Government controlled mortgage giants Fannie Mae and Freddie Mac posted their Q1 profits of 2014. Although home prices grew slowly and home sales have been lethargic, the two GSEs did very well for themselves.
If you can remember, think back to 2008 when the government was handing out bailouts like candy. Fannie and Freddie were bailed out in 2008 and then adopted by the government. So, you can imagine where Q1’s profits are going: right back to the U.S. Treasury. You didn’t think that you were the only one who had to pay back Uncle Sam, did you? Fannie and Freddie received aid totaling $187 billion.
Fannie Mae posted $5.3 billion in net income, and $5.7 billion in comprehensive income. This stands as Fannie Mae’s ninth consecutive quarterly profit. However, the net income is also significantly lower than it was during Q1 of 2013 – just one year ago – of $58.7 billion. That means that Fannie Mae’s Q1 net income for this year is only 9% of what it was last year. The difference in net income can be attributed to a handful of factors such as higher interest rates, slower economic growth, high home prices, and the shift of a refinance market to a purchase market.
The dividends that Fannie Mae will make in June of this year will bring their payback total to $126.8 billion, over $10 billion more than it originally borrowed. Fannie Mae also has an agreement that prevents it from building a capital reserve. Due to this requirement the current $2.4 billion capital reserve is planned to be reduced by $600 million year until it reaches zero (http://www.forbes.com/sites/maggiemcgrath/2014/05/08/fannie-mae-and-freddie-mac-sending-treasury-10-2-billion-after-posting-first-quarter-profits/).This puts pressure on the firm not to make any errors, as it will not have a cushion of liquid cash to fall back on. The bottom line: going forward, the GSEs are on thin ice, and must plan each move cautiously and strategically.
Freddie Mac posted net income of $4 billion for Q1 of 2014, marking the 10th consecutive quarter of exhibiting a profitable net income. An article by the Associated Press reported, “net income was bolstered in the latest period by a decline in mortgage delinquencies, the company said” (http://www.forbes.com/sites/maggiemcgrath/2014/05/08/fannie-mae-and-freddie-mac-sending-treasury-10-2-billion-after-posting-first-quarter-profits/). Freddie has already repaid their government bailout after Q3 of 2013. The bailout paid back was a total of $71.3 billion. However, Freddie will still be paying Uncle Sam back this quarter as interest on the money that they borrowed. After Freddie pays this dividend back in June of this year, Freddie will have paid back the Treasury $86.3 billion, almost $95 billion higher than the initial amount that it borrowed.
Moving forward, both of the GSEs will be affected by market changes just like everyone else. For now, the two companies are expected to be profitable in the near future. After that, the market will determine the rest.