WASHINGTON — There's an elephant in the room amidst discussions on how to unwind Fannie Mae and Freddie Mac — the two government-sponsored enterprises are now making money hand over fist.

The entities rebounded to profitability roughly two years ago, after being put in conservatorship in September 2008 near the start of the financial crisis. Indeed, the GSEs are coming close to having sent back funds equal to the amount of government aid they received.

Their income is complicating the debate over housing finance reform and even raising fresh questions about whether they should be dismantled at all.

Following are some frequently asked questions about those profits and the impact on reform efforts in Congress.

How profitable are the GSEs right now?

In the third quarter of 2013, the most recent data available, Fannie Mae reported net income of $8.7 billion and Freddie Mac said it earned $30.5 billion — with the majority of those funds sent to the Treasury Department in the form of dividends. Fourth-quarter earnings reports from the two GSEs are due out soon.

Due to their arrangement with Treasury, the GSEs have not paid down any of the principal they owe on the nearly $190 billion they drew from the government, though they are coming close to having sent Treasury that amount in dividends. Since Fannie and Freddie began to turn a profit in late 2011 and early 2012, questions about whether the entities should be unwound have begun to crop up.

Most policymakers, including the Obama administration, have played down that idea and many warn that the government windfall from the GSEs is unlikely to continue at the same pace indefinitely.

Michael Stegman, a counselor to the Treasury Secretary on housing finance policy, said at an industry speech in January that he's concerned recent earnings "may significantly overstate the true financial condition of the enterprises."

He pointed out that through the first three quarters of 2013, $75 billion of the net income reported by the GSEs was due to one-time tax reversals that will soon end. Another $11 billion came from the release of loan loss reserves, while $10 billion came from one-time settlements with banks over legacy mortgage-backed securities.

Moreover, Stegman noted that 60% of the remaining income in the first nine months of 2013 stemmed from the enterprises' retained investment portfolios, which are required by the government to shrink by 15% per year. He also warned that the portfolios, while still profitable, "remain a continuing source of volatility and taxpayer risk."

Going forward, the GSEs are likely to continue to making money, albeit at much lower levels.

"They're still going to be profitable, they're just not going to be on the same order of magnitude profitable," said Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute. "Profitability is not going to look nearly like this year, because some of the one-time items are huge."

Analysts suggested that future profitability is likely to be influenced by a number of factors, including the health of the mortgage market and policy decisions made by Mel Watt, director of the Federal Housing Finance Agency, which oversees the GSEs.

How has this impacted the GSE reform debate?

Even if some of the limited-time charges, like the deferred-tax assets, are artificially pumping up profits at Fannie and Freddie in the near term, the money appears to be playing a role in the debate over GSE reform in Congress.

"Clearly it slows any sense of urgency, because the GSEs are basically being used to help subsidize the government deficit," said Goodman.

The problem is largely a political one, coming at a time when concerns about the deficit remain high, and Stegman's comments are notable for trying to downplay the impact of the profits.

"Given our tight budget conditions, any time you have money coming in to make the budget picture look better or for a program you want, it becomes attractive," said Edward Mills, a policy analyst at FBR Capital Markets. "If the administration is successful in talking down the future value of this revenue stream, that's how you get members to tackle reform — by giving up that stream."

But those interested in reform are still facing somewhat of an uphill battle.

"I'm left with the question of how often in the history of the federal government has Congress willingly removed a dedicated source of revenue from its budget," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.

The argument is particularly critical because it gives cover to lawmakers who aren't sold on the need for immediate mortgage finance reform — what Mark Calabria, director of financial regulation studies at the Cato Institute, calls the "mushy middle." Lawmakers are already finding it difficult to move GSE legislation through Congress in the absence of a pressing crisis, and the income from the enterprises simply adds to that inertia.

The big profits "have made reform less likely this year, but I don't think it kills reform forever, because they'll get back to having profits in the single-digit billions," Calabria said. "The difference it has made is with the mushy middle — people who didn't have strong feelings either way."

What are the other potential consequences?

The strong profits at the GSEs have also raised questions about how the Congressional Budget Office might score a housing finance reform bill, which could affect its chances for success given the current fiscal environment.

