Real Estate & Mortgage Insights

Fannie Mae and Freddie Mac Are Starting to Turn Profits - Could This Be Bad?

Mortgage finance companies Fannie Mae and Freddie Mac have been carefully nursed back to health since being taken into government conservatorship in 2008. In fact, Freddie Mac reported profits of $11 billion during 2012, a sharp improvement compared with it $5.3 billion loss in 2012. Fannie Mae saw profits of $9.6 billion during the first three quarters of 2012 and expects to report "significant net income" for the fourth quarter. And yet some in Washington say this could be "bad news."

Bad news, that is, for those hoping for serious U.S. housing and mortgage reform. Fannie and Freddie were chartered by the government decades ago to help encourage widespread homeownership across the country. They do not make home loans, but guarantee loans made by lenders by buying up millions of loans, bundling them and repackaging them as securities investments. Things got tricky after the housing bubble burst and they were left with tons of toxic mortgages, resulting in massive losses. The government took control of both entities before they could collapse.

Since then there has been plenty of talk about the future roll of Fannie and Freddie. Because they back so much of the American mortgage market, they put taxpayers at risk anytime a major housing crisis occurs. During the financial crisis following the housing bust, Fannie and Freddie have borrowed $187.5 billion from the Treasury in order to stay afloat. So far they have paid about $50 billion in dividends to the government. Because of the high risk many are calling for the two companies to be abolished.

In fact, when the Fannie and Freddie were put in conservatorship in 2008, no path for independence was created because it was expected that lawmakers would do away with them before they returned to profitable status. They can only retain $3 billion in net worth, with any excess being returned to taxpayers.

But profitability could change any plans for reform. "The good news is they're actually starting to make money again," Senator Mark Warner, a Virginia Democrat, said as quoted in a Bloomberg article. "Bad news is if they make too much money, there may be a sense of, 'Well, let's not mess with them anymore.' We need housing finance reform."

There is fear that if Fannie and Freddie can maintain profitability that the government will hold on to the companies and earmark its revenue for other pet projects. If that happened, the companies could remain government-controlled indefinitely with no real reform made to protect the American people for future risk.

There are some lawmakers still concerned with Fannie and Freddie's status. In the Senate's most recent budget vote, a provision was inserted that would prohibit lawmakers from raising the companies' fees in order to use that revenue for government expenses.

The Obama administration has not released any details on its plans for the two companies.

"I can't sit here today and tell you exactly what the next step is, but we're very much focused on it," said Treasury Secretary Jacob Lew in a Bloomberg interview. He added, "We can't ever again be in a place where the American taxpayers were left responsible for practices that get out of control."