Fannie, Freddie close to paying off taxpayer bailout bill

Treasury reaps revenue from 2 mortgage giants

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Fannie Mae and Freddie Mac, the housing giants whose combined $188 billion bailout dwarfed all others during the 2008 financial crisis, announced Thursday that they will return another $39 billion in dividends to the U.S. Treasury next month, bringing them close to fully repaying the taxpayers who rescued them.

Fannie Mae said it plans an $8.6 billion dividend that will bring its total payments to the Treasury in the past two years to $114 billion — $3 billion shy of its total $117 billion bailout — while Freddie Mac said a payment of $30.4 billion in dividends will more than complete the repayment of its $71 billion bailout.

Further dividends from both mortgage giants at the beginning of next year almost certainly will make taxpayers whole and turn their rescue operations into once-unimaginable cash cows for the government.

Although the two mortgage guarantee agencies technically cannot expunge their debts to the taxpayers and are still owned and controlled by the Treasury under the terms of their bailouts, the near break-even point they have achieved marks a symbolic closing of a major chapter in U.S. economic history as their bailouts were among the most dramatic, controversial and far-reaching events during the tumultuous financial crisis.

The large dividend payments to be reaped by the Treasury also highlight the important role the two mortgage giants have played in helping to sharply reduce the federal budget deficit in the past year to less than half of its $1.4 trillion peak during the crisis.

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Fannie Mae headquarters in Washington.

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getty images Fannie Mae headquarters in Washington. more >

Just as the financial bailouts contributed in a big way to unprecedented budget deficits in 2008 and afterward, the return of taxpayer funds is now helping to quickly deflate them. All of the major banks have returned their bailout funds, with interest, and the Treasury is slowly recouping money shelled out to smaller banks.

Only the bailout of General Motors Co. remains as a significant loss for taxpayers, although the Treasury is expected to recoup another big chunk of the $50 billion in funds it paid two of Detroit’s Big Three automakers when it completes the sale of its remaining GM stock later this year.

“We are quickly approaching the point when taxpayers will receive a positive return on their investment in this company,” Fannie Mae Chief Executive Tim Mayopoulos said in announcing a seventh straight quarter of profitability and earnings for the once-insolvent leviathan. “That’s obviously very good news for taxpayers.”

The mortgage giants owe their profitability to the robust recovery in the housing market and refinancing boom in the past two years, which dramatically lifted sales and prices and sharply increased the fees they earn for packaging individual mortgages into mortgage-backed securities and providing a guarantee to investors.

Defaults on mortgages also are way down, meaning that the once-gigantic losses sustained by Fannie and Freddie are waning and leaving them with more profits. They also are enjoying better returns on sales from their large portfolios of foreclosed homes.

Since being burned by the crisis, Fannie and Freddie have become much more selective about the mortgages they guarantee. Because they provide backing for the lion’s share of all mortgages made today, the stricter requirements they have imposed on borrowers have quickly become standard for much of the rest of the mortgage industry.

“We’re a stronger and better-run company than we have been in years,” said Donald Layton, chief executive of Freddie Mac.

Dilemma for Congress

The growing profitability of the mortgage giants poses a dilemma for Congress and the administration.

President Obama and congressional leaders all say they want to phase out Fannie and Freddie, given their notoriety during the crisis, and turn over most of their functions to the private sector. But the sizable dividend payments streaming out each quarter pose a temptation for lawmakers who are still groping for ways to reduce huge budget deficits.

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