Fannie Mae and Freddie Mac are known to be “too big to fail”….at least that’s what the U.S had said up until the 2008 financial crisis.
In 1968 Fannie Mae and Freddie Mac had become a government-sponsored enterprise, a term insinuating that the government would always be there to bail them out if needed.
In 2008, the government was there to do just that.
With extreme lending of subprime mortgages, the economy quickly began to fail. Individuals were able to get mortgages they were unable to repay, something that would have been easily foreseeable, had the lenders set stricter requirements.
In this time, Fannie Mae and Freddie Mac had borrowed over $187 billion. And now, finally, they have repaid to the full amount and more…leaving the Trump administration to decide what to do next.
With reporting of a fourth-quarter net loss, it is obvious they have yet to recover to pre-crisis standards, and neither is it surprising that they are looking for taxpayer help with the new tax bill that has been passed by the trump administration.
This crisis begs the question….Where are the reserves? Fannie and Freddie finally became debt free. Now, is it time to save?
Currently, in the U.S the housing markets have continued to struggle and the government is running out of ways to help turn it around. Maybe, even worsened it.
This is believed to be why the mortgage giants have finally been able to reach a deal with the treasury department of Congress in which will allow them to keep some of their profits.
By creating this agreement, the companies are allowed to keep up to $3 billion worth of profits to save as a cushion for any future losses the companies may incur.
This agreement is primarily meant to protect the company from regular income fluctuations, not the drastic tax cuts that they will be experiencing, however, it is astep in the right direction.
With greater losses to come due to the 2017 tax reform in which reduced the corporate tax rate significantly, it is no surprise the housing giants are looking for help yet again. Their tax credits currently held will be made worth substantially less, and even had they been able to save a portion of their profits earlier on in time, it still would not have been enough.
The chief economist of Moody’s analytics is quoted as saying the economy may need a recession to “clear the mind”. And this way, he believes that there will be pressure to do something and the markets will begin to respond.
Is there a way for Fannie Mae and Freddie Mac to fully recover? Or will they continue searching for help from outside sources?