Does a Fannie Mae or Freddie Mac Profit Translate to Taxpayers?

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If you were as actively monitoring the financial giants as we were during the financial meltdown, you know all about the woes of Fannie Mae (FNMA). So when news came out this morning that the company managed to post a profit, we wanted to take a look. This stock saw a huge run up in recent weeks, only to see its share price come crashing down.

We were a bit surprised to see a total profit of $17.2 billion for all of 2012 on Tuesday. This compared to a loss of $16.9 billion in 2011. With the number being so large and the first profit in six years, it had to be assumed that there were issues inside the numbers. A recovery in housing and lower and lower problem loans were the main culprit.

One quote stood out: the CEO signaling that earnings are now expected to remain strong over the next few years. The next few years?

Behind the earnings was a boost from the large rise in housing prices. The move allowed Fannie Mae (and Freddie Mac for that matter) to set aside much lower reserves against defaults. We have been tracking this with much regularity, but it is nice to see that this came about for the quasi-government agencies that are under conservatorship.

If you read into the outlook lasting a few years, then the translation may be that interest rates have been telegraphed to remain extremely low to Fannie Mae and Freddie Mac as well. We have said that there is a conflict of interest in the Federal Reserve’s pegging of low rates or no rates for such a long period. Maybe it is simply nothing more than having to include the Fannie Mae and Freddie Mac as formal obligations.

Fannie Mae shares are up 14% again, at $0.90 against a 52-week trading range of $0.09 to $1.47. We are encouraged to see this, but for some reason we just do not really see Fannie Mae nor Freddie Mac not being kept as likely taxpayer obligations down the road.