The housing crisis is far from over. Millions of foreclosures are working their way through the system, and countless homeowners are underwater on their mortgages. But there are signs that housing is shifting from a drag on the nation’s finances to a factor that can add to economic growth. Housing starts and existing home sales have been rising compared with 2011. There are even suggestions that the long slide in home values may be coming to an end. Wednesday morning brought another surprising piece of data. Fannie Mae, the government-sponsored housing lender that required a 12-figure bailout, reported a huge ($5.1 billion) profit in the second quarter. The report suggests taxpayers may finally be drawing a line under one of the least palatable (and most expensive) components of the rescue efforts.
Nearly four years ago, the government formally assumed responsibility for both Fannie Mae and Freddie Mac, the two government-sponsored enterprises that dominate the mortgage market. The Treasury Department agreed to subsidize their losses so that investors (banks, pension funds, etc.) that owned bonds they had issued would be made whole. In return, Treasury would get stock and dividends. For the first several years of the bailout it was a one-way street. As Fannie and Freddie racked up losses, they drew down money from Treasury. The chart on page two of this report shows that, since the fourth quarter of 2008, Fannie Mae alone has drawn down $116.1 billion.
But things have improved somewhat. Essentially, Fannie Mae is now two companies in one–a smart, conservative post-bust lender lashed to a really dumb, reckless, pre-bust lender. (The same holds for Freddie Mac.)
Since 2009, Fannie Mae has tightened credit standards and required more down payments. In the first half of 2012, loans Fannie Mae acquired had a loan-to-value ratio of 73 percent. In the meantime, they’ve been lending into an economy in which housing prices are beginning to stabilize and in which consumers at large are doing a better job keeping up with financial obligations. Check out Slide 8 of this presentation. It shows that default rates on loans originated in 2006 and 2007 was 9.3 percent and 10.3 percent, respectively. That’s really bad. But for loans issued in 2008, the default rate is only 3.1 percent. Of the loans made in 2009, only .3 percent are in default. It’s early days for those loans, but those mortality rates are quite low.
More good news. With each passing quarter, more of the old loans are paid off, refinanced, or defaulted on. That means with each passing month, the bubble-era loans can inflict less damage on Fannie Mae’s overall portfolio. Today, 59 percent of Fannie Mae’s single-family book of business consists of loans purchased or guaranteed since the beginning of 2009. The plague years of 2006 and 2007 account for only about 16 percent of the unpaid principal of loans on Fannie Mae’s books.
Essentially, Fannie Mae is now two companies in one–a smart, conservative post-bust lender lashed to a really dumb, reckless, pre-bust lender.
Most of Fannie Mae’s metrics are trending in the right direction. In the second quarter, only 3.53 percent of Fannie’s loans were delinquent. The company reduced the number of homes it owns, and boosted the number of short sales and modifications it approved. Fannie Mae earned $5.1 billion in the quarter. That’s enough to make the required $2.9 billion dividend payment to Treasury and keep some money left over.
For the second straight quarter, Fannie Mae has managed well enough that it was able to pay the dividend it owes Treasury without drawing down new cash. And that means the size of the bailout is shrinking. The net cost to taxpayers of the Fannie Mae bailout is now $90.5 billion, down from $96.3 billion at the end of 2011.
That’s still a mind-boggling, epic, ridiculous, absurd amount of money. And the taxpayers won’t come close to recouping all the cash they gave Fannie Mae and its equally profligate brother, Freddie Mac. But the latest report does suggest that the bailouts of the housing giants may be coming to an end.