Fannie and Freddie may cost tax payers $1 trillion

Posted by Jason | Posted in Miscellaneous | Posted on 16-06-2010

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I saw this article this morning on the Tribune Review. Just think about the amount of money that is going to go into these two government entities, and what the people actually get out of it.

WASHINGTON — The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by taxpayers, have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Va., own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them.

Fannie and Freddie account for 53% of the $10.7 trillion dollar residential mortgage market, which comes out to $5.35 trillion. If it costs $1 trillion to bail them out, that is 20% of the mortgages that they hold. Shouldn’t 1 and 10 home owners nation wide or 1 in 5 home owners that have a loan held by these two entities have a home free and clear? How about every home owner have their mortgages reduced by 10%? While I don’t really think that is a good idea, because the money will be either borrowed or printed, I don’t think it make sense for the American people to have to eat $1 trillion dollars in mortgages to keep these entities propped up. Let them go bankrupt. Other banks will pick up the pieces.

The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.

If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.

Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pa., said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.

“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.

Fannie and Freddie are deeply wired into the American and global financial systems. Figuring out how to stanch the losses and turn them into sustainable businesses is the biggest piece of unfinished business as Congress negotiates a Wall Street overhaul that could reach President Obama’s desk by July.

Deeply wired means there are very wealthy and powerful people who stand to lose a lot of money if they go under. They want the American people to subsidize their losses, and our government is all too willing to give them what they want.

Neither political party wants to risk damaging the mortgage market, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and White House economic adviser under President George W. Bush.

“Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said.

With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative — cutting the federal lifeline and letting the companies default on their debts — would produce global economic tremors akin to the federal decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Conn., who helped create the S&P/Case-Shiller indexes of property values.

“People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said. “We can’t let Fannie and Freddie go. We have to stand up for them.”

The companies’ liabilities stem in large part from loans and mortgage-backed securities issued between 2005 and 2007. Directed by Congress to encourage lending to minorities and low- income borrowers at the same time private companies were gaining market share by pushing into subprime loans, Fannie and Freddie lowered their standards to take on high-risk mortgages.

Treasury Secretary Timothy F. Geithner has vowed to keep Fannie and Freddie operating.

“It’s very hard to judge what the scale of losses is,” Geithner told Congress in March.

One idea being weighed by the Obama administration involves reconstituting Fannie and Freddie into a “good bank” with performing loans and a “bad bank” to absorb the rest. That could cost taxpayers as much as $290 billion because of all the bad loans, according to a May estimate by Credit Suisse analysts.

Keeping Fannie, Freddie afloat might cost up to $1 trillion – Pittsburgh Tribune-Review.

Great idea Obama. One bank where his cronies can maintain their profits without risk and another bank where the tax payer can eat the losses. Awesome!

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