By Ian Swanson - 05/05/10 10:00 AM EDT
Fannie Mae and Freddie Mac see the billions in dividends they must pay annually to the Treasury Department as a significant burden that cripples any hope they have of returning to profitability.
A strict lobbying ban prevents Fannie and Freddie from airing much of a critique of the agreement, but it is clear from their annual reports that they think the dividend payments are unfair.
“The amounts we are obligated to pay in dividends on the senior preferred stock are substantial and will have an adverse impact on our financial position and net worth and could substantially delay our return to long-term profitability or make long-term profitability unlikely,” Freddie’s annual report says.
That either company would even be thinking about profitability might come as a surprise to some.
The two government-sponsored mortgage enterprises at the center of the housing and financial crisis are in conservatorship and heavily indebted to the government. People still hold publicly traded stock in the companies, but the shares are worth little. Both were trading at a little more than $1 on Tuesday.
The dividend payments were set up in 2008 when the George W. Bush administration’s Treasury provided a $100 billion backstop to ensure the companies remained solvent. The backstop was increased to $200 billion by the Obama administration in 2009.
In exchange, the administration received senior preferred stock from the two companies that pays an annual 10 percent dividend in cash, or 12 percent in stock.
The two companies have drawn down a total of $126.9 billion from the Treasury.
Freddie has paid $4.3 billion to Treasury to date, while Fannie estimates it will pay $7.6 billion during the first year of the agreement, according to its annual report.
There was no negotiation between Treasury and the government-sponsored mortgage agencies over the terms of the deal, according to people involved with the arrangement at the time. No options were presented, either.
The dividend payments add to Fannie and Freddie’s debt, giving the exchanges a peculiar circular nature. Fannie and Freddie are essentially paying money to the government from money the government loans to the two companies.
The dividend payments have received scrutiny from GOP Rep. Kenny Marchant (Texas), who sits on the House Financial Services Committee.
Marchant, who said he’s heard Fannie and Freddie officials chafe about the arrangement in meetings he has requested with the companies, is worried the high dividend payments will make it more difficult for the two companies to pay back taxpayers.
He’s working on legislation, which he stressed was still months away, that would preserve Fannie and Freddie as publicly traded companies that would continue to offer mortgages.
Marchant’s view is a departure from that of many Republicans, who have called for Fannie and Freddie to be dissolved, but he insists others share it.
No one knows how the companies will emerge from the Great Recession, and their futures will likely be debated heatedly next year, if and when Congress turns to housing legislation.
If ascendant Republicans win back the House, Marchant could have a heavy role to play in a critical policy debate.
He’d keep Fannie and Freddie functioning, though with new rules that would rid the companies of what he described as the “social engineering” aspects of their policies.
Marchant suggests setting interest on the loans from the federal government at something close to the 3 percent rate for interagency exchanges. He’d also set up a structure to ensure the companies pay off their debt to taxpayers before shareholders could see a return.
Some outside analysts think Freddie in particular could make a profit if it had a different arrangement with the government.
John Hempton runs a hedge fund from Australia and writes a blog about financial matters. In an e-mail, he noted that Freddie Mac makes revenue on over $2 trillion in mortgages.
“If the government were not demanding 10 percent on its preference shares the companies would be sufficiently well-capitalised to repay their interest in 4 years,” Hempton wrote.
“With the drag of having to pay the government $5 billion per annum it will take a bit longer. Either way the operating profits of Freddie Mac are big enough to ensure the government gets its money back provided there is not another substantial [drop-off] in housing prices.”
He added in an interview, “When Fannie and Freddie start to declare big profits … it will be clear the only thing holding them back is [the dividend payments]. At which point an enterprising lawyer will file a complaint on unfair regulatory taking.”