Fannie Mae Will Require Treasury Draw of About $3.7 Billion

Government-sponsored enterprise Fannie Mae saw a fourth quarter net loss of $6.5 billion and will require an infusion of capital from the U.S. Treasury beyond the $3 billion capital buffer that its regulator, the Federal Housing Finance Agency, restored to its budget in January.

The loss is primarily a result of the tax reform bill passed in December: Tax credits Fannie Mae held on its balance sheet became worth less as a result of the adjustment in their value under the new tax code.

The GSE says the re-measurement of its deferred tax assets due to the Tax Cuts and Jobs Act resulted in a $9.9 billion provision for federal income taxes in the fourth quarter.

Most other U.S. companies are similarly impacted – but GSEs Fannie Mae and Freddie Mac are unique in that they have been in conservatorship since 2008 and, subject to their bailout agreements, their profits are swept to the U.S. Treasury.

Under their senior preferred stock purchase agreements – which were originally written in 2008 but redrafted in 2012 to allow for the “full sweep” of their profits – the companies were to see their FHFA-set capital buffers drawn down down to zero by Dec. 31, 2017 – mainly because no one imagined that conservatorship would last beyond a decade.

But in late December, the FHFA, citing the risk of a capital draw, took administrative action and restored the GSEs’ capital buffers to the original level of $3 billion each, as of Jan. 1.

That $3 billion each was intended to not only cover the impact of corporate tax reform on the GSEs’ tax credits but also to cover normal fluctuations in business cycles:

“While it is apparent that a draw will be necessary for each enterprise if tax legislation results in a reduction to the corporate tax rate, FHFA considers the $3 billion capital reserve sufficient to cover other fluctuations in income in the normal course of each enterprise’s business,” Mel Watt, director of the FHFA, said in a statement in December, when the agency announced the restoration of the buffers. “We, therefore, contemplate that going forward enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.”

Fannie Mae reports it had net revenues of $5.5 billion in the the fourth quarter, versus $6.2 billion in the fourth quarter of 2016.

As a result of the fourth quarter loss, the company will require a Treasury draw of about $3.7 billion.

Fannie Mae saw net income of $2.5 billion in 2017, compared with $12.3 billion in 2016, according to its quarterly report.

Its annual pre-tax income was $18.4 billion, compared with $18.3 billion in 2016.

In a statement, Timothy J. Mayopoulos, president and CEO of Fannie Mae, says the company is financially stable and characterized the fourth quarter loss as a one-time accounting event from which it will quickly recover.

“Our 2017 results demonstrate that the fundamentals of our business are strong,” Mayopoulos says. “While the fourth quarter was affected by a one-time accounting charge, we expect to benefit from a lower tax rate going forward.

“As we mark 80 years of serving America’s housing market, our focus is on building a strong, stable housing finance system for the future,” Mayopoulos adds. “We are doing this by delivering innovative solutions for our customers and demonstrating leadership on our country’s most persistent housing challenges.”

In its fourth quarter report, Fannie Mae said it “expects to remain profitable on an annual basis for the foreseeable future.” However, “certain factors could result in significant volatility in the company’s financial results from quarter to quarter or year to year.”

“Fannie Mae expects volatility from quarter to quarter in its financial results due to a number of factors, particularly changes in market conditions that result in fluctuations in the estimated fair value of the financial instruments that it marks to market through its earnings,” the company says. “Other factors that may result in volatility in the company’s quarterly financial results include developments that affect its loss reserves, such as changes in interest rates, home prices or accounting standards, or events such as natural disasters.”

The need for a Treasury draw should be viewed in the context of how much the GSEs have paid to the U.S. government since their bailout: Together, Fannie Mae and Freddie Mac have paid about $90 billion more to Treasury than they received during the crisis.

Watt warned that the GSEs could require a Treasury draw if tax reform was enacted as far back as October of last year. During the Mortgage Bankers Association’s Convention & Expo, he indicated that the situation with the draw-down of the GSEs’ capital buffers was dire.

Watt said that although the companies were on much better footing, financially, since the meltdown of 2008, the incremental draw-down of their taxpayer buffer meant there was greater risk of the need for a taxpayer bailout.

“The challenge is that additional draws of taxpayer support would reduce the amount of taxpayer backing available to the enterprises under the PSPAs and the foreseeable risk that the uncertainty associated with such draws or from the reduction in committed taxpayer backing could adversely impact the housing finance market,” Watt said. “This challenge is significantly greater today than it was last year and will continue to increase unless it is addressed.”

Watt – and the entire mortgage industry – has been pushing Congress to adopt housing finance reform that would release the GSEs from government control, going so far as to call conservatorship “unsustainable.”

“While many reforms of the enterprises’ business models and their operations have been accomplished through conservatorship, FHFA knows probably better than anyone that these conservatorships are not sustainable,” Watt said in October. “We also know that housing finance reform will involve many tough decisions and steps that go well beyond the reforms made in conservatorship.”

Although he has recently voiced his opinion on the topic, Watt has steadfastly maintained that “it is the role of Congress, not FHFA, to make these tough decisions that chart the path out of conservatorship and to the future housing finance system.”

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