Liquidity moves markets!Follow the money. Find the profits!
The two enterprises are at the heart of the American housing finance system: they buy mortgages from banks and other lenders, enabling lenders to extend credit for longer periods than would be possible if they had to keep the loans on their own balance sheets, and, presumably, open up the housing market to a larger swath of the population. Throughout 2018, the two companies together funded approximately 3.2 million mortgages.
In the fourth quarter, Fannie had net income of $3.2 billion, and Freddie had $1.5 billion. The two enterprises are still in government conservatorship, as they have been since the 2008 financial crisis, and will sweep those profits over to the U.S. Treasury in March, while continuing to retain a slim capital buffer of $3 billion each.
It is difficult to compare the companies’ financial results to the year-earlier quarter because that’s when changes in the tax laws left both with hefty accounting losses. Compared to the year ago quarter, Fannie’s pretax income fell to $4.06 billion from $4.96 billion, while Freddie Mac’s dropped to $1.39 billion from $3.82 billion.
Despite Fannie and Freddie’s positive net income, analysts were expecting even higher earnings. Take Fannie Mae, who earnings have generally fallen as the housing market cools.
But FF’s equity has soared recently on specualtion of Fannie and Freddie being released from Treasury bondage.
On Thursday, the Trump administration’s pick for head of the regulatory agency overseeing Fannie and Freddie, Mark Calabria, is facing the Senate Banking Committee. As MarketWatch was first to report, the interim director of the regulator, the Federal Housing Finance Agency, has already begun working with Treasury to lay out a long-term vision for the American housing finance system, finally freeing the two companies from conservatorship.
If he is approved, Calabria’s responsibility will include two companies that look vastly different than the entities that helped plunge the U.S. economy into turmoil about a decade ago. In the fourth quarter, Fannie’s serious delinquency rate was just 0.76%, and Freddie’s was 0.69%, both near historical lows. Both companies continue to experiment with additional ways of selling slices of their portfolio to private-market investors, in order to spread the risk more broadly. And they continue to work toward the issuance of a single bond, a step that aligns their fortunes more closely, rather than intensifying the competition between them.
Being released from conservatorship can mean many things. One, the became private corporations again (but who or what will provide their capital buffer?). Second, they could be shut down (likely gradually) and the private market takes care of securitizing residential mortgage loans. And about 5,000 other proposals, most are just more of the same.
But this is Washington DC, and they will tell “we the people” as little as possible.
Here is the link to Mark Anthony Calabria’s hearing testimony that began at 10am. Perhaps Calabria will shed some light on what he plans to to as FHFA Director.
Here is a photo of both Mark Calabria and I testifying in the House. Calabria looks like he is thinking “What is Sanders going to say?”
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