BLOG VIEW: Last week, the GSEs released their numbers for the first quarter of 2013. Under normal circumstances, for normal companies, the figures would have simply represented strong financial performance for a couple market giants.
But Fannie Mae and Freddie Mac, as we all know, are not normal companies. And their circumstances, as wards of the federal government, are far from normal. Fannie and Freddie have been under the microscope since their conservatorship began in 2008, and GSE reform has become a central issue in the mortgage banking and larger financial sectors.
The GSEs notched awesome first-quarter financials. Fannie Mae reported pre-tax income of $8.1 billion (compared to $2.7 billion in the first quarter of 2012), which the firm says is ‘the largest quarterly pre-tax income in the company's history.’ Including the release of the valuation allowance on its deferred tax assets, Fannie's quarterly net income was $58.7 billion.
When language such as ‘record income’ and ‘most profitable’ start accompanying the GSEs, the world starts talking. Taxpayers bailed out Fannie and Freddie repeatedly, but they're now paying us back. Fannie Mae alone will replenish the U.S. Treasury with $59.4 billion in dividends in the second quarter.
And for some observers, a central question is this:
If the GSEs are doing so well, will reform really happen?
And, by extension:
On Friday, Fitch Ratings suggested that the dividend payment and solid Q1 performance ‘will likely complicate efforts to pursue far-reaching GSE reform.’
It might be easy – and perhaps convenient – to demonize Fitch in this context, given the role the major credit-rating agencies played in escorting toxic classes of mortgage-backed securities to the top of the investment heap in the mid-2000s.
But that doesn't mean Fitch is wrong about congressional appetite for GSE reform perhaps quietly waning.
‘The political motivation to overhaul the GSEs and the broader mortgage market remains limited,’ the company said. ‘With the point where taxpayers are effectively made whole on their investment in GSEs now in sight, we believe broad reform will become more challenging to achieve.’
If the GSEs are operating profitably and repaying their debt to society (literally), reform will become less and less of a hot-button issue outside of the mortgage banking industry. That's just a fact.
However, whether or not the GSEs' role in mortgage banking needs tweaking is a different issue entirely. Will Fannie and Freddie be merged or dissolve? Will they carry on as they did pre-crisis? If so, what will they look like?
Answers might not be coming anytime soon, unfortunately.