Capitol Report: Fannie Mae to turn to taxpayers after $6.5 billion loss

Mortgage finance provider Fannie Mae on Wednesday reported a fourth quarter net loss of $6.5 billion, a step that means it will draw billions from the U.S. Treasury.

Fannie’s losses were a result of the 2017 tax legislation that slashed the corporate tax rate, making tax credits it held on its balance sheet worth less, resulting in a $9.9 billion provision.

Fannie had net revenues of $5.5 billion in the last quarter, versus $6.2 billion in the year-ago period.

Many large companies have had similar profit hits in the fourth quarter thanks to the tax changes, but few are in the same precarious position as Fannie FNMA, -5.11%   and its counterpart, Freddie Mac FMCC, -5.06%  . In 2012, Congress directed both government-sponsored enterprises to send quarterly profits to the U.S. Treasury, ultimately reducing their capital to zero by the end of last year.

Despite being long-expected and well-telegraphed, Fannie’s need for taxpayer dollars was a stark reminder that two companies at the heart of the 2008 financial crisis still represent unfinished business.

“It has been a great policy failure to allow these enterprises to operate without capital reserves,” said Rob Zimmer, acting executive director of the Community Mortgage Lenders of America.

Washington’s response to the crisis was to force financial institutions to hold more and more capital, Zimmer pointed out – yet an opposite policy has been applied to two housing giants that have come to define “too big to fail.”

But other analysts are more sanguine. Mark Zandi, chief economist for Moody’s Analytics and an author of a 2016 proposal to overhaul the housing finance system, has long said it will take far more than one quarterly draw – particularly one caused by accounting losses – to rattle investors in the housing market.

Read: Foreclosures dropped to lowest on record, Fed data show

“It will have an impact when it appears we’re in for a series of quarterly draws,” such as during a recession, Zandi said.

Over the past decade, Washington has attempted – but failed – to find a permanent fix for housing finance, to replace the Band-Aid that was slapped on at the height of the financial crisis. Several recent efforts have raised hopes that 2018 might be the year for an overhaul, but they’ve petered out recently.

Zandi thinks Congress might need a recession “to focus the mind,” as he puts it. “That’s when there will be pressure to do something. That’s when markets will start to respond.”

The current inertia isn’t due to Congress being too indecisive or unable to reach a compromise on a thorny policy issue, Zandi said. “The status quo is just too comfortable. It’s not fixed but it’s not broken.”

That “status quo” has been good for taxpayers. Together, Fannie and Freddie have paid about $90 billion more to Treasury than they received during the crisis. And they’ve supported a stable, ultra-safe lending backdrop for the housing market. Delinquency rates hover near all-time lows, with a slight uptick in late 2017 only due to the recent hurricanes.

But the quarterly sweeps have wiped out shareholders, who’ve fought the 2012 agreement in court.

And as the CEOs of both companies and their regulator have pointed out, operating with near-zero capital isn’t a sustainable way to run a business. The regulator, the Federal Housing Finance Agency, in December struck a deal with Treasury to allow Fannie and Freddie to retain slim capital buffers of $3 billion each. Once those $3 billion thresholds are reached, they’ll re-start quarterly remittances back to Treasury.

That makes housing industry participants like Zimmer nervous. For now, the bond investors who keep the housing market humming are content with the status quo, but he thinks that can change suddenly.

“When Fannie says ‘we’re going to be profitable for the foreseeable future,’ no one ever knows what ‘foreseeable’ means,” Zimmer said. “Nobody in the government foresaw the last recession until it hit them right between the eyes.”

Read: Mortgage rates hit 14-month high as bonds sell off

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