In case you missed it ailing mortgage giant Fannie Mae announced its first quarter
earnings loss numbers on Friday. About $11 billion in credit losses on the firm's giant mortgage portfolio led to a fresh $6.5 billion loss in the quarter. Ultimately, it needs another $8.5 billion from taxpayers to stay afloat. Meanwhile, however, Freddie Mac needs nothing: it actually made a profit during the quarter. How did these two seemingly similar firms have such different results?
Let's start with Fannie. The above explanation might have been confusing. If Fannie lost $6.5 billion, then why does it need $8.5 billion from taxpayers? Give or take a few hundred million dollars, the difference is the first quarter dividend that Fannie must pay to the Treasury for its past "borrowings," which is about $2.2 billion.
What's going on here might seem a little bit ridiculous, because it is. Fannie owes the Treasury $2.2 billion for the first quarter, so it's taking money from the Treasury to pay the Treasury. So really, Fannie isn't paying that $2.2 billion it owes, but requesting another $6.3 billion on top of it. Unfortunately, the future doesn't look very bright for Fannie. In its new release (.pdf), it explains that its debt to the Treasury will never be manageable:
It will increase to $99.7 billion upon the receipt of funds from Treasury to eliminate the company's first-quarter 2011 net worth deficit, which will require an annualized dividend payment of $10.0 billion. This amount exceeds the company's reported annual net income for each year since its inception.
In other words, for the approximately $100 billion it owes the Treasury, it must pay a $10 billion annual dividend -- which amounts to more money than Fannie's annual profits have ever been any year since its inception decades ago. The firm will never survive on its own.
But the future looked slightly brighter at Freddie. It actually managed to pay its dividend to the Treasury with its own money -- $1.6 billion worth -- and still have a profit of $1.2 billion. Why's that?
Its portfolio isn't quite as awful as Fannie's, according to Anthony Sanders, Mercatus Center scholar and a real estate finance professor at George Mason University. He says that Fannie had a larger share of subprime mortgage-backed securities and Alt-A mortgages. Consequently, its losses were more severe last quarter than Freddie's losses.
Ultimately, however, Freddie isn't all that much better off than Fannie in the long-run. Its financial results release states:
Treasury is entitled to receive cumulative quarterly cash dividends at the annual rate of 10% per year on the liquidation preference of the senior preferred stock. As of March 31, 2011, the company's annual cash dividends payable to Treasury are $6.5 billion, which exceeds the company's annual historical earnings in all but one period.
Like Fannie, Freddie's long-term viability doesn't look good. There has been just one year in its history when its profit would have exceeded the dividend payments it owes taxpayers.
In short, neither of these bailout recipients will ever recover, unless the Treasury forgives a large portion of their bailouts and the dividend payments that it requires. Of course, many in Washington -- including the Treasury, House Financial Services Ranking Member Rep. Barney Frank (D-MA), and numerous Republicans have already called for these firms to be wound down. At this point, their fate looks pretty inevitable.
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