- The Washington Times - Thursday, October 21, 2010

Fannie Mae and Freddie Mac are well on their way to becoming the biggest and most enduring black holes for taxpayers coming out of the 2008 financial crisis, with a new estimate of their bailout cost nearly doubling the tab to as high as $259 billion.

The estimate was released Thursday as the Treasury reported a profit of $11 billion on $308 billion of bank bailouts and raised hopes for the repayment of costly and unpopular rescues of insurance giant American International Group Inc. and Detroit automaker General Motors Co., enabling those controversies to fade more into the background.

“Taxpayers won’t get their money back” with Fannie and Freddie like the did with the banks, said Daniel Indiviglio, a former investment banker and blogger at TheAtlantic.com. “The moral of the story here is pretty clear. Quasi-public enterprises like Fannie and Freddie don’t work.”

While the banking and mortgage bailouts began at the same time as the financial markets were imploding in the fall of 2008, they are ending quite differently because banks were better cushioned to endure the crisis and return to profitability, despite their risky ventures, he said. Fannie and Freddie had no backstop other than the Treasury.

As the ultimate guarantors of trillions of dollars of risky mortgages that went bad during the housing market’s collapse, Fannie and Freddie were saddled with a disproportionate share of burgeoning mortgage losses. Nearly four years into the housing crisis, no end is in sight to the red ink, with the pace of foreclosures only picking up speed this year.

The government seized control of the failing mortgage giants two years ago and has sought to use them to prop up the collapsed mortgage and housing markets. But their role in aiding and abetting the crisis remains an irritant and unresolved matter in Congress.

Republicans and Democrats agree that dramatic reform is needed at Fannie and Freddie, but they strongly disagree on how to accomplish that.

Democrats say the government will have to continue to play a role backstopping the mortgage market, since the private mortgage market collapsed in 2008 and the government now provides insurance or guarantees on nearly all new mortgages.

Many Republicans say they want to abolish the mortgage agencies and get the government out of the housing and mortgage business.

“Americans should never again be forced to hand over their tax dollars so that other people can escape the consequences of their own mistakes,” said Rep. Tom Price, Georgia Republican and executive director of the House Republican Study Committee.

“Republicans formulated a plan to get these failed financial giants off the taxpayer dole” during last year’s financial reform debate, he said, but “the majority chose to do nothing.”

Peter J. Wallison, financial analyst at the American Enterprise Institute, said that abolishing Fannie and Freddie and reprivatizing the mortgage market would be the best solution. But at this point, the private market has evaporated and may not be easily put together again.

“They are currently the mainstays of the U.S. housing market,” and are more important than ever, he said. “Once the housing market recovers, they will still be the only game in town, and supporting them will continue to be the course of least resistance for Congress.”

President Obama has pledged to offer proposals to overhaul Fannie and Freddie and make that the center of next year’s congressional debate. It promises to be every bit as contentious as this year’s partisan standoff over banking reform.

U.S. Treasury Undersecretary Jeffrey A. Goldstein said the administration realizes that “the current structure of the government’s role in the housing-finance market is unsustainable and unacceptable,” and it has invited public debate on what the role should be.

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