Today’s news of a financial downturn at Fannie Mae, one of the two major government-sponsored enterprises (GSEs) involved in the mortgage sector, may have a logical explanation -- but that doesn’t mean taxpayers can rest easy about the prospects of a future bailout. In detailing their earnings for the final quarter of 2017, Fannie announced a loss of $6.5 billion that would require it to seek a $3.7 billion draw from the U.S Treasury. For the first time since 2012, taxpayers are being asked to cover Fannie’s shortfall.
Make no mistake -- Fannie’s balance sheet, like those of many companies, needed a one-time adjustment because their assets to offset tax liabilities were reduced in value now that the corporate tax rate is going down. Going forward, the new tax law will be a net boon for Fannie and other firms subject to the federal corporate income tax … but unlike those other businesses, this news still demonstrates the GSEs may not be equipped to handle a worse situation down the road.
Reforms to the GSEs are long overdue after nearly a decade of being under government conservatorship. This situation could have been entirely avoided had the Obama Administration not mandated the GSEs send over all profits, known as the Net Worth Sweep, to the U.S. Treasury. These profits could have been left in the GSEs account as a capital buffer in case of short-term deficits like Fannie is experiencing now. While serving as a member of Congress current Budget Director Mick Mulvaney sponsored legislation to help create such a buffer. As NTU remarked last year, proposals like Mulvaney’s made sense:
While some have asserted that allowing this modest amount of capital retention is tantamount to solidifying the GSEs’ market position at government expense, the cold reality is that a serious market fluctuation could pose problems for taxpayers too, unless additional resources are put in place.
NTU continues to urge Congress and the administration to pursue housing finance reform and wind down these institutions’ liabilities to protect taxpayers from future losses.
In response to Fannie Mae’s 4th quarter report, NTU President Pete Sepp commented on the financial loss and what this means for taxpayers, saying “it is unfortunate that policymakers have not yet heeded the warnings of NTU and other experts about the future stability of the GSEs. Even though the loss reported today seems modest and can be explained by a tax law that will greatly benefit the economy, Fannie and Freddie are by no means out of the woods. Until true and lasting reform is put into place, federal policies toward these institutions will further threaten the security of taxpayers and our national economy.”
(Update: Shortly after this statement was prepared, Freddie Mac announced it would seek a $312 million draw from the Treasury. Sepp observed that like Fannie Mae's action, Freddie Mac's decision, while tax-related, "should still serve as an urgent reminder to public officials to address the future of the GSEs before another event such as a housing-market disruption creates a genuine crisis for taxpayers.")