Fannie, Freddie may write
down $21 billion due to U.S. tax cut: BMO
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[April 01, 2017]
NEW YORK (Reuters) - U.S. mortgage finance giants Fannie Mae
<FNMA.PK> and Freddie Mac <FMCC.PK> may write down $21 billion of
tax-related assets if there is a deep cut in the federal corporate tax
rate as promised by President Donald Trump, according to an analyst at
BMO Capital Markets on Friday.
These assets, known as deferred tax assets, are items such as tax
credits that may be used to reduce a company's taxes.
If the rate cut is lowered to 20 percent from 35 percent, the value of
Fannie and Freddie's deferred tax assets is worth less and it would be
recognized against their capital.
The two agencies, which guarantee home loans and mortgage-backed
securities, are holding little capital since they are not allowed to
retain their earnings after they have been under conservatorship or
government guardianship due to heavy losses from the housing market
collapse more than eight years ago.
Fannie drew $116.1 billion and Freddie $71.3 billion from the U.S.
Treasury Department to cover those losses. They have remitted all their
profits, which are more than their draw, to the Treasury under the
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A stands outside Fannie Mae headquarters in Washington February 21,
2014. REUTERS/Kevin Lamarque
In absence of much capital cushion, the government-sponsored enterprises (GSEs)
would need borrow nearly a total of $17 billion from Treasury, BMO's head of
fixed-income strategy, Margaret Kerins, wrote in a research note.
Such a move, however, would not hurt the value of their bonds or disrupt
mortgage market, she said.
"However, the potential for renewed draws is likely to be politically unpopular
and may spark preemptive Treasury action
and Congress to prioritize GSE reform in addition to headline risk," Kerins
(Reporting by Richard Leong; Editing by Jonathan Oatis and Marguerita Choy)
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