Fannie-Freddie Keep Giving Profits to U.S. Amid Talks on Changes

(Bloomberg) -- Fannie Mae and Freddie Mac may one day stop paying billions of dollars in dividends to the U.S. government. But not today.

The mortgage-finance giants paid a combined $5.1 billion to the U.S. Treasury on Friday, extending for another quarter the government's controversial sweep of their profits. The latest payments bring the total turned over since 2008 to nearly $276 billion, according to their regulator, the Federal Housing Finance Agency.

There could be change in the offing, however. FHFA Director Mel Watt said in a letter to lawmakers on Friday that he's working with Treasury on alternatives for the two companies, whose capital buffers are being wound down under the terms of their taxpayer bailouts.

“FHFA is exploring with the Department of the Treasury a number of options,” Watt wrote to six senators including Sherrod Brown of Ohio, the Banking Committee's top Democrat.

Speculation that Fannie and Freddie might skip the payments rose in recent months after Watt told lawmakers that he was considering directing the companies to keep capital. Such a move would be in defiance of Treasury Secretary Steven Mnuchin and other Trump administration officials.

Capital Buffers

Fannie and Freddie currently send nearly all profits to the U.S. Treasury and have capital buffers of $600 million each. Those buffers are set to fall to zero next year. From that point, any loss at one of the companies would require them to draw on about $258 billion in bailout money remaining under the bailout agreements.

Watt has expressed concern that a draw on those funds could lead to a disruption in the mortgage market. Mnuchin and some senators countered that the government's line of credit is sufficient and the dividends should continue.

Brown and five other Democratic senators wrote letters to Watt and Mnuchin earlier this month, asking them to let Fannie and Freddie build capital. In his response Friday, Watt reiterated his concern about the dwindling buffers and said FHFA was “committed to working with Secretary Mnuchin to address the issue.”

Some shareholders of the companies want Watt and the Trump administration to let Fannie and Freddie recapitalize completely and exit government control. For his part, Watt has said any capital buildup would be small and only to protect against minor losses.

Corporate Tax

While the housing market is still strong, another wrinkle might add to Watt's concerns.

The just-released Republican plan for cutting in the federal corporate tax rate from 35 percent to 20 percent could lead to more than $15 billion in losses at Fannie and Freddie. That's because the two companies have more than $46 billion in “deferred tax assets” that would lose value if rates are cut.

Fannie's and Freddie's tax assets would drop in value by $19.8 billion if the tax rate fell to 20 percent, according to BMO Capital Markets managing director Margaret Kerins. Based on the companies' average quarterly earnings over the last couple years, that could mean a one-time taxpayer bailout of more than $15 billion, Kerins said.

Lawmakers could agree to exempt Fannie and Freddie from the tax cut. If they don't, it would likely take more than one quarter's worth of earnings to protect against a bailout.

Watt is scheduled to testify for the House Financial Services Committee on Tuesday.

To contact the reporter on this story: Joe Light in Washington at jlight8@bloomberg.net.

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott