Fannie Mae at risk of needing a bailout

Barney Jopson in Washington
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Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned.

Fannie Mae's chief executive and its regulator are sounding the alarm on a decline in the institution's capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds.

Their warnings highlight Washington's inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis.

Since 2008 Fannie Mae has been in the post-crisis limbo of state-sponsored "conservatorship," neither fully nationalized nor private, following several unsuccessful attempts by Congress to overhaul it.

Because the government does not let Fannie Mae retain profits, Tim Mayopoulos, its chief executive, told the Financial Times on Friday that its capital buffer, which has dwindled from $30 billion before the crisis to $1.2 billion today, was on track to disappear by January 2018.

At that point it would be unable to weather quarterly losses and would need to draw on Treasury funds to avoid being placed into receivership.

So far investors who own Fannie Mae's mortgage-backed securities have not been spooked, Mr. Mayopoulos said, but he added: "We are a major source of liquidity to the mortgage markets and it would be better to avoid testing the market as to what the breaking point is well in advance of us getting to that point."

His comments came the day after Mel Watt, Fannie Mae's top regulator, thrust the issue into the spotlight.

Addressing both Fannie Mae and its counterpart Freddie Mac, Mr Watt, director of the Federal Housing Finance Agency, said: "The most serious risk and the one that has the most potential for escalating in the future is the enterprises' lack of capital."

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"If investor confidence in enterprise securities went down and liquidity declined as a result, this could have real ramifications on the availability and cost of credit for borrowers," he said in a speech.

Fannie Mae's inability to retain profits, which must instead be swept into government coffers, also makes it almost impossible for the institution to exit federal control.

Mr. Mayopoulos said a range of options for solving the capital problem were available, such as allowing Fannie Mae to retain earnings, changing the terms on what gets Treasury support via preferred stock purchases, and taking it out of conservatorship so it could be recapitalized in another way.

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Terry Haines, managing director at Evercore ISI, an investment research house, said Mr. Watt's speech "may hint at a frustration with administration inaction on housing finance reform".

Despite an improving labor market, Mr. Haines said the housing market was being held back by the absence of a new regime for housing finance, a "free-for-all" of mortgage litigation, and regulatory constraints on credit supply.

A Treasury spokesman said: "Taxpayers injected $188 billion into [Fannie Mae and Freddie Mac] to stabilize the housing market and lay the groundwork for our economic recovery. Director Watt's remarks underscore the administration's consistent position regarding [their] conservatorship: the best long-term solution is comprehensive housing finance reform. Until then, Fannie Mae and Freddie Mac will continue to rely on the $258 billion of taxpayer provided support to sustain market confidence."