Bailout is Back: Fannie and Freddie Need $$$$ After Derivatives Losses

There is trouble again for federal mortgage backers and bailout queens Fannie Mae and Freddie Mac, whose failures helped to trigger the housing market collapse and subsequent 2008 economic crisis.

The government enterprises are again turning their lowest profits since the recovery,thanks to derivatives losses – where most of the mortgage lender money is invested:

Fannie Mae will make its smallest payment to taxpayers in more than four years after large derivatives losses crimped its fourth-quarter profit, the government-controlled mortgage financier said on Friday.

Fannie Mae said a drop in long-term interest rates sharply reduced the value of the derivatives contracts it uses as hedges in financial markets, adding that low capital buffers are raising the risk it could need taxpayer money in the future.

The derivatives losses helped reduce quarterly profit to $1.3 billion, about 80 percent less than a year earlier, and the $1.9 billion check that Fannie Mae will cut for the Treasury in March will be the smallest since the second quarter of 2010.

Regulators are concerned that the problems leading up to the previous housing crisis are being repeated. Former Federal Housing Finance Agency director Ed DeMarco said:

“In the past year or so we’ve actually seen a renewed policy focus on questions regarding access to credit, which can risk repeating the approach that contributed to the financial crisis—that being the government’s rather vigorous concern about expanding access to credit. That’s not to blame the conservator, whoever it is, it is pointing out the consequence of having a lack of legislative action and having these two companies continuing to operate in conservatorship.”

Behind the scenes, losses are being socialized, while profits are being privatized as usual.

With growing perils, Fannie and Freddie are again looking towards a possible bailout, and the likelihood of a short term Treasury infusion of cash. Reuters reported:

“Future profitability is far from assured,” Federal Housing Finance Agency Office of Inspector General said in a report, pointing out that the firms could again chalk up losses on their derivatives portfolios, similar to those they reported in the fourth quarter.

“(This) increases the likelihood of additional Treasury investment,” the report stated.

Exactly how much the bill will be is not yet clear.  Continue reading

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