Despite the recent improvement in the financial performance of Fannie Mae and Freddie Mac, the government-sponsored enterprises’ future profitability is “far from assured” and more bailouts from U.S. taxpayers could be required to keep them afloat, an internal watchdog has warned.
In a report released Wednesday, the Federal Housing Finance Agency Office of Inspector General identified several red flags that it suggested could return Fannie Mae and Freddie Mac to the dark days of 2008. That year, the U.S. government pumped $187.5 billion in bailout capital into the mortgage-finance companies after the housing collapse.
Since 2012, Fannie Mae and Freddie Mac have been highly profitable, but last month they reported weak earnings for the fourth quarter.
“Future profitability is far from assured,” the Inspector General’s report says, noting that the companies’ financial results “are subject to uncertainty due to changes in the fair value of their derivatives portfolios.”
Fannie Mae reported fair value gains on derivatives of $3.3 billion in 2013, and fair value derivative losses of $5.8 billion in 2014, a swing of more than $9 billion.
As part of their bailouts, Fannie Mae and Freddie Mac are required to to wind down their respective investment portfolios to $250 billion by 2018. In addition, they are barred from accumulating a financial cushion against future losses and have been paying the U.S. Treasury a quarterly dividend.
“The reduction and eventual elimination of the [companies’] capital reserves increases the likelihood of additional Treasury investment,” the IG’s report says.
Stress test results released by the FHFA in April 2014 indicate that Fannie Mae and Freddie Mac, under a worst-case scenario similar to 2008, would require additional Treasury draws of either $84.4 billion or $190 billion, depending on the treatment of deferred tax assets.
“Fannie and Freddie’s 2013 financials generated a great deal of misplaced confidence in their financial health, which in turn distracted many from the need to reform the housing finance system,” Jim Parrott, a senior fellow at the Urban Institute and former adviser in the Obama White House, wrote in an Urban Institute report released Monday.