New Articles | Fannie Mae and Freddie Mac

Never been better

America's mortgage-insurance giants are making bigger profits than before the crisis

|LONDON AND NEW YORK

By C.R. & T.E.

FANNIE MAE and Freddie Mac may sound like a couple living in suburban America but they are in fact two of the country’s more unusual listed companies. With a government-backed guarantee, Fannie and its sibling Freddie buy mortgages from lenders and package them for resale.

Looking at the headlines, it may seem that both Fannie and Freddie are in financial trouble again. On February 19th Freddie Mac reported a sharp decline in its net income last year, which fell from $48.7 billion to $7.7 billion. The next day Fannie Mae also announced a big fall in earnings. Falling market interest rates forced the pair to declare losses on the derivatives they hold as a hedge against rising rates, although these should recover the lost ground if, as expected, the Federal Reserve starts to raise rates later this year.

The fact remains that both Fannie and Freddie have emerged from the financial crisis churning out more profits before tax than they ever have before (see chart). Who benefits most from this is a subject of controversy. The government, having bailed out Fannie and Freddie in 2008, owns most of the pair. Other shareholders own 20%, but Barack Obama’s administration in effect expropriated these stakes in 2012: virtually all earnings now go to the Treasury. Two challenges to this arrangement are before federal courts. Critics contend that the government is sowing the seeds of another crisis at the pair by encouraging them to loosen their lending standards for political reasons. But in the meantime the American government can look forward to some healthy dividends.