Fannie, Freddie: Still 'No Exit' For Government's Investments In Troubled Housing Giants

Seventeen months and $110 billion later, the U.S. government's enormous investment in Fannie Mae and Freddie Mac has turned the two firms into semi-permanent crutches for the ailing housing market.

As this morning's deep dive into Fannie and Freddie in the Wall Street Journal puts it, two companies are still "troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government." Just last week, James B. Lockhart III, the former head of the Federal Housing Finance Agency, Fannie and Freddie's regulator, suggested that the government's investment would essentially be permanent:

Here's Lockhart:

"I would love to figure out how to get there, but I think we may be too far along the line of government involvement...Most of that money will never be seen again. They were just allowed to leverage themselves so dramatically."

The WSJ identifies two ways in which Fannie and Freddie are helping to prop up home prices. First, because Fannie and Freddie provide46 percent of the outstanding mortgage debt in the U.S., they are seen as "essential cogs in the housing market." Second, the WSJ argues that they are being used as tools of public policy, a sentiment shared by House Financial Services Chairman Barney Frank (D-Mass.) and even ousted Fannie Mae CEO Daniel Mudd.

For their part, Fannie and Freddie executives have taken to openly suggesting their companies are being forced to attend to more than bottom-line concerns. Here's the WSJ:

"We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could," Mr. Haldeman said in late January in a speech to the Detroit Economic Club.

The Congressional Budget Office has estimated the U.S. government will lose $291 billion on its investments in Fannie and Freddie this year alone. The two firms are expected to cost taxpayers an additional $99 billion in the coming decade, for a grand total loss of $390 billion.

Frank (D-Mass.) recently called for the two firms to be abolished. "The remedy here is to, in fact, as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," said Frank. "That's the approach, rather than a piecemeal one."

For now, no Fannie and Freddie fix seems imminent. The Obama administration, the WSJ noted, included just one line in its 2010 budget regarding the two companies, saying it would "monitor the situation" and "provide updates."

Read the entire WSJ piece here.

Comments

[mrjames1]

06:50 AM on 02/11/2010

Will cost the taxpayers a trillion dollars before it stabilizes. But with gov't ownership, will never completely be 'done'

[DanEboy]

10:54 PM on 02/09/2010

Hey and theses two outfits are now in charge of guess what STUDENT LOANS....!!!!!!!! look it up you'll see...isn't life grand ....yes a few billion grand ................WHO DAT?

[cybexg]

11:42 AM on 02/10/2010

while permitting corporations to skim approximate 30% off of the repayment, government guaranteeing the loans (no risk to the corporation), and the corporation producing no product/service other than collection (remember, student loans are already exempt from bankruptcy, etc.) is perfectly fine?

Give it a rest

[Rebrouser]

02:37 PM on 02/09/2010

Murtha gone...Frank still around...doesn't seem fair..

[Rebrouser]

02:36 PM on 02/09/2010

Poof...the money is gone...oh well, what's hundreds of billions of dollars...?

[Rebrouser]

02:35 PM on 02/09/2010

"Whose on first."?

[ajax cleanser]

01:31 PM on 02/09/2010

Does anyone have data on the criteria the underwater lenders are using to meter out upside down loans?
I know mark to market is suspended so they do not need to liquidate; in fact when they do I understand they need to write-down at that time (example, my brother-in-law has been sitting in a house he has not paid a payment on for over 15 months now, no move by the bank except to put it on the market at a 2006 price, which of course it will never sell at)
So if I was them I would move slowly, offsetting the losses with gains elsewhere, to preserve the capital position and save the institution from bankruptcy
I would like to find data on the evolving staus.
Anyone know where?

[kells1001]

12:51 PM on 02/09/2010

All those homes insured by Fannie and Freddie big banks will gladly now repossess. Protected from losses and owing nothing on the gains is a license to steal and enslave many Americans.

[Lorianne]

12:41 PM on 02/09/2010

They are the problem, not the solution.
We cannot re-inflate the housing bubble and WE SHOULDN'T WANT TO.
This administration has not lost the plot, they never had it to begin with.

