post profitable quarters. Could it be that the companies have recovered and have regained their footing in the housing sector to the extent that now their strength is coming through? Of course, all the more reason for Treasury officials like Stegman to continue draining them of their profits by refusing to let them build up their capital buffers.