WASHINGTON, DC—Last week when the White House released its budget for fiscal year 2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship.
The item gave the commercial real estate industry pause for a few reasons. This number 1) assumes the GSEs will remain under federal conservatorship 2) it assumes that the lawsuits filed by GSE shareholders disgruntled by the government’s decision to sweep all profits from the GSEs back to the US Treasury will go nowhere 3) it assumes the GSEs will continue to bring in record profits.
Of all of these, the latter supposition is the least controversial.
The two GSEs have paid back more than what their received in federal aid; Fannie Mae has sent back the government $134.5 billion in payments compared to $116.1 billion it received, while Freddie Mac has sent $91 billion compared to $72.3 billion it received in rescue funds.
This cash flow is one reason why some in the industry quietly speculate that the government has little intention of cutting the GSEs loose to be privatized—despite the stated intention of the Obama Administration to do so.
Also, consider that the government can basically set the GSEs’ profit levels, David Reiss, professor of Law and research director for the Center for Urban Business Entrepreneurshipat Brooklyn Law School, tells GlobeSt.com.
“Their regulator, the Federal Housing Finance Agency, sets the amount of their guarantee fee. If the FHFA raises it, it tends to raise profits for the two companies,” he notes.
The FHFA also sets, within limits, the types of mortgages the GSEs can buy, thereby increasing the size of the total market and the market share of the two entities, Reiss continues. “For instance, the FHFA recently lowered the down payment requirements for Fannie/Freddie loans. This action will increase the total number of loans made and will also increase Fannie and Freddie’s market share because they can now operate in a part of the market that had been off limits.”
The chances of the GSEs actually staying in conservatorship for another decade, however, are slim. Both Congress and the White House have stated they want to see the GSEs privatized at some level.
Also, while the GSE shareholder lawsuits have recently experienced setbacks in court, their battle is by no means dead.
Perhaps the most important consideration is offered by Bill Isaac, former FDIC chair and currently senior managing director of FTI Consulting in Sarasota, FLA.
He tells GlobeSt.com that if Fannie and Freddie remain in conservatorships for the next ten years, it would be a clear violation of the law authorizing these specific conservatorships, a clear violation of the legal principles underlying conservatorships generally, and an unconstitutional taking of private property. “One would hope the courts will not allow this situation to stand,” he says.