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Investments

GSE reform suddenly a pipe dream

June 10, 2013

Right now, Fannie Mae and Freddie Mac are awash in feel-good vibes from Standard & Poor's. The credit ratings agency reported that the strong performance from both government-sponsored enterprises factored into the decision to revise the nation's credit outlook upward.

Last month, Fannie Mae reported first-quarter pre-tax net income of $8.1 billion, compared to $7.6 billion from the previous quarter, as a result of strong credit results driven by an improving housing market.

Similarly, Freddie Mac posted first-quarter net income of $4.6 billion, up slightly from $4.5 billion in the fourth quarter of 2012 and the second largest profit in enterprise history.

"Combined with Freddie, which is still analyzing the valuation of its deferred tax position, Treasury will get more than $65 billion this quarter," wrote Jim Vogel, an analyst at FTN Financial in an email on the earnings. "That is $55 billion more than officially expected and will cramp bill sales even more unless Treasury decides to float a higher cash position through the summer."

So now that Fannie and Freddie are directly involved in driving investment interests in this nation, how likely can it be that well-minded GSE reform legislation stands a chance of passing into law?

Sen. Bob Corker, R-Tenn., for example, is leading a bipartisan group in the hopes of creating legislation constructed to reform the housing finance system.

Corker’s push on Capitol Hill is a testament to the current sentiment toward government’s dominance in the mortgage market.

But like it or not, Fannie and Freddie are now drivers of growth and investment.

Attempts at GSE reform in the short term now feels destined to fail.

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