Fannie Mae and Freddie Mac’s regulator said Thursday that the companies could end up costing the government $363 billion as they absorb losses from bad mortgages.
The Federal Housing Finance Agency ran stress tests under varying scenarios. The best case, with improving housing prices, saw the government-sponsored mortgage companies drawing a cumulative $221 billion in taxpayer money. If house prices drop, the bill would hit $363 billion.
“These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the enterprises,” said FHFA Acting Director Edward DeMarco.
To date, Fannie and Freddie have drawn $148 billion from the Treasury Department under the Preferred Stock Purchase Agreements program.
A significant chunk of Fannie and Freddie’s losses are from dividend payments on preferred stock. If the dividend payments were excluded, cumulative funding needs would range from $142 billion to $259 billion, the FHFA said.
An Obama administration official said the figures excluding the dividends would reflect the actual cost to taxpayers.
The government took over the two enterprises in September 2008 as they faced a financial crunch. The projections released Thursday primarily reflect losses from mortgages that predate the conservatorship, the FHFA said.
The stress test comes as politicians debate the future of the enterprises, as well as the government’s role in the mortgage market. The Obama administration is due to present an overhaul plan by January.
Fannie and Freddie either own or guarantee about half the mortgages in the country.
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(Source: WSJ)
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3 Responses
There is also the possibility that they can sue the banks who sold them the mortgage grounds on the theory that since the paperwork was often bungled (cf the current dispute about illegal foreclosures), the bank is liable for any losses since the banks implicitly warranted that the mortgages sold to Fannie and Freddie were fully valid mortgages.
Or akuperma, we could finally audit Fannie and Freddie and privatize them. Then, repeal the Community Reinvestment Act.
Yet Obama refused to address the GSEs in the financial reform bill. The GSEs have too much clout on capital hill. At least Henry Paulson who was a pretty bad treasury sec. had the gall to take them on.