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Freddie Mac Posts Huge Loss, Wants 1.8 BILLION In Federal Aid

ALAN ZIBEL   08/ 9/10 04:28 PM ET   AP

Freddie Mac Requests Aid

WASHINGTON — Keeping Fannie Mae and Freddie Mac in business will cost taxpayers billions. But getting the federal government out of the mortgage business would cost home buyers dearly, in the form of higher interest rates.

The Obama administration will begin tackling this dilemma next Tuesday at a public conference on the future of the mortgage system. Fannie and Freddie lost a combined $9 billion in the April-to-June quarter and have needed more than $148 billion to stay afloat since the government rescued them nearly two years ago.

Figuring out what to do with Fannie and Freddie could take years and involves a more difficult question: How much should the government do to subsidize the housing market?

The government has helped make mortgages attractive to Americans for decades with a range of policies, from allowing homeowners to deduct mortgage interest payments to backing loans that make long-term fixed-rate mortgages widely available.

Now, Fannie and Freddie are facing scrutiny for the billions that taxpayers have covered for the bad loans made during the housing boom. And the administration and Congress are under pressure to address Fannie and Freddie's role that contributed to the mortgage crisis after leaving that out of the broader financial regulatory overhaul.

Some would like the government to scale back its support for Fannie and Freddie to give the private sector a chance to compete. But others say ending it is unrealistic because it would make the 30-year fixed rate mortgage less available or more expensive.

"When Congress overhauls the housing finance system, it's going to have to preserve something close to the status quo," said Jaret Seiberg, an analyst with Concept Capital's Washington Research Group. "Our whole housing system is built upon the ability of borrowers to get 30-year fixed-rate mortgages. You just can't remove that product from the market."

Without the government's backing, banks would prefer not to make loans that leave interest rates fixed for more than five years. They don't want to take the risks that interest rates will skyrocket, leaving them with an unprofitable loan a decade later.

Fannie and Freddie buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors. The pair nearly collapsed two years under the weight of soaring foreclosures and defaults.

On Monday, Freddie said it lost $6 billion, or $1.85 per share, in the April-to-June period. The company lost $840 million, or 26 cents a share, in the same quarter last year. And it asked for an additional $1.8 billion from the federal government, bringing its total request to $63.1 billion.

There are numerous ways to restructure the mortgage system, ranging from a fully privatized system to one totally controlled by the government. Here's a look at some of the options:

_ A FULLY PRIVATE SYSTEM: Fannie and Freddie would be eliminated and private lenders would take over, either holding loans on their books or selling mortgage bonds. But the market for mortgage securities issued without any government backing has been virtually dead ever since the housing bust. It's unclear whether it can come back.

_ A SEMI-PRIVATE SYSTEM: Fannie and Freddie would be dissolved. Their function would be assumed by private companies, which would apply for permission to issue government-backed mortgage securities. They would pay the government for the ability to do so, creating a government-run insurance fund to absorb losses if the market went bad.

This arrangement would ensure 30-year loans are available even during bad economic times and limit the damage to taxpayers for future meltdowns. Still, mortgage rates could rise under this scenario, and smaller banks might not like this because it could increase the power of the nation's biggest banks.

_ A HYBRID SYSTEM: Fannie and Freddie would continue to exist, but would compete against other companies that would issue government-backed mortgage securities.

_ A GOVERNMENT-RUN SYSTEM: Fannie and Freddie would be folded into the government. This option is unlikely because it would further balloon the already-expanding federal debt.

Experts say Congress is likely to choose a semi-private or hybrid system.

"In the end, the politics are going to dictate that some sort of guarantee remains," said Republican economist Douglas Holtz-Eakin, a former adviser to Sen. John McCain's presidential campaign.

Obama administration officials are giving only vague hints about where they stand. Treasury Secretary Timothy Geithner said last month the administration wants to "bring fundamental change" to the mortgage market but offered few specifics.

But he hinted that he sees some role for the government.

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Filed by Nate C. Hindman  |