Fannie Mae and Freddie Mac executives warned that their solid first-quarter profits are unsustainable and the government-sponsored enterprises remain in a precarious condition because they are restricted from building capital.

The GSEs are required to pay all their profits to the government, under terms of the 2008 bailout and subsequent amendments, and so cannot retain earnings. Operating in their sixth year of conservatorship, Fannie and Freddie have no formal mechanism to raise capital. If there were another recession — or even, some say, a regional housing downturn — the GSEs might once again have to tap Treasury for a taxpayer-funded bailout. Legal settlements alone contributed to the majority of both GSEs' earnings in the first quarter, and without such one-time items, Fannie and Freddie earnings' power is questionable.

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