Why Federal Home Loan Mortgage Corp (OTCBB:FMCC) Can Need More Government Funds?

As per a report from the FHFA Inspector General, Federal Home Loan Mortgage Corp (OTCBB:FMCC) as well as Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) can need another round of bailouts. The Federal Housing Finance Agency regulates Freddie and Fannie.

The details

The U.S. government took charge of Federal Home and Fannie in 2008, in due course providing $187.5 billion of financial assistance to the two companies. Since 2012, the mortgage companies have been profitable. In fact, the two companies have returned back over $228 billion to Treasury. The problem, however, started when the two companies posted weak earnings for 4Q. Federal Home reported a profit of $227 million compared to $8.6 billion in the same period, a year ago. Fannie recorded net income of $1.3 billion, down from $6.5 billion. The dismal results can be attributed to the accounting method of the two companies’ derivatives. The results also indicated the lack of one-time items to boost income.

The report

The report stated that in last few years, Federal Home and Fannie’s net income has been led by several important legal settlements and the revaluation of assets and one-time items. These reasons are not sustainable to boost income in long-term. The settlements along with the declining capital cover increased the probability of requiring more bailouts in the future. Few years ago, the investments had been prime source of the companies’ profit. However, the government now wants to minimize the size of portfolios at an accelerated rate.

The agreements

As per the amendment made in an agreement between the U.S. Treasury Department and the FHFA in 2012, most of Federal Home and Fannie’s profits are paid to the Treasury in the form of dividends. Also, the two companies are required to close their capital buffer by at least $600 million annually, ultimately posting zero in 2018.

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