After earning billions in profits, Fannie, Freddie reform further than ever

WASHINGTON (MarketWatch) — Despite years of hand wringing on Capitol Hill over the need to protect taxpayers by reforming the U.S. housing-finance market, it may take a financial hit to mortgage giants Fannie Mae and Freddie Mac to spur decisive congressional action.

It’s been almost seven years since the government sponsored enterprises were put into conservatorship, but U.S. lawmakers have yet to approve a plan that replaces the companies and rebuilds the country’s housing-market infrastructure. It’s a huge, complex undertaking, and no elected official wants to be the one who gets reform wrong.

“They are concerned with the unintended consequences,” said Isaac Boltansky, an analyst at Compass Point Research & Trading, a Washington-based investment firm. “None of these guys want their name attached to a bill that helped tank the mortgage markets.”

The stakes are high: Together Fannie FNMA, -1.65%  and Freddie FMCC, -1.72%   back a bit more than half of new mortgages. In the second quarter the companies backed a total of more than $230 billion in new mortgages, according to Inside Mortgage Finance, which closely monitors industry trends.

Any law that winds down the firms and reconstructs the mortgage marketplace will strike close to the heart of family finances across the country.

Fannie and Freddie’s role is crucial, enabling borrowers to get mortgages by providing financial liquidity. The government sponsored enterprises don’t make loans. Rather, they guarantee that investors in securities backed by mortgages will receive expected payments. Lenders who sell their loans into the Fannie and Freddie security packages then have money to lend again.

Fear of failure isn’t the only obstacle to reform. Some U.S. lawmakers may be loath to revamp a system that has helped the government to narrow its deficit. A bailout arrangement forces Fannie and Freddie to send their profits to the U.S. Treasury Department each quarter. The GSEs have sent more than $50 billion to the Treasury than the bailout funds they received.

Last week, Fannie Mae reported a $4.6 billion second-quarter profit, and Freddie Mac reported a $4.2 billion second-quarter profit.

With windfalls like these, some officials are more interested in maintaining than slaughtering their cash cows. Case in point: A recent bipartisan Senate proposal to fund infrastructure and transportation investment would be paid for, in part, by guarantee fees charged by Fannie and Freddie.

“It makes the government even more reliant on the GSEs as a source of funding for government programs,” analysts with Keefe, Bruyette & Woods, a New York-based investment bank, wrote in a research note.

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