There are growing concerns that housing finance firms Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) might require fresh bailout from the U.S. taxpayers. Risks in the two mortgage companies are rising as their reserves shrink. U.S. taxpayers came at the rescue of the companies in 2008, providing billions of dollars in financial lifeline for the companies.
Future profitability in doubt
An internal watchdog said that Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and its sibling Freddie Mac could be forced to turn to the government for financial support in the face of declining cash reserves and rising risks. According to the FHFA’s office of Inspector General, future profitability in both Fannie Mae and Freddie Mac is far from assured.
One of the major risks facing the two housing finance companies is that they could make huge losses in their portfolios of derivatives. Such losses already occurred in the 4Q2014. The watchdog noted that increases in derivative losses raises the possibility of Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac additional funding from the government.
Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s CEO also recently warned about making the smallest payment to taxpayers in about four years.
At the height of the financial meltdown in 2008, the government provided a $116.1 billion bailout loan to Fannie Mae. Freddie Mac received $71.3 billion in government bailout. The two mortgage companies have both repaid their government loans. They continue to turn all of the profits to the government through dividends.
Fannie Mae and Freddie Mac do not lend money directly in the housing market. They purchase loans from lenders and then package them into securities that are sold to investors.
Housing finance laws reform
The U.S. Congress is facing pressure to overhaul the housing finance laws. The report that the government-sponsored Fannie Mae and Freddie Mac could seek more government funding is expected to put more pressure on the lawmakers regarding the housing finance reforms.
A number of investors have also been pushing to have the government stop taking all the profits from Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac.