Forget about the fact that most of the borrow was to write down DTAs that were then written back up, oh and that the most profitable company in the world was forced to pay interest on those accounting shenangians.
Subprime Redux: As Fannie’s and Freddie’s regulator pushes the mortgage giants to bail out low-income borrowers, the agency’s inspector general warns they risk needing another bailout of their own due to waning profits.
Recent moves by Federal Finance Housing Agency chief Mel Watt to ease mortgage terms for delinquent and underwater borrowers could further hurt Fannie’s and Freddie’s profitability — and even put taxpayers on the hook for more losses.
In a just-released report, FHFA’s inspector general cautions that Fannie’s and Freddie’s post-crisis profitability may be short-lived, thanks to lost income from non-recurring items, legally required cuts in their investment portfolios, and limits on the guarantee fees they can charge. Their earnings already have plunged in recent quarters.
What’s more, the agencies cannot legally build a financial cushion to absorb future losses and must pay a dividend to the Treasury Department each quarter that’s equal to the excess of their net worth over an applicable capital reserve amount, the report says. The reserve is now $1.8 billion and must be slashed by $600 million per year until it reaches zero by 2018.
If Fannie and Freddie’s losses outstrip their capital buffer, they will need another bailout. “Fannie Mae reports that it expects to remain profitable for the foreseeable future,” wrote Acting Deputy Inspector General Kyle Roberts in the paper. “However, it acknowledges that a decrease in home prices or changes in interest rates, combined with provisions of their agreements with Treasury that require the reduction of their retained asset portfolios, could lead to losses.
“Thus if these losses result in an Enterprise reporting a negative net worth, that Enterprise would be obligated to draw on Treasury’s funding commitment.”
The paper noted that a stress test conducted last April by the FHFA found that under falling home prices or changing interest rates, Fannie and Freddie would need a Treasury draw of as much as $190 billion. After 2008’s financial crash, Fannie and Freddie required a combined bailout of $188 billion.
President Obama promised in his vaunted “financial reforms” that taxpayers would never be subjected to such a liability again. But the Dodd-Frank bill he signed didn’t touch Fannie or Freddie. Democrats left their political piggy banks intact.
And now Obama has put one of the top Democrats responsible for pushing Fannie and Freddie over the subprime cliff, former House banking committee member Mel Watt, in charge of regulating the toxic twins.
Read More At Investor’s Business Daily: http://news.investors.com/ibd-editorials/031915-744290-watt-pushes-more-sketchy-loans-by-fannie-and-freddie.htm#ixzz3UwO0P2ml
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