Government-controlled GSEs Fannie Mae and Freddie Mac appear to be profitable for the first time since the real estate market tanked. However, that does not mean that they don’t need major handouts (read: billions of dollars) each quarter from the Treasury Department in order to stay afloat. In fact, even though both companies pay 10 percent dividends on preferred shares (shares belonging to the U.S. government as compensation for taking over the GSEs in 2008), most of that money goes right back to the GSEs in the form of cash infusions, creating a vicious cycle that will keep the GSEs asking for more cash long after they are back in the black. For example, while the two companies paid $7.5 billion in dividends over the last two quarters, they received back $5.7 billion “to keep them in business.”
Many experts blame the high dividend payments to the U.S. government for this nasty cycle. The National Association of Realtors, for example, is using lobbyists to push for lower dividend payments of 5 percent from the GSEs just as other lenders who received TARP aid paid. The Obama administration has defended the high payments since there are no plans to revive the GSEs as “stand-alone companies,” and Timothy Geithner said in his testimony yesterday before the House Financial Services Committee that while a complete overhaul of the GSEs is needed within two years and implied that unwinding the companies was probably the way to go. However, that means that for the next two years – at a minimum – Fannie and Freddie could be receiving million- and billion-dollar handouts just to keep them in action, further exacerbating the housing market’s dependence on the behemoths. Do you think that Fannie and Freddie need to go now, or are the crucial to the housing market’s survival?
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