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U.S. Made Profit on Mortgage Debt

Published: March 19, 2012 | 8:16 am
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In the latest sign of the government’s gradual retreat from financial-crisis-related programs, the Treasury Department is expected to announce Monday that taxpayers reaped a $25 billion profit on mortgage bonds purchased at the height of the meltdown.

The profit is the Treasury’s biggest for any program tied to the 2008-09 crisis. The government last week sold the last of the bonds, winding down Treasury’s ownership of debt backed by the federally backed mortgage investors Fannie Mae and Freddie Mac. Treasury spent $225 billion on purchases over 16 months before it began selling the securities last year.

Officials said the effort shows the government can unwind a rescue program without roiling markets. How asset prices might respond to the eventual curtailment of government support has been a tense subject for investors in recent years.

“We said if we thought there was any stress in the market around this, we would pull back,” said Mary Miller, the Treasury’s assistant secretary for financial markets. “We frankly never saw that and just continued.”

Even so, the announcement underlines the extent to which government support has driven the recovery of financial markets and the costs of that far-flung effort.

The Treasury’s mortgage purchases were just one aspect of government support for banks, financial markets and the housing sector. The related federal takeover of Fannie Mae and Freddie Mac has cost $151 billion. Treasury’s mortgage-debt program was in force at a time when the Federal Reserve was supporting that market by buying and holding hundreds of billions of dollars of mortgage debt, and boosting all financial markets by keeping short-term interest rates near zero.

The Treasury also disbursed $414.3 billion under the Troubled Asset Relief Program, which aimed to restore investor confidence in U.S. financial firms. Through Friday, the program had collected $331 billion from dividends, interest, disposals and other revenue. The Congressional Budget Office in December forecast a lifetime cost of $34 billion for TARP.

Though major aid recipients such as Citigroup Inc. C +1.16% have repaid all their loans, the government still owns majority stakes in American International Group Inc. AIG -0.18% and Ally Financial Inc., along with a minority stake in General Motors Co. GM -1.84% and investments in hundreds of smaller banks.

Criticism of TARP
Some critics charge that many programs were too generous to banks while failing to help the housing market, which remains sickly.

“Essentially, TARP successfully stabilized markets and helped prevent another Great Depression, but it failed horrifically in meeting its equally important Main Street goals—including preserving home–ownership—and institutionalized Too Big to Fail and the moral hazard that accompanies it,” said Neil Barofsky, the special inspector general for TARP from 2008 until early 2011 and now a New York University law professor.

The Treasury began buying the mortgage bonds in September 2008, the month the government took over Fannie Mae and Freddie Mac, which guaranteed the securities and used to be large buyers of them.

A broad housing bill passed by Congress that summer gave the government authority to place Fannie and Freddie under federal control and to buy the mortgage-backed securities. Weakness in the housing market and investor concerns about the financial health of Fannie and Freddie had caused “spreads” on mortgage-backed securities to widen significantly, to more than two percentage points over comparable Treasury bonds, versus about one percentage point in normal times. The spread measures the perceived riskiness of the securities relative to safer assets.

Bonds Rise in Value
The Treasury completed its mortgage-bond purchases in December 2009, accumulating as much as $191.6 billion of the debt. The government’s holdings of the bonds lagged behind its spending on them because the portfolio balance falls when maturing securities pay off. Though the outlook for the housing industry remains poor, the market for the securities had improved enough by March 2011 that the department announced plans to start selling off its portfolio in $10 billion chunks over the course of a year or so.

Since then, agency mortgage-backed bonds have risen in value and spreads have narrowed. Investors have been attracted to the mortgage assets because they offer better returns than other government bonds while presenting similarly low risk, thanks to the government’s backing of Fannie and Freddie. Spreads on agency mortgage-backed securities are now about 0.8 percentage point.

“Overall, the agency mortgage market has done very well, because you could pick up an incremental spread over Treasurys while having the same type of credit risk as Treasurys,” said Credit Suisse analyst Mahesh Swaminathan.

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