Could Latest Fannie and Freddie Earnings Releases Signal a Halt to Sweep?

With the latest quarterly/full-year earnings releases of Fannie Mae and Freddie Mac, it is easy to regard the news with a sense of “here we go again” – more earning snatched up by Treasury.  But maybe not. Could the two home finance giants be on the verge of retaining their earnings?

On Thursday,  Freddie Mac announced its Q4 and full year earnings for 2016, declaring, net income of $7.8 billion for the full year of 2016, the fifth straight year of positive earnings. This amounts to “nearly $106 billion returned to taxpayers, including scheduled March 2017 payment.”

Note the word “scheduled.”  Previous year-end statements referred to dividend payments to Treasury as a fait accompli. Maybe the time has come for Freddie to do what other companies do – retain earnings and maintain a capital buffer.

Meanwhile, Fannie Mae today announced the company had paid a total of $9.6 billion in dividends to Treasury in 2016 and added, “The company expects to pay Treasury $5.5 billion in dividends in March 2017. With the expected March 2017 dividend payment, Fannie Mae will have paid a total of $159.9 billion in dividends to Treasury.”

To be clear, there has been no bold declaration that the quarterly sweep of earnings by Treasury is about to come to an end. However, it is worth taking stock of the fact that these companies have undertaken reforms and have been operating profitably for years. They are not behemoths teetering on what was perceived as insolvency as they were in the frenzied turmoil of the 2008 financial crisis.  As such, it would be a welcome shift by the Treasury Department and the Federal Housing Finance Agency to come together and enable to companies to start retaining their earnings and building up capital.

Naturally, shareholders would welcome this development. Over the last eight years, too many policymakers seemed to have forgotten that, despite the government charter and conservatorship, Fannie and Freddie are privately held companies. The earnings, far in excess of the $187.5 billion the government provided to stave off a possible emergency in 2008, belong to shareholders.

A reconsideration of the policy that has routinely stripped the company of their earnings would also be welcome news for taxpayers, who would benefit from a return to the important and traditional regulatory concern of safety and soundness. Almost exactly one year ago today, Investor Unite Executive Director Tim Pagliara lauded FHFA Director Mel Watt for his forthrightness in discussing the possibility that government sponsored enterprises without inadequate capital buffers presented the risk of the companies having to once again draw from the Treasury – meaning taxpayers – to cover possible losses.

The 2008 crisis revealed the need to make improvements in federal policy so Americans could benefit from a healthy, liquid secondary mortgage market. The longtime pillars of this market, Fannie and Freddie, have been profitable since at least 2012. It is becoming clearer every day that they are companies that have been transformed in many ways. And yet, the conservatorship and Net Profit Sweep remain the glaring absurdities of the post-crisis financial world. Two of the largest financial institutions on earth have been forced to actively whittle down their capital reserves to absolutely nothing.

There have been signs that the Trump Administration wants to shed the legacy of inaction on housing reform during the Obama years. If the routine handover of earnings is now regarded as merely an expected or scheduled transaction, rather than firmly committed action, that could be additional evidence that policymakers are looking at the companies less as piggy banks and more as profitable enterprises that need to be run responsibly. This would be a long overdue policy imperative that would be good news for shareholders and taxpayers alike.