Fannie Mae and Freddie Mac will pay $39 billion to the U.S. Treasury by the end of the year, the companies said Thursday, putting the firms close to having paid as much as the government injected in the mortgage-finance giants—nearly $188 billion—to keep them afloat through the housing bust.The payments were disclosed Thursday, when the two companies reported strong earnings for the third quarter. Freddie Mac posted a $30.5 billion third-quarter profit, largely due to a tax benefit, and said it would pay $30.4 billion to the Treasury. Fannie reported an $8.7 billion third-quarter profit and will pay $8.6 billion to the Treasury.
But unlike other financial companies that were bailed out by taxpayers, Fannie and Freddie will continue to send the bulk of their profits to the Treasury indefinitely, as dividends. They aren’t allowed to earn their way out of government control.
Still, the fact the companies are achieving such large profits is likely to reshape the debate in Washington and on Wall Street over how and when to restructure Fannie and Freddie.
In the aftermath of the companies’ takeover, lawmakers and policy makers frequently called for phasing out the firms as part of a more radical overhaul of the nation’s $10 trillion mortgage market. But in recent months, comments from lawmakers, from current and former Obama administration officials, and from industry groups have indicated growing support for preserving significant pieces of the mortgage-market infrastructure provided by Fannie and Freddie, even if the corporate entities themselves are ditched.
The profits “kind of lessen the political need to eliminate them for some. It doesn’t eliminate it entirely,” said Jeb Mason, a Treasury policy adviser in the Bush administration who is now a partner at Cypress Group, a financial-services consultancy. He said he doesn’t think the profits will dim the urgency for an overhaul because they “are a symptom of a still-broken housing-finance system.”
With a coming payment to the Treasury, Freddie will have paid the government nearly $9 million more than the $71.3 billion that taxpayers were forced to invest in the company. Fannie will have paid $113.9 billion, compared with $116.1 billion invested by Treasury.
Beginning this year, Fannie and Freddie have been required to send nearly all profits to the Treasury as dividends. Together, the companies will have paid more than $185 billion in dividend payments by year-end.
“We are quickly approaching the point where taxpayers will receive a positive return on their investment in this company,” said Timothy Mayopoulos, Fannie’s chief executive.
Profits could also complicate any overhaul by triggering a change in federal budgeting. If government accountants now conclude the firms are revenue-generating entities for the government and positive to the budget, Congress would either have to raise new revenue or cut spending as part of a revamp of Fannie and Freddie.
The companies owe their turnaround to the sharp home-price rebound, particularly in California, Arizona, Florida, and Nevada, where the firms have guaranteed a significant share of mortgages. Fannie and Freddie were forced to build large reserves in anticipation of rising mortgage defaults and foreclosures during the housing bust.
Now, housing demand has rebounded, led initially by investors buying up cheap foreclosures and later by traditional owners looking to take advantage of low mortgage rates. The result: Fannie and Freddie are losing less money on sales of foreclosures than they had initially anticipated. That has boosted their bottom lines.
While Freddie should remain profitable for the foreseeable future, the recent level of earnings “is not sustainable in the long run,” said Donald Layton, chief executive. “At some point, home-price growth will moderate as housing markets reach the end of their recovery cycle.”
While discussions are heating up in Washington over what to do with the companies, it isn’t clear whether a bill will pass any time soon. And most legislative proposals have contemplated at least a five-year transition period. The upshot, Mr. Layton told lenders at an industry conference last week, is that “Freddie Mac is going to be doing business with you roughly in the same way, roughly in the same setup, for an awful lot of years to come.”
Write to Nick Timiraos at firstname.lastname@example.org