"If you take controversial legislation like GSE reform and say it's going to cost more money, it won't go anywhere," said Jeb Mason, a managing director at Cypress Group.

Determining the budget score for any piece of legislation overhauling the mortgage market is a complex process, and will take into account a number of factors — not limited to the length of the transition to a new system and how the GSEs are wound down.

But at least for now, those pushing for reform appear to have the numbers in their favor.

"Shrinking them reduces the risk to taxpayers irrespective of the dividends they are currently paying to Treasury, so I would not expect GSE reform to face a CBO scoring problem," Mason said.

With the GSEs in conservatorship, the CBO projects future mortgage guarantees provided by Fannie and Freddie as costing taxpayers money — and thus shutting them down would be a savings, generating a positive budget score. That's because the agency uses a form of fair value accounting that considers the future probability of costs associated with their business.

Essentially, the agency considers a mortgage guarantee from the GSEs to include a credit subsidy from the federal government based on the long-term estimated cost to the government of the guarantee. The large profits currently being generated, which are already considered to some degree in CBO's baseline, don't undo that because those profits don't fully account for the cost of that subsidy. Moreover, any profits generated and sent to Treasury are considered an intra-governmental transfer.

In October, the agency scored House legislation by Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, to unwind the GSEs and get rid of the government backstop for the mortgage market, estimating that winding down Fannie and Freddie would reduce direct spending by $6.7 billion. (Overall, the bill, which would also make significant changes to the Federal Housing Administration, was estimated to reduce the deficit, which includes changes in spending and revenue, by $5.7 billion.)

Still, some advocates for reform continue to warn that Congress should act to unwind the GSEs quickly, rather than let them linger — both because an economic downturn could potentially put them back at financial risk again and because the longer they are around, the more possible it is that CBO could change some of its modeling assumptions about the subsidy cost of the enterprises.

Sen. Bob Corker, R-Tenn., who has led efforts to write a GSE reform bill in the Senate with Sen. Mark Warner, D-Va., has been vocal on the issue.

"Very soon, in order to rid ourselves of the situation that we have on our hands, we're going to have a major pay-for," Corker said at an industry event hosted by the Financial Services Roundtable in early January. "We haven't hit that point yet, but very soon, we'll hit that crossing hour where Congress has to come up with a pay-for to end this arrangement."

How do g-fees factor in?

Another hurdle for those interested in overhauling the mortgage finance market is the ongoing concern that lawmakers could use the entities' guarantee fees to fund unrelated budget provisions.

Already impacting any budget score for winding down the GSEs is a two-month extension of the payroll tax cut passed in December 2011. The $33 billion provision required Fannie and Freddie to raise their guarantee fees 10 basis points through Oct. 1, 2021, to offset the cost of the extension.

A bipartisan group of senators introduced a bill last March to prevent the use of g-fees to offset other government spending, with a companion bill introduced in the House in June. Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Mike Crapo, R-Idaho, the panel's ranking member, included a similar provision as an amendment to the Senate's fiscal year 2014 budget resolution, where it passed with unanimous consent.

Housing and banking groups have also been active in warning that ongoing use of the g-fees for budgetary purposes impacts the mortgage market and will make GSE reform harder. So far, all of these efforts have been successful in helping to shield the g-fees from being used to pay down other government activity.

"The strong leadership of Chairman Johnson and Ranking Member Crapo, as well as the united opposition of the housing industry, has made the use of Freddie and Fannie g-fees for deficit reduction increasingly unlikely in the future," said Dwight Fettig, former staff director for Johnson and a partner at Porterfield, Lowenthal, Fettig & Sears.

But despite those efforts, it's still possible the fees could be used as an offset in the future. The issue most recently came up several weeks ago, as the Senate debated a plan for a three-month unemployment insurance extension, when at least one prominent budget group suggested using the g-fees, along with other possible options, to help pay for the $6.4 billion short-term extension. The bill did not include the g-fees as a pay-for, and ultimately failed to get enough support to avoid a filibuster.

"While we have legislation out there that many, many members have signed on saying, 'cross my heart, we'll never touch the [g-fees] again for anything else'… nobody believes that. It's always on the use list," said Warner at the Roundtable event in early January.

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