Housing is back! America is not Greece! We live in a golden age of deficit reduction! I know, I tend to repeat myself a lot in this space. But over the past year, the evidence in support of all three propositions has just kept mounting. And this morning, shortly after 9 o'clock, a wire transfer conducted in Washington, D.C., provided further proof.
Fannie Mae, the mortgage giant that failed in 2008 and was bailed out by taxpayers, Friday morning informed the world via a tweet that it made a massive $59.3 billion payment to the Treasury Department.
Like the rest of the financial sector, Fannie Mae and its sister company Freddie Mac, the two government-sponsored mortgage enterprises, went on a housing lending binge in the 2001–07 period. It lent too much money to people with poor credit against very expensive homes. When the housing bubble popped, both companies were functionally bankrupt. To save them and the financial system—major institutions around the world held trillions of dollars in Fannie and Freddie securities—the U.S. government formally stepped in. The taxpayers assumed control of the company, formally guaranteed their trillions of dollars in debt, and put about $180 billion into the two companies so they could continue making interest payments. Of all the bailouts, this was the least likely to be paid back.
But since 2009, America’s economy has bounced back. Fannie and Freddie have become more intelligent lenders, requiring higher credit scores and larger down payments. As we’ve noted, they’re Jekyll and Hyde institutions—really stupid pre-2008 lenders lashed to really smart post-2008 lenders. With each passing quarter, more of those older loans get paid off or refinanced or foreclosed. And because Fannie and Freddie are pretty much the only game in town, they’ve put out a lot of new loans in the last few years. And as the economy slowly expands, as jobs return, and as Americans across the board do a better job keeping up with their financial obligations, Fannie and Freddie are minting profits. The delinquency rate on their post-2009 book of business is about 1 percent, which is very low.
In 2011, Fannie and Freddie essentially stopped drawing on the line of credit extended by the taxpayers and started returning cash to the government in the form of dividends. Basically, any profits the two entities report going forward revert to the government. Fannie Mae in 2012 made $17.2 billion. In the first quarter of 2013, Fannie Mae reported a gigantic $58.7 billion profit, in large part because it notched a $50.6 billion accounting gain on tax credits. (Long story short: when you rack up gigantic losses for several years, you accrue big tax benefits that have a financial value once you become profitable again.) In May, Fannie Mae said it would make a $59.2 billion payment to Treasury by the end of June. That happened Friday. In all, Fannie has returned $95 billion of the $116.1 billion cash it took from Treasury. And if the housing market continues to recover for the next year or so, it could easily return all that cash. Freddie Mac, for its part, has returned $29.6 billion of the $71 billion it took from Treasury. All in, the two have returned $125 billion of the $187 billion in aid they took.
Fannie and Freddie have been able to return to financial health because the American consumer and the American housing market have bounced back from their torpor. Yes, the Federal Reserve and the stimulus had a lot to do with it. But the natural and impressive recuperative powers of American consumers, and of the American economy at large, have played a huge part.
These two trends—the recovery of housing, the general snapback of the U.S. economy—are propelling a third powerful trend: a decline in the federal deficit. Fiscal year 2013 was already slated to be a year of epic deficit reduction. We have substantially higher revenues, because more people are working at slightly higher wages and paying higher payroll taxes, and because higher taxes are hitting upper-income earners. And we have lower spending, thanks to the sequester, and declines in outlays on defense and unemployment benefits. In the first seven months of fiscal 2013, revenues rose 15 percent from the year before while spending was essentially flat. That led to a 25 percent decrease in the deficit for the first seven months of fiscal 2013 compared with the first seven months of fiscal 2012.
That process is accelerating. That payment of $59.3 billion is real money—equal to about 2 percent of all expected federal revenues for the current fiscal year. And it all goes to deficit reduction. Oh, and should the housing market continue to plod along, there’s plenty more where that came from.