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Fannie Mae vs. Banks, U.S. Treasury

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Seems as though Fannie Mae is morphing into an unpredictable, courtroom-loving entity that it was never supposed to be. But is it because the GSE is actually playing by the rules with a government that changes those rules on a whim? The dynamics include billions of dollars, millions of homeowners, no shortage of government agencies and more than a few of the “big banks”. Past that, however, things become slightly vague. Here’s the latest from the players:

5 Years and $117 Billion

In 2008, the mortgage entity announced it would be seeking a taxpayer-funded bailout in order to pay its creditors and remain solvent. Five years and $117 billion later, the company has repaid $95 billion. The problem is, none of it has been applied to the actual loan, and instead, the government has labeled it “dividend payments”. And you just thought those payday loan outfits were costly: the Treasury has nothing on these companies, unless you count the fact that the collective government agency answers to no one.

Fannie Mae Recovers – with Profits

For more than a year, Fannie Mae has been turning an impressive profit; in fact, 1st quarter 2013, it reported an $8.1 billion. Now, though, the Treasury Department has changed the rules. Perhaps when the original agreement was made, no one expected the GSE (government sponsored entities) to make such a strong comeback. Either way, the powers that be have spoken. Under those new rules, Fannie Mae must turn over any quarterly profits to the Treasury. Before the change, the requirement stated that the companies pay quarterly dividends of 10 percent on the government’s nearly 80 percent stake.

Keep in mind, this does not pay back the actual loan; it is just a dividend. That means the taxpayers, for all intents and purposes, haven’t been paid. Wondering where that total $95 billion is going?

It’s up to the Treasury to decide what to do with it,

said Fannie Mae CEO Timothy Mayopoulos during a conference call with the media last week.

Retro Tax Credits

Another reason the profits are so massive are due to its ability to now claim a tax credit from several years ago. It’s worth more than $50 billion. This, of course, reverts back to the Treasury Department. How that happened is a mystery to many since the agreements have often changed without warning.

Citi and Fannie Mae Suit

Meanwhile, Fannie Mae’s efforts of forcing some of those big banks to buy back their bad debt seems to be paying off. These toxic loans were pushed onto not only Fannie Mae, but Freddie Mac as well. Bank of America agreed to pay more than $3.5 billion in cash along with $6.75 billion that’s earmarked for buying back the loans, many of them with Countrywide’s logos.

On Sunday, Citibank announced it too has settled the suits filed by Fannie Mae. It’s agreed to pay considerably less than Bank of America, though it’s still right at the $1 billion mark. This settles Citi’s role in its entirety. This latest announcement doesn’t affect in any way the repurchase claims made against Citi by Freddie Mac. It also received taxpayer bailout funds.

The announcement provides details of the agreement. It covers close to 4 million “potentially dangerous” residential loans financed between 2001 and 2012. They were by Cit to Fannie Mae. Further, Fannie Mae accused Citi of misrepresenting the loans, which in turn caused massive problems. At the height of the recession, homeowners were abandoning their properties in droves.

Lawmakers Want to Break Up GSEs

Many lawmakers have come out against Fannie Mae and said the time has come to break apart both it and Freddie Mac. This is slightly confusing, since the actions of these lawmakers don’t suggest they support the breakup. In fact, Fannie Mae can’t be dissolved until it has repaid all of the bailout money. With absolutely nothing being applied to that principle, one wonders if there aren’t ulterior motives at play. Is the government attempting to build its coffers and once it’s extracted all it can, will it then dissolve the agency, complete with the massive debt still owed to taxpayers? And for that matter – where is all of the money? No one’s talking. There are many who are asking those tough questions, though no answers are being provided.

It seems strange that everyone else who borrowed from U.S. Treasury in the crisis is allowed to pay back, but the GSEs are neither allowed to rebuild capital nor repay. Shouldn’t we get to reform rather than use them as a budget tool?

wonders Graham Fisher analyst, Joshua Rosner.

Taking it a step further, there must be consideration given to the fact that both Fannie and Freddie are turning profits these days. Will those wishing to break them up be able to overcome that truth in their efforts? Some suggest it’s the tax breaks that the agencies can now retro-claim that’s pushing the impressive profits. Mayopoulos says it would be a mistake to allow the profits to be the sole justification for keeping the GSEs going,

There is a risk that policy makers will look at our profitability and conclude that they don’t need to take action to reform the housing finance system.

Maybe there’s a bigger problem, though. At some point (and likely it’s sooner than many realize), Fannie Mae will have repaid every dollar of the bailout funds. How long can the Treasury Department continue to claim the billions as dividends, especially if there have been as much in dividends paid out as the original bailout. Some are suggesting it’s illegal and others say this will continue until lawmakers are able to redefine a better system. If that’s true, Fannie Mae and Freddie Mac have little to worry about. When it comes to the financial sector, lawmakers have historically dragged their feet to the point of decades or more. One analyst says this is nothing more than “punishment for past sins”.

What are your thoughts? Should Fannie and Freddie be dismantled? Should the Treasury Department be forced to change its policies and begin applying the funds it receives from Fannie Mae to the actual bailout balance? Let us know what you think about these latest events.

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