Fannie Mae, Freddie Mac Help Uncle Sam Shrink Deficit: CBO

NEW YORK ( TheStreet) -- The U.S. budget deficit in 2013 is projected to shrink faster than earlier thought, thanks in large part to the government's new cash cows, bailed-out housing giants Fannie Mae ( FNMA) and Freddie Mac ( FMCC).

The Congressional Budget Office on Tuesday said the budget deficit will shrink this year to $642 billion , the smallest shortfall since 2008. The projection was $203 billion smaller than the $845 billion shortfall forecast by CBO in February.

The budget agency said the decline in the projected deficit for 2013 "stems largely from a boost in in estimated revenues as well as from expected payments to the Treasury by Fannie Mae and Freddie Mac."

The CBO projects a $95 billion increase in estimated payments from the housing giants. The increase in estimates came after "certain accounting significantly raised the entities' estimated net worth for this year."

The revised estimates are a direct result of the turnaround in Fannie Mae and Freddie Mac, known as the GSEs.

The government-sponsored mortgage giants were taken under government conservatorship at the height of the financial crisis in September 2008. Under the revised terms of the bailout agreement, the two companies are required to pay quarterly dividends to the U.S. government equal to their net worth in excess of $3 billion.

Both the agencies have returned to solid profitability in recent quarters on the back of the housing recovery. Fannie Mae last week reported a whopping profit of $58.7 billion , setting it up to pay a $59.4 billion dividend to the U.S. Treasury.

That profit largely stemmed from the company's release of $50.6 billion in deferred tax assets -- a tax write-off that a company can utilize only if it has a more than 50% probability of reporting a profit in the following year.

Freddie Mac also expects to release $30.6 billion in deferred tax assets as soon as the second quarter.

Fannie Mae's one-time dividend to the U.S. Treasury was so significant, Treasury Secretary Jack Lew said it would delay the deadline to raise the debt limit to at least Labor Day.

Future dividends from the GSEs will likely be smaller, but the fact is that the government is earning a handsome yield on its investment. TheStreet's Philip van Doorn calculates that the government's annual dividend yield on Fannie Mae preferreds is 16.23%.

Meanwhile, there is no plan in place to allow either of the housing giants to repurchase the government's stake and return to their private forms.

Nonetheless, hedge funds are lobbying Washington to return the companies back to private hands and are betting on the junior preferred shares of the companies, which have had their dividends suspended since September 2008.

Political observers, however, say this is total fantasy and ignores political reality.

-- Written by Shanthi Bharatwaj New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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