Freddie Mac Asks for More Federal Funds as Fate of GSEs Discussed in Washington

By Dees Stribling, Contributing Editor

Freddie Mac’s request for $1.8 billion to sustain its reserves through the next quarter may have followed on sister Fannie Mae’s bid for its own fresh multibillion-dollar infusion, but in the scheme of things it amounts to barely a drop in the bailout bucket.

Late last week, Freddie Mac posted a $4.7 billion net loss for the second quarter of 2010, compared with a $6.7 billion loss during the first quarter. Freddie Mac also reported that at the end of the second quarter it had a net-worth deficit of $1.7 billion, an improvement from the end of the first quarter , when the figure stood at $10.5 billion. At the end of the second quarter of 2009, however, the GSE had positive net equity of $7.6 billion.

The request for $1.8 billion is essentially a request that the U.S. Treasury return the dividend that Freddie Mac paid the government for the second quarter as the main preferred shareholder of the GSE. In comparison, so far the federal government, which controls the GSEs through a conservatorship established nearly two years ago, has provided roughly $160 billion in funds to keep Fannie Mae and Freddie Mac going.

Freddie Mac CEO Charles Haldeman Jr. acknowledged the federal life support in his statement on the second quarter results: “We recognize that high unemployment and other factors still pose very real challenges for the housing market,” he noted. “With that in mind, we continue to focus on the quality of the new business we are adding to our book, to be responsible stewards of taxpayer funds as we support the nation’s housing market.”

And the life support for both Freddie and Fannie are widely understood to be temporary, as political pressure builds to reform the GSEs in one way or another. The proposals include the radical–such as abolishing the two as hated symbols of government interference in the economy. But for now reform, rather than killing off the GSEs, seems to be in the cards.

Late in July, former U.S. Treasury Secretary Henry Paulson (not one of the radical GSE abolitionists) wrote in a Washington Post op-ed that the two should be run like utilities: “Congress could … restructure Fannie and Freddie to create one or two private-sector entities that would purchase and securitize mortgages with a credit guarantee explicitly backed by the federal government and paid for by the new entity,” he noted. “These privately owned entities would be set up like public utilities and governed by a rate-setting commission that would establish a targeted rate of return.”

On Aug. 17, various financial-company executives, affordable-housing advocates, academics and others will meet under the auspices of Treasury to hash out ideas for the future shape of Fannie and Freddie. Treasury Secretary Timothy Geithner, as directed by the financial reform act passed earlier this summer, will unveil the administration’s plan to deal with the GSEs in January.

“We think the administration’s conference will feature a robust debate that we hope will coalesce around the most important issue moving forward–ensuring mortgage liquidity during periods of market stress , such as we are experiencing today,” Michael Berman, chairman-elect of the Mortgage Bankers Association, told CPE on Monday. “Hopefully, the event will empower the administration to create a proposal based on bringing private risk capital back to the market, encouraged through a limited and explicit government role.”

Berman added that the government function could be structured to protect taxpayers through a pay-as-you-go guarantee of specific types of lower risk. “The objective is to recreate a vibrant, competitive secondary market that can become a smoothly functioning engine for prudent economic growth in the housing sector,” he said.