GSE Profits, Now a Political Football, Hard to Forecast

By Brian Collins
Just when it looked like Fannie Mae and Freddie Mac had become cash cows for the government, one-time items in their 2013 financials are raising questions about their future profitability. In reporting their results last week, Fannie and Freddie executives warned that the 2013 level of income is not sustainable. Freddie reported $48.7 billion in net income for the full year and Fannie reported $84 billion. One-time events such as the recognition of deferred tax assets added $23.4 billion to Freddie’s bottom line and $50.6 billion to Fannie’s. The level of profitability is a major factor in the housing finance reform debate. One side wants to wind down Fannie and Freddie and replace them with a new housing finance system where the private sector bears more of the credit risk. But some want to preserve or recapitalize Fannie and Freddie, and will point to the government-sponsored enterprises’ recent strong financial performance as a key reason why. But Karen Shaw Petrou, managing partner of Federal Financial Analytics, claims the two GSEs are barely profitable. “Our analysis removes the one-offs from the 2013 results. When you do that, you show the two giant companies are scraping along,” she says. If the GSEs were required to hold a reasonable amount of capital, such as 5%, “they go upside-down again,” she added.