Bank analysts warn another crisis is in store for Fannie Mae and Freddie Mac, which potentially means another bailout.
Fannie and Freddie’s earnings are now dropping after a surprisingly profitable 2013. Fannie Mae's net income fell 83% in 2014 to $14.21 billion, while Freddie Mac's fell 84% to $7.69 billion, SNL Financial notes. In the first quarter of 2015, Fannie reported only $1.89 billion in net income while Freddie posted $524 million, the bank research shop says.
Brad Bracey and Matt MacFarland at SNL Financial warn: “Some believe the institutions are now exposed to another downturn in the housing market.”
Both housing finance giants are dialing down their portfolios. “Their capital reserves are set to reduce every year until reaching zero by 2018,” at a rate of about $600 million a year, says Compass Point analyst Isaac Boltansky, who characterizes the “dwindling capital reserve” as a “sunset provision.” He adds: "Reduce their capital each year so that, hopefully, at some point in the future, another Congress will handle these issues because they'll have to. It's like a ticking time bomb."
To expedite the wind down of Fannie and Freddie, the two must reduce their mortgage loan portfolios, as well as the size of their capital reserves. According to the Treasury Dept.’s 2012 sweep amendment, their “investment portfolios have been and continue to be wound down at a 15% annual rate,” says SNL.
However, “interest from these portfolios has historically been a major source of income, but revenue also comes from fees charged to guarantee mortgages, which were raised consistently until FHFA director Mel Watt suspended further increases in January 2014,” it says.
SNL notes that the “wind-down will continue until” their portfolios hit $250 billion each; as of March 31, Fannie Mae's total mortgage-related portfolio was $411.7 billion, and Freddie Mac owned $405.6 billion in mortgage assets, according to quarterly filings.
But dialing back on their portfolios is a tricky business as the housing market is still in recovery mode. SNL says market watchers and regulators have already warned that if the downward trend in their profitability continues, the two “might need to draw on Treasury funds once again.” Fannie and Freddie got a combined $187.4 billion taxpayer bailout in 2008. Since then, the two “have paid in dividends $228.2 billion, $40.8 billion greater than the Treasury investment. That difference has led some to say that the enterprises' ‘debt’ to taxpayers has been paid — but the agreement required the 'two' to pay dividends as a return on investment,” SNL adds.