The Federal National Mortgage Association, a government-sponsored enterprise (GSE) commonly referred to as Fannie Mae, is asking the U.S. Treasury Department for $3.7 billion in taxpayer money to offset the effect of accounting changes in the 2017 Tax Cuts and Jobs Act.
As a publicly traded company, Fannie Mae’s long-term financial plans depend on the value of tax deductions available to the corporation, and the reduction of the federal corporate income tax from 35 percent to 21 percent turned the GSE’s ledger negative.
Fannie Mae is a government corporation created in 1938 by Congress and President Franklin D. Roosevelt with the intention of using federal taxpayers’ money to expand financial institutions’ access to capital for home mortgages and thus increase the availability of affordable housing.
The Housing and Economic Recovery Act of 2008, signed into law by President George W. Bush, placed the corporation under more direct control by the government and authorized up to $100 billion in taxpayer funds to be transferred to Fannie Mae. Since then, Fannie Mae and another GSE, the Federal Home Loan Mortgage Corporation, or “Freddie Mac,” have been managed by the Federal Housing Finance Agency.
In 2012, the U.S. Treasury Department under President Barack Obama modified the terms of agreement with Fannie Mae in a document known as the “Third Amendment,” requiring the GSE to turn over all net income to the government, instead of allowing the creation of cash reserves.
Shareholders, Taxpayers Ripped Off?
John Berlau, a senior fellow at the Competitive Enterprise Institute and a policy advisor with The Heartland Institute, which publishes Budget & Tax News, says the 2012 amendment is responsible for Fannie Mae’s current financial woes.
“Not only did the Obama administration rip off GSE shareholders via the Third Amendment, it also picked taxpayers’ pockets, as none of the profits even go to the GSEs to maintain capital reserves,” Berlau said. “Instead, with one small exception in the Trump administration in late 2017, they are remitted directly to the Treasury, added to the pool of funds from appropriations, and immediately spent on government operations.”
Ike Brannon, a visiting fellow at the Cato Institute, says Fannie Mae’s current problems have been brewing for years.
“The Third Amendment sweep basically set it up so that there would be very little money available,” Brannon said. “Then, also, Fannie Mae and Freddie Mac had the ability to deduct their 2000–2012 losses from their income tax, once they started to show a profit. They lost $150 to $180 billion and planned to deduct the loss at the 35 percent corporate tax rate. That is about $52 billion of potential deductions.
“When the government cut the corporate tax rate from 35 percent to 21 percent, the tax savings or value of the deferred tax assets fell by $20 billion, and they had to recognize that loss on their balance sheet,” Brannon said.
Danger: Bailouts Ahead
Unless the GSEs are allowed to accumulate reserve capital for economic downturns, bigger and more frequent taxpayer bailouts are likely, Berlau says.
“If the GSEs continue to operate with little to no capital, the bailouts of Fannie and Freddie may just be the tip of the iceberg,” Berlau said. “Stress tests conducted by the Federal Housing Finance Agency show that Fannie and Freddie may need up to $100 billion in new bailout money if there are changes in interest rates or any serious economic volatility.”
Suggests Sale or Privatization
Brannon says setting Fannie Mae and Freddie Mae free would be a better solution.
“The current status where, from now on, Treasury is going to have to give Fannie Mae and Freddie Mac some of their operating cash doesn’t make sense at all,” Brannon said. “My solution would be to sell Fannie and Freddie off or privatize them. The government could recover its money, including the value of the implicit guarantee it makes on the mortgages.”