How much reduction would Republican tax plan would cause for GSE’s deferred tax assets? And does this write down of DTA mean that GSE have to be placed into receivership rather than recap/released because GSE has to draw from Fed?
Report from Housingwire
As Fitch Ratings noted earlier this year when broaching this very topic, the GSEs’ deferred tax assets consist primarily of “deferred fees, basis differences related to derivative instruments, mortgage related assets and allowance for loan losses.”
When Fitch calculated the estimated impact of a reduced tax rate in February, it based its calculations on Fannie’s DTA of $35.1 billion and Freddie’s DTA of $18.7 billion.
Under that scenario, if the corporate tax rate is cut from 35% to 20%, Fannie would write down its DTA by $15 billion, while Freddie would write down its DTA by $8 billion.
However, each of the GSEs current DTA is less than it was in February. A review of each of the GSEs’ 3rd quarter earnings materials shows that Fannie’s DTA is currently $30.45 billion, while Freddie’s DTA is $14.58 billion.
So the write down would be less than Fitch originally projected, but the likelihood of Fannie and Freddie needing another bailout would significantly increase under the Republican tax proposal because each of the GSEs’ profit in the given quarter is likely to be less than the write down amount.
Based on GSE’s 3Q earnings materials,my calculation of the write down of Fannie’s DTA is $30.45-$30.45/35%*20% = $13 bil; Freddie’s DTA is $14.58-$14.58/35%*20% = $6.3 bil. Comparing with 3Q net income of Fannie $3 bil, Freddie $4 bil, I think the write down of DTA will probably trigger a draw from Fed even if GSE can preserve all capital. Does this mean that GSE have to be placed into receivership rather than recap/released? I am really concerned here.
full article of Housingwire (tax plan will impact GSE _ HousingWire)
Fitch ratings note (tax cuts could force GSE bailout _ HousingWire)
About Timeless Investor
My name is Samual Lau. I am a long-term value investor and a zealous disciple of Ben Graham. And I am a MBA graduated in May 2010 from Carnegie Mellon University. My concentrations are Finance, Strategy and Marketing.
TimelessInvestor
Republican tax plan would reduce GSEs’ deferred tax assets significantly
How much reduction would Republican tax plan would cause for GSE’s deferred tax assets? And does this write down of DTA mean that GSE have to be placed into receivership rather than recap/released because GSE has to draw from Fed?
Report from Housingwire
As Fitch Ratings noted earlier this year when broaching this very topic, the GSEs’ deferred tax assets consist primarily of “deferred fees, basis differences related to derivative instruments, mortgage related assets and allowance for loan losses.”
When Fitch calculated the estimated impact of a reduced tax rate in February, it based its calculations on Fannie’s DTA of $35.1 billion and Freddie’s DTA of $18.7 billion.
Under that scenario, if the corporate tax rate is cut from 35% to 20%, Fannie would write down its DTA by $15 billion, while Freddie would write down its DTA by $8 billion.
However, each of the GSEs current DTA is less than it was in February. A review of each of the GSEs’ 3rd quarter earnings materials shows that Fannie’s DTA is currently $30.45 billion, while Freddie’s DTA is $14.58 billion.
So the write down would be less than Fitch originally projected, but the likelihood of Fannie and Freddie needing another bailout would significantly increase under the Republican tax proposal because each of the GSEs’ profit in the given quarter is likely to be less than the write down amount.
Based on GSE’s 3Q earnings materials,my calculation of the write down of Fannie’s DTA is $30.45-$30.45/35%*20% = $13 bil; Freddie’s DTA is $14.58-$14.58/35%*20% = $6.3 bil. Comparing with 3Q net income of Fannie $3 bil, Freddie $4 bil, I think the write down of DTA will probably trigger a draw from Fed even if GSE can preserve all capital. Does this mean that GSE have to be placed into receivership rather than recap/released? I am really concerned here.
full article of Housingwire (tax plan will impact GSE _ HousingWire)
Fitch ratings note (tax cuts could force GSE bailout _ HousingWire)
About Timeless Investor
My name is Samual Lau. I am a long-term value investor and a zealous disciple of Ben Graham. And I am a MBA graduated in May 2010 from Carnegie Mellon University. My concentrations are Finance, Strategy and Marketing.