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Fannie Mae, Freddie Mac Q3 Earnings Reports Fuel Bailout Speculation

Fannie-Freddie-logos [1]Fannie Mae [2] and Freddie Mac [3]'s 2015 third quarter earnings statements have the housing industry buzzing about taxpayers paying the ultimate cost of funding yet another bailout for the GSEs.

The GSEs have been under FHFA conservatorship since September 2008, at which time they needed a combined bailout of $187.5 billion from taxpayers in order to stay afloat and "preserve and conserve their assets and property and restore them to a sound financial condition so they can continue to fulfill their statutory mission of promoting liquidity and efficiency in the nation's housing finance markets," according to FHFA's website.

On Thursday, Fannie Mae [2] reported a net income of $2 billion [4] for the third quarter and a comprehensive income of $2.2 billion.

However, despite the profits recorded in the third quarter, Fannie Mae's net income and comprehensive income both declined by more than 50 percent from the previous quarter when it reported totals of $4.6 billion and $4.4 billion, respectively. The decline in net income was primarily due to fair value losses which were partially offset by credit-related income, according to Fannie Mae’s announcement.

a“We are delivering innovative technology to lenders to help them originate loans with greater certainty and efficiency, while we continue to transfer a significant amount of credit risk to private capital to better protect taxpayers," said Timothy J. Mayopoulos, President and CEO of Fannie Mae. "Our strong financial results punctuate the ongoing improvements we have made to give our partners the clarity they need to lend with confidence and help more families get a mortgage they can afford.”

Freddie Mac [3]reported a net loss of $475 million for Q3 2015 [5] in its 10-Q filing with the Securities and Exchange Commission on Tuesday [6], the first time the GSE has reported a quarterly net loss in four years.

ff [7]“For the first time in four years, Freddie Mac had a net loss in the most recent quarter,” said Donald Layton, Freddie Mac CEO. “This $0.5 billion loss was caused mainly by the accounting associated with our use of derivatives, whereby the derivatives are marked-to-market but many of the assets and liabilities being hedged are not.

Perhaps the most interesting portion of the earnings statement was how Layton stated that the loss will not cause Freddie Mac to need another draw from Treasury since it was only a fraction of the $1.8 billion net worth reserve the Enterprise has under the Preferred Stock Agreement. The dividends paid into Treasury by Freddie Mac remained unchanged at $96.5 billion, which is about $25 billion more than the $71 billion the Enterprise received in a taxpayer-funded bailout in 2008.

Mayopoulos recently stated that stable housing finance is the goal at Fannie Mae and he is "not looking to maximize profit for investors," in an interview with Forbes [8]. “I’m less interested in what happens to Fannie Mae as a legal entity."

On the surface, this seems to conflict with the $4 million dollar compensation packages [9]for Fannie and Freddie CEOs that Federal Housing Finance Agency (FHFA) Director Mel Watt approved earlier this year.

In an effort to limit the CEOs' pay to its prior level of $600,000 per year, Rep. Ed Royce (R-California) introduced the Equity in Government Compensation Act of 2015 on in May, which was passed by the House Financial Services Committee by a 57-1 vote in July. The House will vote on the bill next later this month.

“Losses like this combined with multimillion dollar CEO salaries at the GSEs are the warning shots of a return to the pre-crisis model of private gains and public losses that wrecked the economy. We can't simply put the blinders on and say that Fannie and Freddie are just like other companies when taxpayers are on the hook if they go in the red," Royce said in statement. [10]

FHFA Director Watt warned that the GSEs [11] may need to draw from U.S. Treasury funds following Freddie Mac's net loss report.

“Volatility in interest rates coupled with a capital buffer that will decline to zero in 2018 under the terms of the senior preferred stock purchase agreements with Treasury will likely make both Enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws going forward,” Watt said in a statement [11].

Another piece of legislation, the Housing Finance Reform and Taxpayer Protection Act (S.1217), introduced by Sen. Bob Corker (R-Tennessee) and Sen. Mark Warner (D-Virginia) in June 2013, passed the Senate Banking Committee in 2014 by a vote of 13 to 9.

The bill is intended to "strengthen America’s housing finance system by replacing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac with a privately capitalized system that preserves market liquidity and protects taxpayers from future economic downturns."

“Today’s announcement by Freddie Mac is yet another reminder that our government-sponsored mortgage enterprises continue to put American taxpayers at risk,” Corker said in a statement [12].  “While Congress must act to protect taxpayers by reforming our nation’s housing finance system, I commend Director Watt and the FHFA for taking steps in the meantime to de-risk these behemoth duopolies and hope the agency will accelerate the process.”