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Taxpayers close to breaking even on Fannie Mae, Freddie Mac bailout

A sign in front of the Fannie Mae headquarters is seen in Washington in this file photo taken February 11, 2011. REUTERS/Molly Riley/Files
A sign in front of the Fannie Mae headquarters is seen in Washington in this file photo taken February 11, 2011. REUTERS/Molly Riley/Files

By Margaret Chadbourn

WASHINGTON (Reuters) - Government-run Fannie Mae and Freddie Mac, America's biggest providers of housing finance, will send $39.0 billion to the U.S. Treasury in December, leaving them within a hair of covering the cost of their 2008 bailout.

Freddie Mac said on Thursday it will pay $30.4 billion in dividends after a multibillion-dollar tax-related windfall fueled a record profit in the third quarter.

Its larger sibling and fellow state ward Fannie Mae said it would make an $8.6 billion payment.

The companies, which own or guarantee about two-thirds of all U.S. home loans, were seized by the government at the height of the financial crisis as mortgage losses threatened their solvency. They are now seeing profits surge as housing rebounds.

Even so, lawmakers on Capitol Hill have said they are intent on winding down the companies to ensure taxpayers will never be on the hook for big mortgage losses again.

When Freddie Mac makes its payment in December, it will have returned all of the $71.3 billion it received in taxpayer aid, and an additional $9 million. Fannie Mae's dividend will leave it about $2.2 billion shy of the $116.1 billion it received.

"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 told reporters during a conference call. "That's obviously very good news for taxpayers."

SHARP TURNAROUND

Rising home prices, falling mortgage delinquencies and higher loan fees have led to a sharp turnaround for the companies. Both also have now booked big gains by reversing write-downs on certain tax assets.

By early next year, taxpayers likely will have turned a profit. The two firms' bailout agreements, however, do not allow them to buy back the $189 billion worth of senior preferred shares the government received in return for its aid.

Under the bailout terms, they will continue to make dividend payments as long as they are profitable.

The sizable profits the two companies have enjoyed in recent quarters have led some investors to speculate that they could be spun off again as private firms.

But Republicans and Democrats in the U.S. Congress, as well as President Barack Obama, have all called for replacing Fannie Mae and Freddie Mac with a new housing finance system. The companies provide liquidity to the mortgage market by buying loans from lenders and repackaging them as securities that they offer investors with a guarantee.

"While I'm always glad when taxpayers see a return on investment, we can't forget that Fannie and Freddie wouldn't be earning one penny today without the government guaranteeing their transactions," Republican Senator Bob Corker said in a statement. "I don't know of any other company in America that gets that kind of deal."

Plans to revamp the housing finance system have emerged in both the Senate and the House of Representatives. The bipartisan Senate bill would ensure a government backstop for the market remains in place in times of crisis, an approach favored by the Obama administration. The Republican bill in the House more sharply limits government mortgage guarantees.

STRING OF PROFITS

Taking into account a decision to write up nearly $24 billion in tax-related assets, Freddie Mac's net income was $30.5 billion for the period that ended September 30.

But even its pre-tax income of $6.5 billion, which compared with net income of $2.9 billion a year earlier, showed the company on solid footing. It was the eighth straight quarter of profitability.

"We're a stronger and better run company than we have been in years," Donald Layton, chief executive officer of Freddie Mac, told reporters.

Fannie Mae, which has posted seven straight quarterly profits, reported net income to $8.7 billion in the third quarter, up from $1.8 billion a year ago.

Both companies had been hobbled by a four-year housing slump that sent home prices plummeting and led to record foreclosures.

But rising home prices and a drop in delinquency rates helped drive profits in the third quarter, they said. They were also helped by payments from banks for legal settlements relating to soured loans.

"We do expect annual earnings to remain strong for the foreseeable future," said Mayopoulos. At the same time, he cautioned that future quarters may not be as profitable, due to possible changes in home prices or interest rate fluctuations.

In addition, the companies are tightening lending standards and shrinking their mortgage portfolios, which could lead to smaller profits over the next few years.

(Reporting by Margaret Chadbourn; Editing by Chizu Nomiyama and Andrea Ricci)

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