Amid Renewed Bailout Fear, Watt Turns Fannie, Freddie Into Welfare Agencies

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Investors Business Daily:

Subprime Redux: As Fannie's and Freddie's regulator pushes the mortgage giants to bail out low-income borrowers, the agency's inspector general warns they risk needing another bailout of their own due to waning profits.

 

Recent moves by Federal Finance Housing Agency chief Mel Watt to ease mortgage terms for delinquent and underwater borrowers could further hurt Fannie's and Freddie's profitability — and even put taxpayers on the hook for more losses.

 

In a just-released report, FHFA's inspector general cautions that Fannie's and Freddie's post-crisis profitability may be short-lived, thanks to lost income from non-recurring items, legally required cuts in their investment portfolios, and limits on the guarantee fees they can charge. Their earnings already have plunged in recent quarters.

 

What's more, the agencies cannot legally build a financial cushion to absorb future losses and must pay a dividend to the Treasury Department each quarter that's equal to the excess of their net worth over an applicable capital reserve amount, the report says. The reserve is now $1.8 billion and must be slashed by $600 million per year until it reaches zero by 2018.