Fannie, Freddie profits could sap will in Congress to reform mortgage giants

Growing profits for the mortgage giants Fannie Mae and Freddie Mac could cause Congress to lose interest in overhauling the agencies.

Lawmakers and housing industry experts have called for reforms in the mortgage finance system to shift the lead role from the government to the private sector.

But any efforts to reduce Fannie and Freddie’s involvement in guaranteeing the bulk of home loans — they hold 31 million mortgages worth $5 trillion — could be undermined by the perception that the agencies have recovered financially.

Lawmakers have made little progress on reforming the mortgage giants since they were bailed out during the financial crisis, and the news that they are turning a profit for the government — at a time of steep deficits — could give them a reason to leave the issue for another day.

{mosads}Fitch Ratings, which has expressed concern about the lack of progress on the overhaul efforts, said on Friday that the massive dividend payment “will likely complicate efforts to pursue far-reaching” reform of the government-sponsored enterprises (GSE).

“Better operating trends at both Fannie Mae and Freddie Mac, driven by continued healing in the housing market” will “likely further reduce pressure on Congress to overhaul the U.S. housing finance system,” Fitch said in a release.

Fannie Mae announced on Thursday that it would send $59.4 billion in dividends to the Treasury. The day before, Freddie Mac said it had $7 billion for the government’s coffers.

“The political motivation to overhaul the GSEs and the broader mortgage market remains limited,” Fitch said.

“With the point where taxpayers are effectively made whole on their investment in GSEs now in sight, we believe broad reform will become more challenging to achieve.”

The suggestion that congressional lawmakers might become apathetic toward an overhaul is hitting a nerve in the mortgage and the housing industries.

“It does complicate things … it puts more sand in the gears,” a mortgage industry representative told The Hill about the increasing profits.

Some in Congress might view the agencies as “self-healing” and ask, “what’s the urgency,” especially as money pours into the Treasury.

Instead, industry leaders said, lawmakers need to face the reality that Fannie and Freddie remaining under government control is “not acceptable.”

“Despite their recent turn to profitability, we cannot forget Fannie and Freddie still remain in conservatorship,” said Jerry Howard, CEO of the National Association of Home Builders told The Hill.

“For this recovery to truly take hold, we need long-term stability in the mortgage markets, and GSE reform would go a long way in getting us there,” he said.

“Delays only foster continued uncertainty and deters private interests from entering the market. That is why we continue to urge Congress to keep moving forward on this vital issue.”

Anthony Sanders, a real estate professor at George Mason University, argues that Fannie and Freddie have merely become “cash cows” for the Treasury and probably won’t see their roles reduced until they pay off their debts.

Fannie CEO Tim Mayopoulos used Thursday’s financial announcement to reiterate his stance that it would be a mistake for Congress to turn away from reform.

“Our goal is to have private capital come and take as much of this market as it can,” he said.

Approaching their fifth year in conservatorship, a longer-term view is emerging that taxpayers might eventually recoup the nearly $188 billion bailout that kept the mortgage giants afloat during the housing market collapse.

Mayopoulos said in a recent Bloomberg interview that he expects to see strong profits “for the foreseeable future.”

“I do think, given the strength of our future profitability, it is possible that we will pay dividends that will be equal to or greater than the amount of money that we have received from the Treasury department.”

Fitch estimates that, at the current pace, the cumulative dividend payments by Fannie could exceed the $117 billion in senior preferred stock owned by the Treasury by late this year or early 2014.

So far, Fannie has paid $95 billion in dividends, or 81 percent of its draw from the Treasury’s investment.

Still, the dividends do not technically reduce the total investment injected into Fannie and Freddie by taxpayers.

Calls for a reform plan were renewed recently when President Obama nominated Rep. Mel Watt (D-N.C.) to take over as permanent head of the Federal Housing Finance Agency (FHFA), the regulator of Fannie and Freddie.
 
Sen. Bob Corker (Tenn.) said he wants the White House to produce an overhaul plan before the upper chamber considers a replacement for acting Director Edward DeMarco, who has led the agency since 2009.

Still, while lawmakers have talked about the urgency of a revamp that would lure private capital back to the mortgage finance market, there has been little movement on a plan.

DeMarco, who offered up a couple options during a housing conference in Chicago on Thursday, has implored Congress in recent months to craft a plan to unwind the agencies.

“Lawmakers in Washington agree on the need to draw private capital back into the mortgage market but no consensus on how to do so has formed,” DeMarco said.