Fannie Mae and Freddie Mac
Never been better
America's mortgage-insurance giants are making bigger profits than before the crisis
Feb 20th 2015 | LONDON AND NEW YORK | Business and finance
Looking at the headlines, it may seem that both Fannie and Freddie are in financial trouble again. On February 19th Freddie Mac reported a sharp decline in its net income last year, which fell from $48.7 billion to $7.7 billion. The next day Fannie Mae also announced a big fall in earnings. Falling market interest rates forced the pair to declare losses on the derivatives they hold as a hedge against rising rates, although these should recover the lost ground if, as expected, the Federal Reserve starts to raise rates later this year.
The fact remains that both Fannie and Freddie have emerged from the financial crisis churning out more profits before tax than they ever have before (see chart). Who benefits most from this is a subject of controversy. The government, having bailed out Fannie and Freddie in 2008, owns most of the pair. Other shareholders own 20%, but Barack Obama’s administration in effect expropriated these stakes in 2012: virtually all earnings now go to the Treasury.
past tense: expropriated; past participle: expropriated
The key takeaway from this is Fannie and Freddie will continue to give smaller and smaller checks to the treasury as long as interest rates stay low! So Q1 2015 is over now and we will see Fannie mae and Freddie mac pay even less again than they just paid for Q4 2014! Why? They are hedging against falling rates, which will not happen! Rates are at all time lows and will not go lower! What happens if they stay same? Fannie and Freddie will keep their hedges and on paper make less money. But if rates go up they can (out of thin air) make more money! These hedges are all part of the plan the FHFA has for the twins. The FHFA calls all the shots and allows them to either send HUGE sums to treasury or allows them to HIDE the profit!
2015 will be the year of HIDE the profit, at the direction of the FHFA conservator! Interesting? I think so.