Fannie, Freddie and Housing

Fannie Mae and Freddie Mac had stellar results in 2013, which have continued into 2014. This means a windfall for the U.S. government, with a payment of $10.2 billion flowing back to the Treasury: $5.7 billion from Fannie and $4.5 billion from Freddie.

After collapsing during the credit crisis, both agencies have worked their way back to profitability (see chart below).

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The enormous losses during the credit crisis forced both agencies into conservatorship, and required substantial infusions of capital from the Treasury in order to keep them from failing. This support came in the form of senior preferred stock purchases, which neither agency has needed since 2012 (see chart below).

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In total, Treasury has invested $117.15 billion in Fannie Mae and $72.34 billion in Freddie Mac. This does not include additional support that both agencies received in the form of MBS or agency debt purchases. Treasury began winding down its $142 billion portfolio of agency MBS in April 2011, liquidating their entire holdings approximately a year later. The Federal Reserve still holds an inventory of approximately $1.1 trillion in agency MBS, and approximately $134 billion in agency debt.

Considering only the direct investment in the agencies, and not any other securities still held or already sold by the government, and despite the large injections of capital invested, the government has actually now turned a profit. With payments of $121.071 billion in total received from Fannie ($117.15 invested) and $81.78 from Freddie ($72.34 invested), the government has made money on its bailout (see chart below).

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The positive return is in large part driven by 2013, and will be further increased in June when the payments noted in the first paragraph of this post are distributed. Housing prices have been strong in recent periods (see chart below), which has driven a recovery in the market and strong performances for both agencies. However, the trend for Fannie and Freddie does not appear sustainable. With new housing starts and existing home sales both heading down the two agencies have warned that they will not be able to repeat the strong performance of 2013.

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There are broader concerns about the mortgage and housing markets as well, and industry insiders see many signs that the recovery is in danger. Federal Reserve chairwoman Janet Yellen testified before Congress that the dip in housing activity presented a considerable risk to the Fed's baseline economic outlook and could cause them to adjust their stance on monetary policy in the future. Congress has been debating a bill to wind down Fannie and Freddie over five years, but it is unclear how those discussions will progress given the recent weakness in the housing market. Any activity that withdraws support from the industry could rattle the markets and cause a lurch back downward and off the road to recovery. In the meantime, the government should enjoy its profits while they last.