Fannie and Freddie as the Federal Government’s Profit Center

by Reihan Salam

Earlier this week, my colleagues at Economics 21 highlighted the fact that Fannie and Freddie are on track to contribute $40 billion in dividends to the Treasury this year, an amount that comfortably exceeds the $30 billion annual budget of the National Institute of Health:

With no plans for a new mortgage finance system, the Obama Administration appears happy to have the GSEs serve as the federal government’s profit center for indefinite future. Consider the host of factors driving the GSEs’ record profits: (1) Fannie and Freddie enjoy nearly 100% market share; (2) the fees they collect for guaranteeing mortgage payments to investors have more than doubled; (3) their post-2008 book of business consists exclusively of borrowers with sterling credit histories; (4) the more strict underwriting has reduced refinancing rates since fewer borrowers can qualify for new loans, which means the older, higher interest loans owned by Fannie and Freddie carry higher market values; and (5) house prices have risen and unemployment has declined, which places downward pressure on default rates and loss severities. Between 2011 and 2012, Fannie and Freddie’s credit expense – i.e. losses on delinquent mortgage loans – fell by 97%, from a combined $37.4 billion to just over $1 billion. Fannie Mae actually reversed its prior losses by $852 million, as it found that it had overestimated losses on delinquent loans. With ultra-low borrowing costs as a result of government ownership, the GSEs collect $40 billion more in interest payments than they pay out to their creditors.

Sen. Bob Corker (R-TN) has proposed legislation that would prevent GSE guaranty fee revenue from being used to finance other government programs, and the grounds that if the GSEs become a “piggybank” for government spending, reforming the GSEs will become politically impossible. An Economics 21 staff editorial on the same subject published last fall concluded on the following note:

This creates an interesting dilemma: if the Treasury has a direct financial interest in the GSEs’ profitability, what incentive is there to reform the mortgage market in a manner that would reduce federal revenues? Rather than “buying time,” the Obama Administration’s move may actually be cementing the current arrangement and increasing the odds that the 95% market share from 2008 remains the GSEs’ low water mark for the next 10 years as well.

Legislators have limited attention spans, and now that a modest housing recovery is underway, it seems unlikely that we’ll have another opportunity to significantly restructure the mortgage market in the near future. So it looks like GSE profits will help paper over yawning budget deficits.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.