The company says its net income decreased because of a drop in long-term interest rates that altered the value of those derivatives that were being used as a hedge to risk.
Meanwhile on Tuesday its smaller sibling, Freddie Mac (FMCC) reported its first loss in four years. The mortgage buyer logged a $475 million loss, which it blamed on interest rate declines.
Both Fannie Mae and Freddie Mac said market volatility contributed to their decrease in profits.
In 2008, the Federal government had to issue a $188 billion bailout to Fannie and Freddie. As a condition of the bailout, however, all of the combined profits go directly to the U.S. Treasury as ‘dividends.’ The agreement also requires that the companies reduce their capital reserves to zero by 2018.
Prior to the bailout, government-sponsored enterprises (GSE) Fannie and Freddie functioned as privately owned companies that were chartered by the government.
Both are regulated by the Federal Housing Finance Agency (FHFA). Following Freddie’s loss in profit (the first time since 2012), Director Mel Watt issued a statement signaling the possibility of the companies’ need for a capital injection from the U.S. Treasury: “Volatility in interest rates coupled with a capital buffer that will decline to zero in 2018...will likely make both Enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws going forward.”
Fannie CEO Tim Mayopoulos expressed his concern to Yahoo Finance: “We’ve been focused on our declining capital for some time and that number is going down each year. We currently have $1.8 billion and it will be zero in 2018. It is difficult to run a $3 trillion business with no capital. We won’t have a cushion of any size to operate with.”
Fannie Mae expects to pay $2.2 billion in dividends to Treasury in December 2015. With that expected payment, the company will have paid a total of $144.8 billion in dividends to the Treasury. Taxpayers paid $116 billion for Fannie’s bailout in 2008.
Mayopoulos says it’s ultimately the responsibility of policymakers to determine the future of Fannie Mae.
“Our companies are at an increased risk at any given quarter, and that loss will be borne by the taxpayers. This isn’t an issue that Washington is ignorant of; it’s just a matter of whether or not they want to address it,” he said.