Fannie Mae and Freddie Mac to Pay $10.2 Billion From Profits

May 08, 2014 11:21 am ET

(Updates with Mayopoulos comments in 10th paragraph.)

May 8 (Bloomberg) -- Fannie Mae and Freddie Mac will pay the U.S. Treasury Department a combined $10.2 billion by June 30, an amount reflecting the profits the U.S.-owned mortgage financiers reported for the first quarter.

The two companies, which are under U.S. conservatorship, are required to pay the government all of their earnings and aren’t allowed to hold capital beyond a cushion of $2.4 billion each, an arrangement Fannie Mae Chief Executive Officer Timothy J. Mayopoulos called “challenging” on a conference call with reporters.

“The taxpayer remains in the first-loss position with respect to our business and as a result we are faced with running this business with really no cushion,” Mayopoulos said today.

Washington-based Fannie Mae had net income of $5.3 billion for the three months ended March 31, according to a regulatory filing today. Freddie Mac, based in McLean, Virginia, had earnings of $4 billion for the period. It was the ninth consecutive quarterly profit for Fannie Mae and the 10th consecutive quarterly profit for Freddie Mac, complicating a debate in Congress and in federal courts about their future.

The two companies were seized by regulators in September 2008, just before the failure of Lehman Brothers Holdings Inc., amid losses that pushed them toward collapse. The companies provide liquidity to the mortgage market by buying loans and packaging them into guaranteed securities.

Taxpayer Aid

Fannie Mae and Freddie Mac received a total of $187.5 billion in taxpayer aid before the rebound in the housing market led them back to profitability. Under an arrangement set by regulators, they will have sent a total of $213.1 billion of their earnings to taxpayers by the end of June. The amount counts as a return on the U.S. investment and not as repayment of the aid.

Stockholders including Bruce Berkowitz’s Fairholme Capital Management and hedge fund Perry Capital LLC are suing in federal court to force the U.S. to allow investors a share in the funds the companies are returning to the U.S..

At the same time, President Barack Obama’s administration as well as Democrats and Republicans in the Senate have been working on legislation to wind down Fannie Mae and Freddie Mac and replace them with a government insurer of mortgage bonds that would take losses only after private investors were wiped out. The bill is in danger of stalling until next year unless leaders of the Senate Banking Committee can quickly build more support for the measure.

Flat Revenue

The companies, which reported record earnings last year, warned that such profits are unlikely to continue. Their earnings in the first quarter reflected one-time gains from legal settlements, while revenue from their core business of charging fees to guarantee loans remained relatively flat as the housing market moderated.

“In 2014 we’re operating in a different market with different business conditions” from 2013, Mayopoulos said. “Home prices increased only modestly in the first quarter compared to last year.”

Shares of Fannie Mae rose to $4.17 at 10:30 a.m. in New York, up 2 percent from $4.10 at Wednesday’s close and 39 percent from $3.01 on Dec. 31. Freddie Mac was trading at $4.12, a gain of 1 percent from Monday’s close and 42 percent for the year.

Ackman’s Bet

Bill Ackman, who runs the $15 billion Pershing Square Capital Management LP, said that Fannie Mae and Freddie Mac will probably soar because there’s no way to replace the mortgage- guarantee companies.

Fannie Mae could be worth $23 to $47 a share over time, Ackman said May 5 at an investment conference in New York. Pershing Square has about 11 percent economic exposure to Fannie Mae and Freddie Mac shares based on common stock outstanding.

“There is no viable alternative,” to Fannie Mae and Freddie Mac, Ackman said the same day in a Bloomberg Television interview. “Preserving the 30-year prepayable fixed-rate mortgage -- it’s like the bedrock of the housing system -- is critical. We think the only way to do it is by preserving Fannie and Freddie.”

--With assistance from Katherine Burton and Beth Jinks in New York.