This increase was mainly due to the appreciation of its investments and a decrease in liabilities. While on the surface this is good news, Fannie Mae remains extremely undercapitalized when compared to other financial institutions in the country.
Fannie Mae is a government sponsored enterprise (GSE), created by the federal government to promote homeownership and housing finance. It buys mortgage loans from lenders, packages them into securities and then sells them to investors. As a GSE, it has access to certain privileges that other financial institutions do not have, including an implicit government guarantee.
For years, Fannie Mae's aggressive portfolio strategy led to substantial profits. However, the events of the 2008 financial crisis exposed its weakness as the company’s portfolio and leverage were too large and too risky. As a result, it had to be taken over by the Federal Housing Finance Agency (FHFA) in 2008.
Since then, Fannie Mae has implemented a number of changes in order to comply with regulatory guidelines and rebuild its capital base. This included a reduction in its portfolio size and transitioning from an active investment approach to a passive investment approach.
As a result of these efforts, Fannie Mae’s financial position has gradually improved and its net worth has doubled since last year to reach $43.4 billion. However, despite these improvements, Fannie Mae remains extremely undercapitalized compared to other financial institutions. For example, its capital levels are lower than the originally mandated 4 percent minimum required by the FHFA.
Furthermore, the GSEs have had to pay Treasury $195 billion in dividends since they were taken over by the government in 2008. Since they can no longer retain profits, this puts significant pressure on their ability to build capital.
The lack of capital reserves poses serious risks to the financial system and could potentially cause a repeat of the 2008 crisis. Therefore, it is essential that Fannie Mae builds up its capital base in order to ensure its long-term stability and mitigate the potential risks to the financial system.
The FHFA recently proposed new capital rules for the GSEs which would require them to hold significantly more capital. However, those rules are still pending and it is unclear when or if they will be enforced.
In summary, Fannie Mae’s recent doubling of its net worth is good news, but it remains significantly undercapitalized relative to other financial institutions. This poses serious risks to the financial system that must be addressed through stronger regulatory oversight and higher capital requirements. Until then, it is uncertain whether or not Fannie Mae will be able to survive without taxpayer-funded bailouts.
This article was contributed on Nov 18, 2023