Fan­nie, Fred­die close to pay­ing off bailout bill

Trea­sury reaps rev­enue from 2 mort­gage gi­ants

The Washington Times Daily - - Front Page - BY PA­TRICE HILL

Fan­nie Mae and Fred­die Mac, the hous­ing gi­ants whose com­bined $188 bil­lion bailout dwarfed all oth­ers dur­ing the 2008 fi­nan­cial cri­sis, an­nounced Thurs­day that they will re­turn another $39 bil­lion in div­i­dends to the U.S. Trea­sury next month, bring­ing them close to fully re­pay­ing the tax­pay­ers who res­cued them.

Fan­nie Mae said it plans an $8.6 bil­lion div­i­dend that will bring its to­tal pay­ments to the Trea­sury in the past two years to $114 bil­lion — $3 bil­lion shy of its to­tal $117 bil­lion bailout — while Fred­die Mac said a pay­ment of $30.4 bil­lion in div­i­dends will more than com­plete the re­pay­ment of its $71 bil­lion bailout.

Fur­ther div­i­dends from both mort­gage gi­ants at the be­gin­ning of next year al­most cer­tainly will make tax­pay­ers whole and turn their res­cue op­er­a­tions into once-unimag­in­able cash cows for the gov­ern­ment.

Al­though the two mort­gage guar­an­tee agen­cies tech­ni­cally can­not ex­punge their debts to the tax­pay­ers and are still owned and con­trolled by the Trea­sury un­der the terms of their bailouts, the near break-even point they have achieved marks a sym­bolic clos­ing of a ma­jor chap­ter in U.S. eco­nomic his­tory as their bailouts were among the most

Good news if you want to make im­prove­ments to your home or busi­ness: The gov­ern­ment can help you pay for it, even if you don’t qual­ify.

In fact, fed­eral investigators found that In­ter­nal Rev­enue Ser­vice over­sight is so bad that the agency handed out more than $1 bil­lion in tax breaks dur­ing 2011 to peo­ple who shouldn’t have been el­i­gi­ble.

The prob­lem lies with the Gen­eral Busi­ness Credit, a tax break for com­pa­nies that make im­prove­ments deemed to be in the pub­lic in­ter­est, such as in­stalling wheel­chair ramps, mak­ing en­ergy-ef­fi­cient im­prove­ments or open­ing a child care center for em­ploy­ees.

But in­di­vid­u­als mis­tak­enly have been ap­ply­ing for the credit as well, investigators said, and have re­ceived hun­dreds of mil­lions of dol­lars in tax breaks meant for busi­nesses.

“As with other tax cred­its, the Gen­eral Busi­ness

dra­matic, con­tro­ver­sial and far-reach­ing events dur­ing the tu­mul­tuous fi­nan­cial cri­sis.

The large div­i­dend pay­ments to be reaped by the Trea­sury also high­light the im­por­tant role the two mort­gage gi­ants have played in help­ing to sharply re­duce the fed­eral bud­get deficit in the past year to less than half of its $1.4 tril­lion peak dur­ing the cri­sis.

Just as the fi­nan­cial bailouts con­trib­uted in a big way to un­prece­dented bud­get deficits in 2008 and af­ter­ward, the re­turn of tax­payer funds is now help­ing to quickly de­flate them. All of the ma­jor banks have re­turned their bailout funds, with in­ter­est, and the Trea­sury is slowly re­coup­ing money shelled out to smaller banks.

Only the bailout of Gen­eral Mo­tors Co. re­mains as a sig­nif­i­cant loss for tax­pay­ers, al­though the Trea­sury is ex­pected to re­coup another big chunk of the $50 bil­lion in funds it paid two of Detroit’s Big Three au­tomak­ers when it com­pletes the sale of its re­main­ing GM stock later this year.

“We are quickly ap­proach­ing the point when tax­pay­ers will re­ceive a pos­i­tive re­turn on their in­vest­ment in this com­pany,” Fan­nie Mae Chief Ex­ec­u­tive Tim May­opou­los said in an­nounc­ing a sev­enth straight quar­ter of prof­itabil­ity and earn­ings for the once-in­sol­vent le­viathan. “That’s ob­vi­ously very good news for tax­pay­ers.”

The mort­gage gi­ants owe their prof­itabil­ity to the ro­bust re­cov­ery in the hous­ing mar­ket and re­fi­nanc­ing boom in the past two years, which dra­mat­i­cally lifted sales and prices and sharply in­creased the fees they earn for pack­ag­ing in­di­vid­ual mort­gages into mort­gage-backed se­cu­ri­ties and pro­vid­ing a guar­an­tee to in­vestors.

De­faults on mort­gages also are way down, mean­ing that the once-gi­gan­tic losses sus­tained by Fan­nie and Fred­die are wan­ing and leav­ing them with more prof­its. They also are en­joy­ing bet­ter re­turns on sales from their large port­fo­lios of fore­closed homes.

