There's an elephant in the room amidst discussions on how to unwind Fannie Mae and Freddie Mac—the two government-sponsored enterprises are now making money hand over fist.
The entities rebounded to profitability roughly two years ago, after being put in conservatorship in September 2008 near the start of the financial crisis. Indeed, the GSEs are coming close to having sent back funds equal to the amount of government aid they received.
Their income is complicating the debate over housing finance reform and even raising fresh questions about whether they should be dismantled at all.
Following are some frequently asked questions about those profits and the impact on reform efforts in Congress.
How profitable are the GSEs right now?
In the third quarter of 2013, the most recent data available, Fannie Mae reported net income of $8.7 billion and Freddie Mac said it earned $30.5 billion—with the majority of those funds sent to the Treasury Department in the form of dividends. Fourth-quarter earnings reports from the two GSEs are due out soon.
Due to their arrangement with Treasury, the GSEs have not paid down any of the principal they owe on the nearly $190 billion they drew from the government, though they are coming close to having sent Treasury that amount in dividends. Since Fannie and Freddie began to turn a profit in late 2011 and early 2012, questions about whether the entities should be unwound have begun to crop up.
Most policymakers, including the Obama administration, have played down that idea and many warn that the government windfall from the GSEs is unlikely to continue at the same pace indefinitely.
Michael Stegman, a counselor to the Treasury Secretary on housing finance policy, said at an industry speech in January that he's concerned recent earnings "may significantly overstate the true financial condition of the enterprises."
He pointed out that through the first three quarters of 2013, $75 billion of the net income reported by the GSEs was due to one-time tax reversals that will soon end. Another $11 billion came from the release of loan loss reserves, while $10 billion came from one-time settlements with banks over legacy mortgage-backed securities.
Moreover, Stegman noted that 60% of the remaining income in the first nine months of 2013 stemmed from the enterprises' retained investment portfolios, which are required by the government to shrink by 15% per year. He also warned that the portfolios, while still profitable, "remain a continuing source of volatility and taxpayer risk."
Going forward, the GSEs are likely to continue to making money, albeit at much lower levels.
"They're still going to be profitable, they're just not going to be on the same order of magnitude profitable," said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute. "Profitability is not going to look nearly like this year, because some of the one-time items are huge."
Analysts suggested that future profitability is likely to be influenced by a number of factors, including the health of the mortgage market and policy decisions made by Mel Watt, director of the Federal Housing Finance Agency, which oversees the GSEs.
How has this impacted the GSE reform debate?
Even if some of the limited-time charges, like the deferred-tax assets, are artificially pumping up profits at Fannie and Freddie in the near term, the money appears to be playing a role in the debate over GSE reform in Congress.
"Clearly it slows any sense of urgency, because the GSEs are basically being used to help subsidize the government deficit," said Goodman.
The problem is largely a political one, coming at a time when concerns about the deficit remain high, and Stegman's comments are notable for trying to downplay the impact of the profits.
"Given our tight budget conditions, any time you have money coming in to make the budget picture look better or for a program you want, it becomes attractive," said Edward Mills, a policy analyst at FBR Capital Markets. "If the administration is successful in talking down the future value of this revenue stream, that's how you get members to tackle reform—by giving up that stream."
But those interested in reform are still facing somewhat of an uphill battle.
"I'm left with the question of how often in the history of the federal government has Congress willingly removed a dedicated source of revenue from its budget," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
The argument is particularly critical because it gives cover to lawmakers who aren't sold on the need for immediate mortgage finance reform—what Mark Calabria, director of financial regulation studies at the Cato Institute, calls the "mushy middle." Lawmakers are already finding it difficult to move GSE legislation through Congress in the absence of a pressing crisis, and the income from the enterprises simply adds to that inertia.
The big profits "have made reform less likely this year, but I don't think it kills reform forever, because they'll get back to having profits in the single-digit billions," Calabria said. "The difference it has made is with the mushy middle—people who didn't have strong feelings either way."
What are the other potential consequences?
The strong profits at the GSEs have also raised questions about how the Congressional Budget Office might score a housing finance reform bill, which could affect its chances for success given the current fiscal environment.
"If you take controversial legislation like GSE reform and say it's going to cost more money, it won't go anywhere," said Jeb Mason, a managing director at Cypress Group.
Determining the budget score for any piece of legislation overhauling the mortgage market is a complex process, and will take into account a number of factors—not limited to the length of the transition to a new system and how the GSEs are wound down.
But at least for now, those pushing for reform appear to have the numbers in their favor.