May 6, 2011

Freddie Mac Profit Not Sustainable

It’s puzzling that Freddie Mac last week reported a profit when the housing market is in such terrible condition. Anthony Sanders, Mercatus Center scholar and a real estate finance professor at George Mason University, explains how the profit is being made and why it will eventually run down.

“Freddie Mac is living through refinancing mortgages it purchased in the past,” Sanders said. “The sustainability of this is limited, since eventually all possible refinances will be exhausted. At that point, its profits will drop unless the housing market comes back.”

 Some are suggesting if Freddie keeps making a profit, it will be able to pay back the money it borrowed from the government and taxpayers.  But this won’t be happening anytime soon, Sanders  said.

“Even if the earnings from the first quarter continued, it would take 20 years for Freddie Mac to pay back its debt,” Sanders said. “The sad fact is that taxpayers are just going to have to absorb the losses from Fannie and Fannie. Keeping them around would, in the long term, be worse for our economy than just paying their debt and winding them down now.”

“Even if the housing market came roaring back, Fannie and Freddie could very realistically replicate the fiscal nightmare we just went through by being overly confident and takes too many risks,” he said.