Amherst: GSEs Will Be Solidly Profitable Going Forward

Fannie Mae and Freddie Mac will be “solidly profitable” by the end of this year, which prompted the Treasury Department to suddenly amend its conservatorship assistance agreements, according to a new report from the Amherst Securities Group.

Treasury needed to amend its Preferred Stock Purchase Agreements to include a “repayment mechanism” allowing GSE profits to be tapped, ASG believes.

“With $188 billion of Treasury borrowing outstanding and the GSEs now profitable—the lack of a repayment mechanism required an amendment to the PSPA,” ASG analysts say in their report.

Both GSEs reported a profitable second quarter after paying a 10% dividend on their outstanding borrowings from the U.S. Treasury. Those profits were mainly driven by reductions in loan loss reserves.

By the fourth quarter, Fannie and Freddie likely will be reporting even stronger profits as their legacy loans continue to run off, being replaced by  “very profitable new issuance,” ASG’s analysts write.

Based on their financial reports, Fannie and Freddie appear to be adequately reserved to cover losses on their legacy loans.

Meanwhile, Congress is unlikely to arrive at a consensus on GSE reform anytime soon. The longer lawmakers wait, the more profitable the GSEs will become.

“The GSEs will be quite profitable by 2014, which will eliminate any sense of urgency” for congressional action, the ASG report says.

The newly amended PSPA eliminates the 10% dividend obligation. Going forward, Treasury will sweep a portion of the GSEs quarterly profits to pay off their obligations to the taxpayers.