Fannie Mae posts record annual profit of $17.2 billion

Fannie and Freddie, along with the Federal Housing Administration, back about 90% of new mortgages. Above, a sign marks the sale of a home in Phoenix.
(Justin Sullivan, Getty Images)

WASHINGTON — Taxpayer-owned Fannie Mae and Freddie Mac are back in the black, but it’s unlikely to keep the nation’s housing finance giants from being dismantled.

Boosted by the recovery in the housing market, Fannie Mae on Tuesday reported a record annual profit of $17.2 billion for last year, a sharp turnaround from a $16.9-billion loss in 2011. In February, Freddie Mac reported net income of $11 billion, compared with a loss of $5.3 billion the previous year.


Their first annual profits in six years also have helped the companies reduce the balance of the combined $187.5 billion they received in a government rescue in 2008 when they hovered near bankruptcy amid the crash in the subprime housing market.

Their hefty profits could delay already slow-moving efforts by Congress to replace the companies because the bailout tab has stopped rising and policymakers are hesitant to do anything to imperil the improving real estate market.

Fannie and Freddie, along with the Federal Housing Administration, back about 90% of new mortgages.

“The problem we’ve had so far is they are the only game in town, so we can’t get rid of them right now because we would have no ability to issue mortgages,” John C. Williams, president of the Federal Reserve Bank of San Francisco, told Los Angeles Times reporters and editors in a meeting Tuesday.

Some policymakers in Washington could be tempted to look at the profits at Fannie and Freddie — both 80% owned by the government — as a potential source of revenue to help reduce the federal budget deficit, said Edward Mills, a financial policy analyst at FBR Capital Markets.

That’s a surprising turnaround from initial fears that money invested in Fannie and Freddie never would be recovered.

“At the height of the crisis, no one would even have entertained a conversation where break-even or profitability were part of the discussion,” Mills said. “That’s where we are now.”

Last year’s profits were driven by a rebound in housing prices and, for Fannie, a big settlement with Bank of America Corp. related to soured mortgages from the subprime boom.

“Our financial results improved significantly in 2012 and we expect our earnings to remain strong over the next few years,” Fannie Mae Chief Executive Timothy J. Mayopoulos said.

The dramatic changes in fortunes at the companies — once semiprivate government-sponsored entities — meant that they no longer needed money from the Treasury to stay afloat.

It also meant that required dividend payments to the government have started eating away at the price tag of their bailout.

Fannie Mae had received about $116 billion in taxpayer money, but said Tuesday that it paid $11.6 billion in dividends to the Treasury last year. Added to dividends paid to the government since the 2008 rescue, the cost of Fannie Mae’s bailout has been reduced to $80.4 billion.

Freddie Mac received about $71 billion in bailout money and paid $7.2 billion in dividends to the Treasury last year, reducing the overall cost of its bailout to $47.5 billion.

“They are on track to pay the government dividends that will exceed what taxpayers invested in the two firms,” said Jaret Seiberg, a senior policy analyst in Washington with financial services firm Guggenheim Partners.

Anthony Sanders, a real estate finance professor at George Mason University, doubts that.

“The amount they owe the taxpayers is so overwhelming,” he said. “I would not expect they could repeat record earnings every year.”

Regardless, the deal that placed the companies into government conservatorship was designed to prevent them from fully paying off their debt. The dividends are simply a return on the investment by the government, which holds preferred shares in both firms.

The goal was to prevent Fannie and Freddie from recapitalizing and trying to cut a deal with the government to erase some of their debt to return to semiprivate status.

The implicit government guarantee before the takeovers enabled the companies to privatize their gains while socializing their losses, and policymakers didn’t want to re-create that situation, Mills said.

Fannie and Freddie have become major examples of the excesses of the subprime housing bubble, and there’s still wide agreement among Democrats and Republicans that the companies should be dismantled.

Last month, the Federal Housing Finance Agency, which regulates the firms, took the first significant step toward shutting them down.

The agency plans to create a new company that would handle a key function for Fannie and Freddie — packaging home loans owned or guaranteed by the companies into mortgage-backed securities. The FHFA had no comment Tuesday on Fannie’s earnings.

But there is no consensus on exactly how to replace the companies and their oversized role in the housing market.

Republicans generally would like to see the government get out of the housing finance business, while many Democrats want to preserve some role, particularly to offset a lack of private bank and mortgage lending during financial downturns.

“The key issue is, is this something that should just be done by the government as a program and regulated very strictly or is this something that should be done by the private sector,” the Fed’s Williams said. “This idea of having a quasi-private enterprise makes no sense.... It really was the worst case of private gains and social losses. That we have to avoid.”

Fannie Mae’s finances were helped last year by the improving performance of mortgages it backs or owns, as well as the recovery in the housing market, Chief Financial Officer Susan McFarland said.

Fannie Mae reported a $7.6-billion profit over last year’s final three months, a record quarterly profit.

The company’s bottom line also was helped by settlements with Bank of America over subprime mortgages issued by Countrywide Financial Corp., the Calabasas lender that BofA acquired in 2008. Fannie Mae said it received $1.3 billion in pre-tax income last year from the bank, which agreed to repurchase thousands of bad loans sold to Fannie Mae.

The agreements, announced in January, call for Bank of America to pay $10.4 billion to Fannie Mae, with some of that money coming this year.