Freddie Mac narrowly avoided requiring a cash infusion from the Treasury in the first quarter of 2016, posting a loss of $200 million that was just short of what would have precipitated a draw from the Treasury.
The mortgage company, which has remained in the government’s management since late 2008, reported Tuesday that its net worth dropped to $1 billion as a result of its first-quarter losses. Under the terms of the government’s takeover, the Treasury would have stepped in to provide capital if Freddie’s net worth had dropped into negative territory.
CEO Donald Layton said “the fundamentals of our business are very solid and continue to improve,” attributing the quarter’s losses to declines in the market value of derivatives contracts.
Lawmakers and officials have been concerned that, as government stewardship of Fannie Mae and Freddie Mac stretches into an eighth year, the companies could require more Treasury funds, creating tumult among investors and members of Congress. Mel Watt, the director of the Federal Housing Finance Agency responsible for managing the two government-sponsored enterprises, warned in February that the risks of such an outcome were “escalating.”
Tuesday’s results show that, in terms of public relations, Freddie is in a precarious situation. Under the terms of the 2008 government takeover, Fannie and Freddie will see their capital decline to nothing by 2018. At that point, any losses would necessitate a Treasury draw, which could be characterized by critics as a “bailout.”
Meanwhile, investors in the companies have been frustrated by the Treasury’s 2012 decision, which they have challenged in court, to sweep all profits from the companies, meaning that they cannot rebuild capital.
Tim Pagliara, an investor who chairs the group of investors Investors Unite, said that “the Treasury Department put taxpayers on the hook for any future losses by either of the companies, and we’re now seeing this play out in real-time. It’s time to reverse the sweep and to protect the taxpayers by allowing these companies to begin rebuilding capital.”
Congress did not expect that the status of Fannie and Freddie would remain unresolved for so long. Legislation to eventually shutter the businesses and replace them with a new system of housing finance has failed to gain traction.
“It has been nearly eight years since the federal government bailed out Fannie Mae and Freddie Mac. Taxpayers ultimately injected $188 billion into the GSEs, and still remain exposed to the risks posed by these ‘too big to fail’ institutions,” Sen. Mark Warner, D-Va., said Tuesday. “Today’s announcement of a loss from Freddie Mac is yet another reminder of why we need to reform our housing finance system now.”
Warner was the co-author of Senate legislation that passed the Senate Banking Committee in 2014 that would have replaced Fannie and Freddie with a private system of capital for mortgage-backed securities that would have provided a government guarantee on losses over 10 percent. The bill, however, was not taken up in the Senate.
