Fannie and Freddie's Huge Profits Raise Questions for Future of Mortgage Finance

October 18, 2012

Government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, accounted for 100 percent of the mortgage market through June 2012. The lowest percentage of the share these GSEs held in the mortgage market was 95 percent in 2008, says Economic Policies for the 21st Century.

  • Between 2008 and 2011, Fannie and Freddie recorded $91 billion in credit losses on mortgages.
  • But in 2012, this figure fell to just $14 billion.
  • The GSEs combined to generate $203 billion to protect against future losses.
  • However, in 2012, the projection of future losses had declined and the combined provision against future credit losses was just $2 billion.

Fannie and Freddie's losses leading up to the collapse of the housing market originated from buying mortgages in an overheated housing market. Many of the loans given out in 2006 and 2007 were in the form of interest-only and low-documentation loans. These loans accounted for 64 percent of all loses. However, once these types of loans stopped going out, the GSE's finances picked up once again.

Tthere are several factors that are contributing to the success of the GSEs.

  • First, Fannie and Freddie face less competition today than they did between the 2000 and 2005 period.
  • Second, guarantee-fees are higher.
  • Third, they are allocating less for compensation-related expenses.
  • Fourth, conservative underwriting has helped increase overall margins.

Arguably the biggest profit driver for Fannie and Freddie are the earning profits, which currently rest at $32 billion annually. On top of that, previous losses from 2008 to 2011 were carried forward to offset future tax liability; but considering the current outlook, accounting profits can exceed $60 billion in 2013.

The Obama administration amended the terms of the bailout to require that the GSEs distribute their profits to the Treasury as dividends each quarter. This may the result of a desire to increase federal revenue. However, now that the Treasury has an incentive for the GSEs to continue profiting as they are in the status quo, there is little motivation to reform the mortgage market, letting the GSEs control 100 percent of the market.

Source: "Fannie and Freddie's Huge Profits Raise Questions for Future of Mortgage Finance," Economic Policies for the 21st Century, October 9, 2012.

 

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