Fannie Mae-No Politics (FNMA)

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Fannie Mae to Send $59.4 Billion to U.S. Treasury

Expected Payment Will Bring to $95 Billion the Amount of Dividends the Bailed-Out Mortgage-Finance Firm Has Paid Treasury.




By NICK TIMIRAOS

Fannie Mae (FNMA +3.22%) said Thursday that it would make a $59.4 billion payment to the U.S. Treasury next month after reporting a $58.7 billion first-quarter profit thanks to a big tax benefit the bailed-out mortgage-finance company booked after determining it would generate profits in the coming years.

Fannie recognized $50.6 billion in tax benefits during the first quarter, in addition to pretax income of $8.1 billion during the period. That compared with a $2.7 billion gain during the year-earlier period.

"I'm pleased to say that we'll be sending a lot of money to the taxpayers," said Fannie Chief Executive Timothy Mayopoulos in a speech to an industry group on Thursday morning.

The government took over Fannie and its smaller sibling, Freddie Mac, FMCC +0.34% nearly five years ago and agreed to inject vast sums to keep the firms afloat in order to stave off a deep freeze in U.S. mortgage markets. In exchange, the government took senior preferred shares in the companies that paid a dividend of 10% until this year, when nearly all of the firms' profits are swept away as a dividend payment.

Fannie's expected payment of $59.4 billion to the U.S. Treasury will bring to $95 billion the amount of dividends it has paid to the Treasury. It has received $116.1 billion in aid, leaving the net cost of its bailout at around $21.1 billion. Freddie said on Wednesday that it would pay $7 billion in dividends by next month, bringing its total dividends paid to $36.6 billion. It has received $71.3 billion in aid, leaving its net cost at $34.7 billion.

Taken together, the cost of the government rescues will be cut in half next month, to around $60 billion, from $120 billion at the end of March. "This is obviously very good news for all of us as taxpayers," Mr. Mayopoulos said.

But the terms of the government's support of Fannie and Freddie don't actually provide a mechanism for the firms to redeem the government's shares in the firms. In that sense, Fannie and Freddie are simply making payments on a loan that can't ever be paid off.

If the profits of recent periods are sustained, Fannie could within the next year return more money to the Treasury than it has borrowed.

Mr. Mayopoulos said he was concerned that Fannie's return to profitability—even without the tax boost, the first-quarter pre-tax income was its largest quarterly profit ever and marked the fifth straight quarterly profit for Fannie—might induce policy makers to shirk from taking any action soon to determine the future of the company and the nation's broader $10 trillion mortgage market. "The payment of these dividends is not putting private capital in front of the government's current backing of the market," he said.

Fannie's tax boost stemmed from reversing write-downs of its deferred-tax assets, which are unused tax credits and deductions that can offset future tax bills but which are worthless if a company isn't expected to turn a profit and have taxable income.

The mortgage-finance company began writing down the tax benefits in 2008 as rising mortgage defaults threatened to wipe out thin capital reserves. Some assets had also counted toward the company's capital, further squeezing the company as the financial crisis deepened.

The turnaround at Fannie is the latest sign of how a broad housing-market rebound has lifted the financial sector, the broader economy and the firms' fortunes.

Fannie reclaimed the deferred-tax assets during the first quarter because the company concluded it is likely to be profitable for the foreseeable future. Fannie reported annual losses of $58.7 billion in 2008 and $72 billion in 2009. Last year, by contrast, it reported a $17.2 billion profit, the company's first since 2006.

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