Releasing their earnings reports simultaneously, Fannie and Freddie reported first-quarter profits of $5.3 billion and $4.0 billion, respectively—a major step back from incomes reported last year but still a fair amount for what was a slow period for the housing market. Both enterprises have reported profits each quarter for more than two years straight.
Fannie Mae’s financial results for the quarter include $4.1 billion in revenue from legal settlements related to private-label securities suits. Acting as conservator for both GSEs, the Federal Housing Finance Agency (FHFA) has aggressively pursued banks it claims knowingly sold sour mortgage-backed securities to the companies before the housing crash. As of the beginning of May, the agency had settled 14 of 18 complaints filed in 2011.
As a result of its profitable quarter, Fannie will be contributing $5.7 billion in dividends to Treasury in June, bringing its total payment to the government to $126.8 billion—compared to the $116.1 billion the company had to draw from Treasury during the economic crisis. Per their amended bailout agreement, dividends from Fannie and Freddie do not offset any draws made.
Meanwhile, Freddie attributes its own quarterly results to $4.9 billion in legal settlement benefits, offset in part by $2.4 billion in derivative losses as a result of lower long-term interest rates. Its own dividend obligation will come to $4.5 billion, bringing its total Treasury payments to $86.3 billion (compared to $71.3 billion drawn).
While both companies warn that their recent earnings levels are not sustainable over the long term as the housing recovery moderates, both expect to remain profitable for the foreseeable future—further complicating the discussion of what to do with them as policymakers contemplate housing finance reform.
While plans vary, many proposals call for the gradual winding down and elimination of both enterprises in favor of a privatized marketplace supported by a more limited federal backstop.
Meanwhile, shareholders for both companies continue to fight for the cut of profits they say they should be getting. In a recent open letter sent to the boards at both companies, investor Bruce Berkowitz at Fairholme Capital Management urged the directors to retain each enterprise’s earnings, rebuild capital, and otherwise resume business as any other company would operate.
“The conservatorship of Fannie Mae and Freddie Mac—now in its sixth year—is perpetuating the pre-crisis regulatory and management shortcomings of the companies,” Berkowitz said in a statement accompanying the release of the letters. “Any notion that the answer to Fannie and Freddie’s pre-crisis problems is more government involvement is just as flawed as the idea that the United States economy can properly function without their core business.”