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Why Fannie Mae And Freddie Mac May Require Further Bailouts

bidnessetc.com | March 23, 2015

By Larry Darrell

Government-backed mortgage giants Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) showed signs of revival from the 2008 housing bust, posting handsome profits over the past few years. Recently though, there have been concerns regarding the duo’s future profitability, owing to the dismal performance of their derivative portfolios.

Fannie and Freddie came under the conservatorship of the US Federal Housing Finance Agency (FHFA) after their near $190 billion bailout in the wake of the financial crisis. Consequently, profits earned by these government-sponsored enterprises since the collapse have been paid out to the US Treasury in the form of dividends.

That said, the housing watchdog is wary about the duo’s future prospects. A recent report from the FHFA Inspector General Office has raised red flags over Fannie Mae and Freddie Mac’s upcoming profitability, saying it is “far from assured.” There are even concerns that the two might require further taxpayers’ dollars to keep them afloat.

The report notes that the companies’ financial results “are subject to uncertainty due to changes in the fair value of their derivatives portfolios.”

The derivative fair value losses in the recently concluded fourth quarter (4QFY14) totaled $2.5 billion for Fannie Mae, compared to $207 million in the preceding quarter and fair value gains of $961 million in 4QFY13. In FY14, fair value losses totaled $4.8 billion, compared to $3 billion gains a year earlier. Freddie Mac had an even worse outlook; after reporting derivative gains of $2.6 billion in FY13, the mortgage firm registered derivative losses of $8.3 billion in FY14.

After the government bailed out Fannie and Freddie, the two were instructed to cut short their investment portfolios to $250 billion each by 2018. Also, because the duo pays out its net income as dividends to the Treasury, Fannie Mae and Freddie Mac cannot pile up a capital cushion to mitigate their future losses in case of turmoil.

The Inspector General report says: “The reduction and eventual elimination of the [companies’] capital reserves increases the likelihood of additional Treasury investment.”

FHFA stress test results from April last year revealed that the mortgage-servicing giants might require another hefty Treasury intervention in case of a collapse similar to that in 2008. These bailouts could be worth either $84.4 billion or $190 billion, depending on how deferred tax assets are treated.

Shares of Fannie Mae and Freddie Mac are down around 5% each in this week’s trading. As of noon today, they are trading at $2.56 and $2.44 apiece, respectively.



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CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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