Since be­ing burned by the cri­sis, Fan­nie and Fred­die have be­come much more se­lec­tive about the mort­gages they guar­an­tee. Be­cause they pro­vide back­ing for the lion’s share of all mort­gages made to­day, the stricter re­quire­ments they have im­posed on bor­row­ers have quickly be­come stan­dard for much of the rest of the mort­gage in­dus­try.

“We’re a stronger and bet­ter-run com­pany than we have been in years,” said Don­ald Lay­ton, chief ex­ec­u­tive of Fred­die Mac.

Dilemma for Congress

huge bud­get deficits.

House and Se­nate bud­get ne­go­tia­tors are try­ing to find sav­ings to re­place $90 bil­lion of au­to­matic bud­get cuts sched­uled to take place this fis­cal year. But key mem­bers of the Se­nate Bank­ing Com­mit­tee have worked hard to en­sure that Congress does not en­shrine Fan­nie’s and Fred­die’s div­i­dend regime and rely on such pay­ments to re­duce the deficit in the fu­ture.

“While I’m al­ways glad when tax­pay­ers see a re­turn on in­vest­ment, we can’t for­get that Fan­nie and Fred­die wouldn’t be earn­ing one penny to­day with­out the gov­ern­ment guar­an­tee­ing their trans­ac­tions. I don’t know of any other com­pany in Amer­ica that gets that kind of deal,” said Sen. Bob Corker, Ten­nessee Repub­li­can and co-au­thor of a bill to phase out Fan­nie and Fred­die and re­vive the pri­vate mort­gage mar­ket.

Congress has been slow to move on hous­ing re­form be­cause Fan­nie and Fred­die, along with the Fed­eral Hous­ing Ad­min­is­tra­tion, the fed­eral mort­gage in­surer, still guar­an­tee nine out of ev­ery 10 U.S. mort­gages, and law­mak­ers want to avoid changes that would un­der­mine the frag­ile hous­ing re­cov­ery.

While all three fed­eral agen­cies have raised their guar­an­tee fees sig­nif­i­cantly since the cri­sis, Mr. Corker said, they con­tinue to un­der­charge for the cost of their guar­an­tees and thus dis­cour­age com­pe­ti­tion from pri­vate mort­gage in­sur­ers. At the same time, as long as Fan­nie and Fred­die re­main charges of the gov­ern­ment, tax­pay­ers are ex­posed to losses from any re­newed down­turn in the hous­ing mar­ket, he said.

“It is time to move to a mod­ern­ized 21st-cen­tury hous­ing fi­nance sys­tem,” he said. ”The pri­vate sec­tor has been al­most com­pletely priced out of the busi­ness, and a hic­cup in the econ­omy could put tax­pay­ers on the hook for another bailout.”

“The truth is Fan­nie and Fred­die cost the tax­pay­ers a whole lot more than the amount of their bailout. Their failed busi­ness model was at the epi­cen­ter of the fi­nan­cial cri­sis.”

The grow­ing prof­itabil­ity of the mort­gage gi­ants poses a dilemma for Congress and the ad­min­is­tra­tion.

Pres­i­dent Obama and con­gres­sional lead­ers all say they want to phase out Fan­nie and Fred­die, given their no­to­ri­ety dur­ing the cri­sis, and turn over most of their func­tions to the pri­vate sec­tor. But the siz­able div­i­dend pay­ments stream­ing out each quar­ter pose a temp­ta­tion for law­mak­ers who are still grop­ing for ways to re­duce

Repub­li­can op­po­si­tion

Many Repub­li­cans in Congress con­tinue to blame Fan­nie and Fred­die for caus­ing the fi­nan­cial cri­sis, and took of­fense at as­ser­tions that they were close to re­pay­ing their bailouts.

Rep. Jeb Hen­sar­ling, Texas Repub­li­can and House Fi­nan­cial Ser­vices Com­mit­tee chair­man, said any no­tion that Fan­nie and Fred­die can re­pay tax­pay­ers is “Wash­ing­ton spin” and noted that legally, the mort­gage agen­cies can­not buy back the $188 bil­lion of stock they sold Trea­sury dur­ing the cri­sis and thus they re­main on the hook to the gov­ern­ment un­til Congress changes their sta­tus.

“The truth is Fan­nie and Fred­die cost the tax­pay­ers a whole lot more than the amount of their bailout. Their failed busi­ness model was at the epi­cen­ter of the fi­nan­cial cri­sis — a cri­sis that threw mil­lions of Amer­i­cans out of work and ru­ined peo­ple’s lives. Fan­nie and Fred­die can never make amends for the cat­a­strophic dam­age their failed busi­ness model caused our econ­omy,” he said.

Mr. Hen­sar­ling’s com­mit­tee passed a bill this year to phase out Fan­nie and Fred­die and re­place them with a pri­vate mort­gage sys­tem that no longer de­pends on gov­ern­ment guar­an­tees. The Se­nate bill would con­tinue to of­fer lim­ited gov­ern­ment guar­an­tees to en­sure that 30-year mort­gages and other pop­u­lar home fi­nanc­ing in­stru­ments re­main avail­able to the pub­lic.

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