The low priority GSE reform occupies on Washington's agenda just got lower.

Freddie Mac reported a $3 billion quarterly profit on Tuesday, enough to pay a 10% dividend to the Treasury Department and leave $1.1 billion of net worth on its balance sheet.

Freddie has had other profitable quarters since the crisis, and the second-quarter earnings hardly dent the $70 billion tab it owes the Treasury from more than three years of bailouts. But Freddie's strong operational performance is sustainable, and it is a reminder that the government-sponsored enterprises could serve as a cash cow for private investors.

Freddie Mac's financials "read like a romance novel" if one focuses solely on its lucrative guarantee business going forward, says Tim Rood of the Collingwood Group. Freddie maintains a miniscule capital buffer, guarantees conservatively underwritten loans and collects around a quarter of a percent of what it guarantees, he notes.

"That these companies are capable of posting real numbers and real earnings, is indisputable," Rood says of Freddie, and its sister GSE Fannie Mae. "There isn't a private organization alive that wouldn't underwrite being in the business under the same terms."

Simply because Fannie and Freddie have the capacity to spin off paper profits will not end the GSE reform debate. A government backstop is the basis of their business, their utility in promoting homeownership is in doubt and they have a track record of distorting housing policy in the eyes of many.

But if the money's flowing in, "you lose sight of the rationale you had leading into the conservatorship and potential receivership," Rood says. "The GSEs' economic stability and success is going to challenge the convictions of legislators" that they have to act.

Fannie and Freddie's nominal private investors appear to agree. Despite being deeply insolvent, their publicly traded penny stocks surged by more than 20% following the release of Freddie's results. They each closed at 29 cents a share, up 5 cents.

Freddie posted a $500 million profit in the first quarter, and it made a sizable jump in the second. Stabilization in the housing market shrunk its second-quarter provision for credit losses to $155 million, and the portion of loans on its book that were underwritten after the crisis rose to 57%.

Meanwhile, Freddie guaranteed $215 billion in new purchase and refinance loans during the first half of the year. The average credit score of borrowers exceeded 760.

Along with promoting homeownership, "our financial results enabled us to avoid an additional draw from the U.S. Treasury, despite paying a $1.8 billion cash dividend to the nation's taxpayers," Freddie Chief Executive Donald Layton said.

There's reason to expect that the guarantee business could get sweeter. Though the GSEs weren't allowed to keep the proceeds of a 10-basis-point rate hike (Congress used it to fund the extension of the payroll tax cut), its conservator, the Federal Housing Finance Agency, is expected to announce an additional repricing of guarantee fees late this month.

"We expect that we will be allowed to retain the revenue from this fee increase," Freddie said in a Securities and Exchange Commission filing.

Freddie still faces challenges.

"It is unlikely that we will generate net income or comprehensive income in excess of our annual dividends payable to Treasury over the long term," Freddie's quarterly earnings report states. But at least on an operational basis, the company expects further improvement: "Over time, our dividend obligation to Treasury will increasingly drive future draws."

For the larger mortgage industry, whether the companies are released from conservatorship may not be the point, however. A year ago, major banks floated the idea of giving their own subsidiaries the capacity to guarantee mortgages with a government backstop.

That talk has largely died down because the status quo is serving the industry's major players.

"You don't hear anyone in the industry clamoring for the GSEs to go out of business," Rood says. "[Mortgage originators'] volumes and margins are at such heroic levels."

Such circumstances make delaying a serious debate over the GSEs future very easy. The prospect of their long term profitability "looks more plausible," Reed says. "And there's a lot of runway between now and paying back $170 billion."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.