Fannie/Freddie Need Your Money Again, But Not Like They Used To

While the prospect of Fannie Mae and Freddie Mac needing taxpayer money conjures up images of a failing mortgage market requiring a government bailout, that's very far from the case this time around.  In fact, taxpayers continue to come out way ahead with respect to the GSEs' conservatorship agreement, even after the draws that will be needed to cover 4th quarter losses.  At issue are one-time write-downs arising from accounting changes in response to the new tax bill.  After this, it should be business as usual (a business that has been returning a significant amount of money to US taxpayers).

Both Freddie Mae and Fannie Mae posted strong full-year incomes for 2017 despite that both also suffered fourth quarter losses courtesy of the new tax law.  Fannie's comprehensive income was $2.5 billion after a loss of $6.7 billion in the fourth quarter. Freddie Mac's numbers for the two respective periods were $5.6 billion and a $3.3 billion loss.

Fannie Mae said its full-year results were down from $12.3 billion for all of 2016 although its 2017 pre-tax net was higher, $18.4 billion versus 18.3 billion. The $6.5 billion net loss for the quarter was down from net income of $3.0 billion in Quarter 3.

The fourth quarter loss was the result of a remeasurement of the company's deferred tax assets due to the enactment of the Tax Act. The result was a one-time $9.9 billion provision for federal income taxes.  

Fannie Mae had net revenues of $5.5 billion in the fourth quarter compared to 6.5 billion in the third. Full-year revenues were $23.0 billion, compared to $22.3 billion a year earlier.  Net income from interest declined for both the fourth quarter and the year because of a decline in income from the company's retained mortgage portfolio. The loss was offset for the year by a substantial increase in fees and other income.

In December, the company's conservator, the Federal Housing Finance Agency (FHFA) reached an agreement with the Treasury Department to modify the dividend provisions of the senior preferred stock agreement to allow Fannie Mae to increase its capital reserve amount to $3.0 billion and reduce the dividend amount otherwise payable for the fourth quarter by $2.4 billion.  Further, the company said it expects FHFA to submit a request to Treasury on the company's behalf for $3.7 billion to cover the quarter's deficit.

Fannie Mae said it provided approximately $570 billion in liquidity to the mortgage market last year and was the largest issuer of single-family mortgage related securities in both the fourth quarter and the year, with a market share of 39 and 37 percent respectively. It also provided more the $67 billion in multifamily and other rental financing and supported 770,000 units of multifamily housing during the year.

Freddie Mac posted net interest income of $3.5 billion during the fourth quarter and $14.2 billion for the year. Third quarter interest income was slightly under 3.5 billion, while the full-year income in 2016 was $14.4 billion.

Freddie Mac wrote down $5.4 billion in net deferred assets because of the tax law. This loss was partially offset by a $2.9 billion after-tax liquidation settlement received in the third quarter. The company will also draw on its Treasury line to cover its fourth quarter net deficit and expects to borrow $0.3 billion.  This will reduce the amount remaining under its stock agreement to $140.2 billion.

The company said its guarantee portfolio grew by 6 percent during the year, the highest growth rate in the past ten years, and exceeded $2 trillion for the first time.  The single-family guarantee portfolio grew 4 percent and the multifamily guarantee portfolio increased by 28 percent.

Despite the shortfall in their fourth quarter results, both companies said they expect the new tax law to benefit them going forward.  Fannie Mae estimates it will be henceforth be paying taxes at a 20 percent rate.  

The company's CEO, Donald H. Layton said, "We now have a fully competitive company that is executing on its mission, protecting taxpayers and helping to build a better housing finance system for the nation."