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BMO analyst: Fannie, Freddie may write down up to $21B if tax reform passes

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BMO analyst: Fannie, Freddie may write down up to $21B if tax reform passes

Fannie Mae and Freddie Mac could write down as much as $21 billion of tax-related assets if the Trump administration is successful in its tax reform efforts, according to an analysis from BMO Capital Markets.

Based on 2016 year-end financials, a corporate tax cut could result in a decline of $14.4 billion and $6.8 billion in deferred tax assets at Fannie Mae and Freddie Mac, respectively, during the quarter that the legislation is enacted, BMO analyst Margaret Kerins wrote in a March 31 research note. The assumption is based on the federal corporate tax rate being reduced to 20% from 35%, which could increase the possibility of renewed draws by the government-sponsored enterprises from the Treasury Department to cover potential losses. Using average quarterly estimates over the prior two years, BMO estimated that the tax cuts could result in Treasury draws of $11.6 billion for Fannie Mae and $5.2 billion for Freddie Mac.

Shortly after Congress approved a bill placing the two GSEs into conservatorship in September 2008, the Federal Housing Finance Agency crafted an agreement granting them the ability to make quarterly draws from the Treasury. Shortly after being nominated, Treasury Secretary Steven Mnuchin emphasized the importance of removing the agencies from government control as part of a broader effort to reshape the nation's housing market.

BMO views the necessity of further draws as a "politically unpopular" move that could trigger pre-emptive Treasury action and possibly compel Congress to prioritize GSE reform.

Beginning in the second half of 2008, Fannie Mae and Freddie Mac started writing down their deferred tax assets amid concerns that they would not be able to generate enough income from the allowance. But by 2013, the GSEs determined that their deferred tax assets were recoverable as home prices rose in value, Kerins noted.