Obama’s $89 billion Fannie-Freddie payday

February 14, 2011, 10:28 PM UTC

Ready to start cashing in on your generous support of Fannie Mae and Freddie Mac?

The Obama administration is. Its budget, released Monday, forecasts that the mortgage companies – which have consumed a net $131 billion in taxpayer funds since their 2008 takeover – will start generating cash for the government the year after next.

Check, please

All told, the administration expects the companies to make $89 billion in net payments to the government over the next decade. It says those payments will slash the net cost of backing Fannie and Freddie to $73 billion.

That’s barely half of the net cost (reflecting government support payments minus dividends the companies pay Treasury) of propping up the companies as of now.

At first blush the forecast sounds implausible, given the massive drain these companies have been over the past few years. It won’t escape notice that the projection will give the administration a tiny shove in the right direction on the deficit front.

But then, few people would have believed you two years ago if you had said the feds would get in and out of Citigroup (C) at a profit. If the economy continues to recover and the housing market avoids another serious downturn — admittedly, two rather large ifs — Fannie and Freddie could end up looking, at the very least, like a smaller, cheaper albatross.

“They could easily be right with their projections,” said Doug Elliott, an economic studies fellow at the Brookings Institute. “But the big question is what happens with housing, and of course no one can know what that answer is now.”

The administration projects the government will pour an additional $88 billion into Fannie and Freddie over the next three years, on top of the $150 billion or so they had received through 2010.

Windfall profits ahead?

But while the companies have acted like bottomless pits for taxpayer funds over the past three years, the government is betting that dynamic is about to reverse.

Under the terms of the companies’ government conservatorship, Uncle Sam lends them money to fill holes in their balance sheet opened up by losses they sustain on their bubble-era mortgage commitments. In return, the companies pay the government a 10% dividend on those loans.

Losses from bad loans, principally those made between 2005 and 2007, have been slowing down as house prices flatten out following a sharp decline in markets such as California, Florida and Nevada.

Meanwhile the government’s loans to the companies continue to accumulate — which means bigger and bigger dividend checks.

Accordingly, the administration expects $17 billion in dividend checks this year and $21 billion next year before that flow tops out at $23 billion in 2013.

Starting in 2014, the government expects to put no money into Fannie and Freddie, which by then are supposed to be well into a program to shrink their balance sheets and raise their prices to lure private investors into the mortgage market.

Meanwhile, it expects to collect $85 billion in dividends between 2014 and 2021, as taxpayers collect on their support for the companies during the bleakest days of the housing collapse.

All this is dependent, of course, on the economy continuing to recover and the housing market avoiding another collapse, even as policymakers begin an overhaul of a dysfunctional U.S. mortgage market that played a large role in feeding the last boom and bust.

“The administration will work with the Congress to pursue reform of the system that best fulfills these principles while engaging a wide range of stakeholders,” the government says in its budget proposal.

Also on Fortune.com: