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Fannie Mae and Freddie Mac deep in the hole

Republicans, Democrats agree on reform, but not on solutions

- 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.

The mortgage bailout has been costly and unpopular, but he said it was necessary and "played a critical role in stabilizing the housing industry during a period of crisis."

Nearly all the losses that taxpayers have covered are a result of bad loans that Fannie and Freddie took on during the height of the housing bubble between 2005 and 2007, he noted. That was during the last years of the Bush administration before President Obama took office.

Despite Fannie's and Freddie's serious shortcomings, "they are practically the only game in town," said Mr. Goldstein. Treasury Secretary Timothy F. Geithner has suggested that the government may have to continue providing guarantees on mortgages — for a fee — to keep the market viable.

How much more the mortgage giants cost taxpayers will depend on how the housing market fares in coming months. The agencies already have consumed $148 billion, and their losses are quickening.

An analysis released by their regulator, the Federal Housing Finance Agency, on Thursday estimated that Fannie and Freddie most likely will require another $90 billion in the next three years, assuming the housing market stabilizes and starts to recover next year.

But the losses could worsen considerably if the housing market slumps back into recession and home prices drop another 20 percent to 25 percent. Under that more dire scenario, the agency estimated additional losses at $215 billion.

Some of the cash Fannie and Freddie have drawn from the Treasury has been used to pay dividends on the shares Treasury owns — essentially returning some of the Treasury's own money.

If those dividends are subtracted, the total cost of the bailout ranges up to $259 billion, the agency estimated.

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