Two of the largest US institutions are at risk of going wobbly.  Fannie Mae lists $3 trillion and Freddie Mac lists $1.7 trillion  in securitized mortgages that they sold to banks usually with guarantees.  According to some sources, their impressive performance in recent years may be drawing to a close and their federal masters have set policies that could make them candidates for another bailout.

During the housing market crisis, the value of many mortgages securities in Fannie and Freddie’s portfolio was questionable. The concerns were strong enough to suspect the value of those assets was less than the amount borrowed to buy the original mortgages. To avoid a massive bankruptcy that would devastate financial markets, the Congress initiated a $188 billion bailout and seized control.

Congress ordered Treasury to collect 10 percent dividend payments from Fannie and Freddie quarterly. In 2012, Treasury changed that to a “sweep amendment,” i.e. Treasury takes most of the profits.

These moves were opposed by many. One group of Fannie and Freddie stockholders contend that Fannie and Freddie would have residual equity value, possibly huge value, had the Treasury not bled them dry, thwarting a return to normal operations and regular profitability. The court ruled that given Fannie and Freddie performance, the plaintiffs may have a reasonable claim, but that the government said otherwise, which sounds like court acceptance of the “might makes right” principle.

The plaintiffs were right. Fannie Mae paid $20.6 billion in dividends during 2014, and by the end of March 2015 it will have paid a total of $136.4 billion in dividends to Treasury.  Since 2008, Fannie Mae has taken Treasury draws (bailout), totaling $116.1 billion, but since bailout was construed to be a loan rather than an equity infusion (as the GM bailout, much of it was equity), dividend payments do not reduce the bailout owed.  Payday loan operators could profitably emulate Treasury’s model.

Fannie Mae and Freddie Mac have been a gusher of dividends and yet they still owe the $188 billion bailout loan.  Fannie and Freddie’s dividend stream allowed Congress and the White House to continue their big spending ways.

Unfortunately earnings have weakened by 90% in the last year.  Fannie Mae earned just $1.3 billion in the 4th quarter of 2014, down from $6.5 billion a year ago, and it will send $1.9 billion in “dividends” to the U.S. Treasury in March. On a parallel track, Freddie MAC reported earnings of $227 million in the 4th quarter, down from $8.6 billion a year ago, and it will send $900 million in dividends to the Treasury.

A substantial part of the net income decline is attributable to the 2013 clustering of settlements from banks for some faulty mortgages they sold to Fannie and Freddie in the run up to the great recession.   Freddie Mac also suffered an embarrassing $3.4 billion in interest rate derivatives losses during 2014.

Home prices are firming, borrower finances are generally better and mortgages are less likely to go into default, except for the planned 3% down payment loans which might reintroduce mortgage risk similar to what precipitated the 2008 great recession. These loans may be politically stylish, but they increase lenders’ and guarantor’s risk.

Besides demanding all the profits from Fannie and Freddie, the Treasury prevents them from using profits to provide sufficient capital to continue operations throughout times of economic and financial stress.   That shortsighted policy is the converse of what the Federal Reserve and Dodd-Frank impose on large banks.  These factors could make it impossible to deliver large dividends, repay the bailout loans, and fend off any economic shocks, without the need for more bailout funds.

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research