The federal government, in order to wind down mortgage giants, is collecting all profits generated by Fannie Mae and Freddie Mac—a move some say may backfire by providing the federal government a source of revenue that Congress will be hard-pressed to let go.
The Treasury announced in August that it would take all profits from the two housing giants in “a quarterly sweep of every dollar of profit that each firm earns.”
This “quarterly sweep” is an effort to recoup money that the federal government has loaned Fannie and Freddie, starting with the 2008 bailout. The federal government took over Fannie and Freddie in September of 2008, in the middle of the housing crisis that brought down the economy. Since then, the two firms have struggled to regain profitability, only recentlymaking money on their investments.
The federal government has loaned the two firms almost $200 billion, with the expectation that they would eventually repay the money. The Treasury argues that the policy shift, along with mandatory portfolio reductions, is a step toward ensuring Fannie Mae and Freddie Mac will “not be allowed to retain profits, rebuild capital, and return to the market in their prior form.”
However, a former Fannie Mae official pointed to a potential problem in the “quarterly sweep”: Fannie Mae and Freddie Mac could become a revenue source for the government, making it very difficult politically to end the two institutions.
Edward Pinto, former chief credit officer at Fannie Mae and a housing finance expert at the American Enterprise Institute, warned that because the money will be flowing into the Treasury, “If you don’t do something quickly, Congress could get used to this.”
Congress has used Fannie and Freddie’s profits to fund their legislation in the past, Pinto said. He pointed to legislation from Congress late last year that raised fees at Fannie and Freddie for 10 years in order to fund a two-month extension of the payroll tax cut.
