09.30.2010 0

Fannie, Freddie Bailouts Could Total $363 Billion

  • On: 10/22/2010 09:36:54
  • In: Economy
  • By Robert Romano

    The total taxpayer tab for the government bailout of Fannie Mae and Freddie Mac could total $363 billion under a worst-case scenario, according to the Federal Housing Finance Agency (FHFA). That scenario assumes further declines in housing prices, which many analysts are already predicting.

    It could even be worse than that, however.

    Right now, the Government Sponsored Enterprises (GSEs) that helped cause the housing bubble in 2000’s and the financial crisis that followed with loose lending standards have an unlimited credit line from the U.S. Treasury. The bailouts have already cost $148 billion, and although the unlimited credit line expires at the end of 2012, after that the companies will be entitled to another $275 billion, according to former chief credit officer of Fannie Mae Edward Pinto.

    Fannie and Freddie, you will recall, were the mortgage giants that helped foment the financial crisis by selling trillions of dollars of mortgage-backed securities all over the world with the implicit backing of taxpayers. Currently, they own or guarantee some $5.5 trillion of mortgages, more than half of all homes in the nation.

    Pinto recently published a forensic study explaining how government policies, including those of Fannie Mae and Freddie Mac, the Department of Housing and Urban Development (HUD), and the Federal Housing Administration (FHA) helped to cause the crisis by weakening underwriting standards, lowering down payments, and generally degrading the quality of credit.

    All of that put taxpayers on the hook. Now, anything else that goes wrong in the housing market affecting the GSEs’ bottom lines between now and the end of 2012 will be drawn from the Treasury, necessitating more sales of treasuries and increasing the national debt that currently totals more than $13.6 trillion. And then another potential $275 billion after that.

    Adverse conditions that will weaken the GSEs include further depreciation of home values, more foreclosures, higher taxes on homeowners, and continued high unemployment, all of which will make it harder for folks to make mortgage payments. In short, anything that weakens demand for housing or otherwise puts more pressure on borrowers will be factored into future GSE losses, resulting in more taxpayer bailouts.

    Importantly, none of it will require any new vote in Congress. Instead, it will come under existing authority that the House and Senate have delegated to the Treasury, meaning the cash will automatically be tapped from the Treasury.

    The FHFA also outlines rosier scenarios, including one where home prices appreciate and the GSEs actually pay dividends back to the Treasury. This is the economic recovery scenario, although the American people have been awaiting the fabled recovery for some time now. Current indicators in the housing market itself are not good, with prices continuing to decline.

    Outside of that market, things are even worse. Commercial property values are rapidly declining, indicating further stress in the real estate market. Unemployment remains high. Taxes on all American are guaranteed to go up at the end of the year since Congress has failed to make the 2001 and 2003 tax cuts permanent.

    Making matters worse, the dollar’s continued devaluation is causing the price of staples like food, gasoline, oil, and clothing to spike. Gold has reached new heights, and all indications are that these inflationary pressures are just beginning to take root. Come November, the Federal Reserve is fully prepared to engage in another round of monetary easing (i.e. printing more money) through the purchase of U.S. treasuries.

    Higher prices for basic necessities will put more pressure on distressed homeowners. This is not the first time. In 2008, commodities inflation, which the Fed helped to cause with easy money and too-low interest rates, squeezed household budgets, and resulted in more foreclosures. Therefore, the Fed’s plans to target higher inflation once again carry the great risk that the same thing will happen again.

    But it’s even worse than that. More home defaults will not just turn the lives of families upside down — it will put more pressure on the nation’s very solvency.

    By August 2011, the Fed’s current purchases of treasuries will bring its total stake in the national debt to over $1 trillion, making the central bank the largest holder of U.S. debt in the whole wide world. And that’s without any “QE2”. With it, and we’ll be following the ruinous path of the Weimar Republic.

    Therefore, further weakening of the housing market by government policies will increases taxpayer exposure to the sovereign debt crisis, since new losses by the GSEs will only be heaped atop the debt. Taxpayer commitments to Fannie and Freddie have already exceeded the original $200 billion price tag the government put on the bailout. When the Obama Administration came into power, it doubled the commitments to $400 billion before making it unlimited through 2012.

    All of this is because the government refuses to look at any alternative to government control of housing finance. Government control provided the easy money and loose lending necessary to blow up the housing bubble, and which ultimately brought on the bust.

    Now, government control refuses to allow the housing market to find its natural bottom (because that will mean more losses to taxpayers), and prolongs the economic downturn, making the crisis longer and deeper than it might have been. And government control threatens to bankrupt the nation. What’s to like here?

    Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau.

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