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5 Years Later, Mortgage Market Still Needs Fannie Mae, Freddie Mac (Update 1)

So the conservatorship agreement left shareholders with a 20% stake in the company. Those shares plummeted to pennies on the dollar as the enormity of the bailout loomed large.

But the idea was to temporarily place the companies in conservatorship until the government could figure out how to get rid of them for good.

It was already clear back then that policymakers no longer saw a future for the old public-private model. The expensive bailout was seen as too big a price to pay for the goal of homeownership.

Aftermath

Under the leadership of the Federal Housing Finance Agency and its acting director Edward DeMarco, Fannie and Freddie have over the past five years set out on a path to return to profitability.

They have tightened underwriting standards tremendously. The average credit score of a borrower qualifying for a Fannie Mae loan is currently over 750.

The agencies have also more than doubled the fees they charge to guarantee loans.

These measures, along with improving credit quality thanks to the housing recovery, has led to record profits at the companies. Fannie Mae reported a profit of $10.1 billion in the second quarter of 2013, its sixth straight quarterly profit. Freddie Mac posted a profit of $5 billion in the second quarter.

Still, the path forward for the agencies is unknown. The conservatorship does not have a timeline. Until Congress decides how to wind them down, they remain in limbo.

Shareholders of Fannie Mae and Freddie Mac meanwhile are eager to see taxpayers repaid so that they can get a piece of the pie.

But there is no provision in the bailout agreement that allows the agencies to buy back the government's senior preferred stake in the company.

Under the original terms of the bailout, the companies paid a 10% cumulative dividend on the preferred shares, which often meant that they had to draw from the Treasury to pay the Treasury.

In 2012, the agreement was amended. Rather than pay a 10% dividend, the companies were required to transfer almost all their profits to the Treasury. Essentially the companies would not be able to build capital, a move seen as a step toward accelerating the wind-down of the GSEs.

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