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Th e M Rep o RT | 55 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest which is a secondary market infrastructure that will issue mortgage-backed securities for both GSEs and handle back office and administrative functions for both companies. Most importantly, however, Blumenthal claims a merger would achieve the goal of the conservatorship. "The goal of the conservator- ship is to conserve the assets of the corporations, and a merger is entirely consistent with that goal," Blumenthal wrote in recent commentary. But the new Congress may have other ideas. Sen. Bob Corker (R-Tennessee) created S.1217 in June 2013, which called for the elimination of Fannie Mae and Freddie Mac, replac- ing them with a private insur- ance company identified as the Federal Mortgage Insurance Corporation (FMIC). Senate Banking Committee Chairman Tim Johnson (D-South Dakota) and Ranking Member Mike Crapo (R-Idaho) added to that plan and made it their own. Like Sen. Corker's earlier version, this one also includes eliminating the GSEs over a five-year period and establishing the FMIC with a few additional changes. But the likelihood of a GSE reform bill passing in its current form is low. Conservatives are not excited about the prospect of creating another giant gov- ernment entity in the FMIC. Liberals believe the bill does too little to help struggling home- owners. And members of both parties are dubious of giving up the billions of dollars in GSE profits that are swept into Treasury as part of the conserva- torship agreement. The Congressional Budget Office (CBO) released a report in early September estimating that eliminating the two GSEs and replacing them with the FMIC would reduce direct government spending by about $60 billion over a 10-year period from 2015 to 2024. Can we really expect to see any significant move- ment on GSE reform now that Republicans have a majority in both the House and the Senate? At least one research group says no. Qorvis MSL Group re- leased a report last month entitled "2014 Midterm Election Analysis: Expect Little Change." And why can we expect little change? "The reason is simple," the report stated. "The same types of stalemates that have typi- fied legislating in Washington either will continue or possibly even intensify over the next two years." We are already in the 2016 election season after all. The Republican majority in the Senate (assuming any pro- posed reform measures actually reach the Senate floor) is only 52 to 43, with more seats yet to be decided. That means if Republicans want changes, they will need some Democrats to get on board in order to achieve the 67 votes that will override a pos- sible presidential veto. Regardless, it is clear that while some type of reform is possible, it is unlikely. If anyone can push GSE reform faster, Sen. Shelby may have the motivation to do it. Time will tell. gses report moderate growth in Profits Fannie and Freddie have repaid $225B to taxpayers, yet Treasury continues to siphon their quarterly earnings. F annie Mae and Freddie Mac are set to send another $6.8 billion to the U.S. Treasury after posting mild increases in profits during the third quarter. For its part, Fannie Mae re- ported net income of $3.9 billion for the third quarter, up from a profit of $3.7 billion in Q2 but down from $8.7 billion in the year-ago quarter. According to Fannie, the increase was driven primarily by lower fair value losses and an in- crease in revenues. Also contribut- ing to the third-quarter boost was a recently announced settlement between Goldman Sachs and the GSEs' conservator, the Federal Housing Finance Agency (FHFA), over faulty residential mortgage- backed securities (RMBS). In a sour sign for the housing market, a shrinking portion of Fannie's earnings stemmed from credit-related income—$836 mil- lion compared to $1.9 billion the prior quarter. The company said the decrease was mostly due to a decline in its benefit for credit losses as home price appreciation continues to slow. Fannie also acknowledged that a growing share of its revenues in recent years have come from increases in guaranty fees, a trend the company expects to continue as its mortgage portfo- lio contracts. Meanwhile, Freddie Mac reported net income of $2.1 billion for Q 3, up from $1.4 bil- lion in the prior three months. The company attributed the increase to lower derivative losses stemming from an upturn in long-term interest rates and the same RMBS settlement that benefited Fannie. Those improvements were counterbalanced against a drop in Freddie's provision for credit losses "driven by a slight worsening in loss severity," the company said. As a result of their profitable quarter, Fannie says it expects to pay $4 billion in dividends to Treasury in December, while Freddie will pay $2.8 billion. By the end of this year, the two GSEs, which have been in con- servatorship since 2008, will have returned a combined $225.5 billion to taxpayers—nearly $40 billion more than the amount the two companies were forced to draw to keep afloat in the aftermath of the financial crisis. Despite the over- age, the GSEs' agreement with the government stipulates they must continue to pay. That agreement has drawn the ire of the companies' shareholders, some of whom are trying to take the government to court on claims it has robbed them of their share of the profits and kept the GSEs from returning to normalcy. Meanwhile, Washington continues to debate over what should happen to the two mortgage giants as policymak- ers work to revive private-label securitization and diminish the government's role in the mar- ket. While there has been some support for plans to wind down the GSEs and replace them with a government corporation, those plans remain up in the air in the wake of Republicans' takeover of the Senate. "The same types of stalemates that have typified legislating in Washington either will continue or possibly even intensify over the next two years."