[liberal user]

12:33 PM on 02/09/2010

hat tip to: http://financenews.esmartkid.com/index.html

[AlanInGA]

12:29 PM on 02/09/2010

Sell Fannie and Freddie's assets for what they can get.

Dissolve them and write legislation that never again allows this type entity to be created.

Banks need to hold their own loans or sell them to private business, not quasi-government entities.

Who ever was at the helm of Fannie and Freddie when leveraging went thru the roof needs to be put in jail.

Take the loss now and never have to worry about it again.

Home ownership is a privilege not a right.

[Baltotoast]

12:41 PM on 02/09/2010

guess that means you want Barney Frank in jail, as he did as much as anyone else to create the mess at Freddie and Fannie!

[ajax cleanser]

01:22 PM on 02/09/2010

Over and over again we were warned F&F was a disaster
Bush tried repeatedly to rein in their profligacy
But Barney, Barack and Chris got big bucks running interference for them
Barney got even more, his gay lover was in charge of the development of alternate mortgage products while old Barney was legislating them into a monopoly market position
This is your government, as corrupt as can be!
Now they want to show you how they can "improve" health care!
Trainwrecks are disasters, but who can take their eyes off them?

[realpolitic]

12:18 PM on 02/09/2010

If there is a secondary market for mortgage contracts and it is liquid, why not abolish Freddie and Fannie as the private sector now performs their mandate? Also, banks should be made to hold on to more of their original loans so they do solid underwriting and make sure people can pay back mortgages. Of course, the ratings agencies must be on the job to rate the bundled securities fairly or else the government will simply be bailing out the huge banks again.

[lightningbolt]

11:51 AM on 02/09/2010

"a grand total loss of $390 billion"

It is probably more than $390 billion. These institutions were given unlimited guarantees by the Treasury with no Congressional approval. The Treasury is stealing our tax dollars and giving it to these institutions to pay for their gambling debts. UNLIMITED GUARANTEES!!!

[drbob601]

09:00 PM on 02/09/2010

This article is about Fannie and Freddie. They don't "gamble" money in the sense that, say, Goldman Sachs or other TBTF banks have been doing. Their purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers...that is, they are the main providers of "liquidity" in the U.S. mortgage market. And, as the article points out, they are now being used by our government to "make decisions on [loan modifications] and other issues."

Seems what the Treasury is doing is they're using Fannie and Freddie as a repository for a lot of bad home loans (i.e., at risk of default) made during the housing "boom." In essence, they are using Fannie and Freddie as a "back-door" way to bail out many of the other financial institutions that made and/or owned bad mortgage loans (i.e. Countrywide Financial...now owned by B of A).

Unfortunately, the $291 billion losses (eventually paid for by the U.S. taxpayers) are losses from mortgage defaults...that is, individuals who borrowed money to buy an over-priced house and then defaulted on those loans (or will likely default in the future). One could reasonably argue that the real gamblers were the ones who borrowed the money in the first place (when they probably should have been renting...or at least buying a cheaper home).

[rbchilds]

08:51 AM on 02/10/2010

The original bailout of Fannie and Freddie had nothing to do with the mortgage market, but had everything to do with their exposure to $1.3 Trillion in derivatives. If allowed to collapse they would have sank the global economies. Now they aren't doing so well again, why, they still have these toxic derivatives on their books. The original provisions of their bailouts put a ceiling on bailout money, which the Treasury recently lifted giving FM&FM the keys to the bank.

[econ1]

11:25 AM on 02/09/2010

Ah Barney, what have you done?

[Doug Compagner]

11:22 AM on 02/09/2010

When is freddie & fannie paying back their loans?

[gjohnthehorrible]

11:24 AM on 02/09/2010

2 weeks after NEVER

[lightningbolt]

11:52 AM on 02/09/2010

Never. They were given unlimited government guarantees. UNLIMITED!!!

[mrspiffy]

10:54 AM on 02/09/2010

Unwind that trade...sell it at a loss.
http://yieldpig.blogspot.com/