The role of Fannie Mae and Freddie Mac post-bubble
Fannie Mae’s role post-crisis
Since the financial crisis, Fannie Mae has gone back to its old role as mainly a securitizer of newly issued mortgage-backed securities. After the bubble burst, the private label securitization market basically ended. The only mortgage-backed securities being issued were government-related. This meant Ginnie Mae securities and Fannie and Freddie securities. An estimated 90% of all mortgage issuance is government-related (either Fan/Fred or Ginnie). The government now bears 50% of the credit risk of the entire mortgage market. For all intents and purposes, the U.S. mortgage market is more or less nationalized.
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As the real estate market has improved, Fannie Mae and Freddie Mac have returned to profitability. The government has increased the guarantee fee (or the G-fee), which is the cost of their insurance. Second, as the real estate market has rebounded, the value of their holdings has increased. As the value of their real estate increases, Fannie Mae and Freddie Mac are now showing mark-to-market gains. As a matter of fact, in the first quarter, Fannie Mae had its most profitable quarter ever.
Given Fannie Mae’s profitability, shouldn’t it be paying off what it owes the government, and could it return to its old role? Well, the government changed its treatment of Fannie Mae about a year ago. Prior to the change, Fannie Mae’s profits or losses would apply to what it owes the government (which stands at about $170 billion). In late 2012, the government changed the rules, and now all of Fannie Mae’s profits or losses just go straight into the budget and don’t apply to Fannie’s debt to the government. So even though Fannie Mae is making several billion in profit per quarter, it isn’t working down its debt.