Fannie, Freddie Bailout Could Double, Regulator Says
Washington Post,
Oct 21 -
By Zachary A. Goldfarb
The federal bailout for Fannie Mae and Freddie Mac could more than double in size during the next three years, according to projections from the companies' federal regulator.
Fannie and Freddie, the federally-controlled mortgage finance giants, will likely need at least another $73 billion and perhaps as much $215 billion from taxpayers in the next three years to meet their financial obligations, the Federal Housing Finance Agency said.
The growing taxpayer infusions will cover losses Fannie and Freddie suffer on home loans, as well as payments the companies must make to the U.S. Treasury in exchange for a federal guarantee to provide cash to keep the companies solvent.
In fact, over time, the majority of funds flowing to Fannie and Freddie from taxpayers will go to pay that dividend.
To date, the Treasury has already injected $148 billion into Fannie and Freddie. Under the worst-case scenario, in which the country enters a second recession, the total infusion would equal $363 billion in three years.
The projections of additional bailouts for Fannie and Freddie are in sharp contrast to recent discussions by the Obama administration about how the bank rescue known as the Troubled Assets Relief Program, originally valued a $700 billion, is expected to cost taxpayers less than a tenth of that.
Fannie and Freddie were seized by their federal regulator in September 2008 as the crisis in the housing market threatened to topple them. The Bush administration pledged $200 billion to keep them solvent. Early on, the Obama administration doubled that number to $400 billion, and then late last year made an unlimited pledge of support.
The companies play a central role in the housing market, buying or guaranteeing most home loans. With the collapse of the private market for home loans, they have been essential to keeping interest rates low and the housing market from falling more.
But they also are deeply controversial and were one of the causes of the financial crisis. The Obama administration is set to release a proposal to overhaul or replace them in January. That decision will ultimately be made by the administration in concert with Congress.
The Federal Housing Finance Agency made the projections based on stress tests similar to those that were applied to the largest banks last year. The best-case scenario assumes that housing prices improve soon, a middle-case scenario assumes that housing prices decline slightly and then begin to improve, and a worst-case scenario assumes deep declines.
In the middle-case scenario, Fannie and Freddie would need $90 billion more in taxpayer support.
"These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac," said FHFA Acting Director Edward J. DeMarco. "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."
Online: Washington Post
