Surprise: Fannie and Freddie Are Set to Pay Taxpayers Back

US News

It was the most eye-popping bailout of all: $187 billion in taxpayer money to rescue the wrecked housing agencies Fannie Mae and Freddie Mac. Those two agencies alone soaked up 31 percent of the $606 billion in bailout funds disbursed by the Treasury Department to dozens of organizations.

[PHOTOS: Home Construction on the Rise]

The Fannie and Freddie bailouts symbolized everything wrong with a housing boom that was fueled by funny money and implicitly backed by the federal government. Yet as the housing market has recovered from a six-year bust, so have the prospects for Fannie and Freddie. In fact, they're now set to do something that once seemed implausible: Pay back all the taxpayer money they drained, with interest.

After five years of losses totaling an unprecedented $164 billion, Fannie Mae earned a $17 billion profit in 2012, its most profitable year ever. Freddie Mac, which racked up $94 billion in losses between 2007 and 2011, earned $11 billion in 2012. Both agencies have stopped drawing taxpayer money, and through the end of 2012 they had remitted $55.2 billion worth of dividend payments to the Treasury.

It's now possible to foresee the point at which the two agencies will pay back all the taxpayer money they required. Moody's Analytics estimates that on their current course, Fannie and Freddie will return everything they owe by 2019. The break-even date could occur much sooner--perhaps just a couple of years from now--if the agencies are permitted to claim a tax break allowing them to deduct some portion of past losses.

[READ: Fannie Mae CEO Says Taxpayers Will Get Their Money Back]

In fact, Treasury now seems likely to earn a profit on its entire bailout regime, which once seemed so large it made the whole financial universe quake. Treasury has so far recouped $362 billion of the $606 billion it disbursed, plus another $115 billion in dividends and interest payments, according to the ProPublica bailout tracker. If Fannie and Freddie pay back everything they owe, the whole program will be in the black. The biggest deadbeats are General Motors (with about $22 billion of bailout funds not repaid), Ally Financial (formerly GMAC, with $10.5 billion unrepaid), CIT Group ($2.3 billion) and Chrysler ($1.3 billion).

Despite the crippling losses that came with the housing bust, keeping Fannie and Freddie alive has allowed the U.S. mortgage market to continue functioning more or less normally. During ordinary times, the two agencies backed about 45 percent of all mortgage-backed securities - the bonds that most mortgages are packaged into as a way of keeping a strong flow of investor money available for loans. The private sector accounted for most of the rest.

But since 2008 Fannie and Freddie have backed more than 90 percent of all MBSs. Without the two agencies, the flow of loans to home buyers would have almost completely dried up, with hardly any sales occurring. Home prices would have fallen much more than they did and the housing bust would probably still be ongoing. Aside from the taxpayer money they still owe, the two agencies are now in relatively sound shape, thanks to tougher underwriting standards and writedowns of past losses.

[ALSO: Fannie, Freddie Extend Program for Underwater Homeowners]

"All the loans Fannie and Freddie have booked since the housing crisis began are excellent," says Cris deRitis, an economist at Moody's Analytics. "They still have some losses in the pipeline, but everything they've written since 2009 is performing exceptionally well."

With Fannie and Freddie back on track, the pressure to wind them down or reform the whole housing-finance system may ease. But most experts think major changes are still needed--most importantly, reviving the private-sector market for mortgage-backed securities. The problem with having the government perform that role is that political pressure could generate bad lending incentives--such as the affordable housing mandate that caused some of Fannie and Freddie's problems--and that government agencies could distort free-market dynamics. Several proposals--including one from the Obama' administration--call for a hybrid model in which government agencies serve a few particular needs while private-market lenders handle the bulk of mainstream loans.

But solving that problem isn't quite as urgent as it seemed a couple of years ago, and as long as Fannie and Freddie keep sending money back to the Treasury, policymakers in Washington may find other things to worry about. When the money's coming in rather than going out, the critics tend to clam up. Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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