Post by Zachary A Goldfarb on Oct 21, 2010 23:41:13 GMT 4
Fannie, Freddie bailout could nearly double in size
By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, October 21, 2010
The federal bailout for Fannie Mae and Freddie Mac could nearly 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 need as much as $215 billion more from taxpayers in the next three years to meet their financial obligations, the Federal Housing Finance Agency said Thursday, but much of that money would automatically be returned to the government.
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.
Over time, the majority of funds flowing to Fannie and Freddie from taxpayers will go to pay that dividend. As a result, most of the additional funds that go to the companies from taxpayers will ultimately be paid back. An Obama administration official said this arrangement is not being reconsidered at this time.
To date, the Treasury has injected $148 billion into Fannie and Freddie, $13 billion of which has been returned to the government. Under the worst case, in which the country enters a second recession, the total infusion would be $363 billion in three years. In this situation, after dividends are paid back to the Treasury, the total cost of the bailout would be $259 billion.
Under a more moderate possibility, in which housing prices decline a little, stay flat for a while and then slowly rise, the total taxpayer bailout would be $238 billion. After dividends are paid back, the total cost would be $154 billion.
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 Asset Relief Program, originally valued at $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, then late last year made a pledge of unlimited 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 declining 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 ultimately will be made by the administration in concert with Congress.
"In the most likely economic scenario, nearly 90 percent of the losses at Fannie Mae and Freddie Mac are already behind us, and that almost all of those losses are attributable to mortgages that were already on those businesses' books prior to" the government seizing them, said Jeffrey Goldstein, Treasury undersecretary for domestic finance, in a statement. "But that news should not distract us from the pressing need for reform so that taxpayers aren't put on the hook in the future. From the beginning, the Obama Administration has made clear that the current structure of the government's role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long-term."
An administration official said the dividend - 10 percent - is a fair price for the companies to pay in exchange for taxpayer support and would be reexamined only in the context of an overall revamp of housing finance policy next year.
The Federal Housing Finance Agency made the projections based on stress tests similar to those that were applied to the largest banks last year. In the best case, housing prices would start to recover immediately and there would be minimal additional costs to taxpayers.
"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."
By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, October 21, 2010
The federal bailout for Fannie Mae and Freddie Mac could nearly 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 need as much as $215 billion more from taxpayers in the next three years to meet their financial obligations, the Federal Housing Finance Agency said Thursday, but much of that money would automatically be returned to the government.
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.
Over time, the majority of funds flowing to Fannie and Freddie from taxpayers will go to pay that dividend. As a result, most of the additional funds that go to the companies from taxpayers will ultimately be paid back. An Obama administration official said this arrangement is not being reconsidered at this time.
To date, the Treasury has injected $148 billion into Fannie and Freddie, $13 billion of which has been returned to the government. Under the worst case, in which the country enters a second recession, the total infusion would be $363 billion in three years. In this situation, after dividends are paid back to the Treasury, the total cost of the bailout would be $259 billion.
Under a more moderate possibility, in which housing prices decline a little, stay flat for a while and then slowly rise, the total taxpayer bailout would be $238 billion. After dividends are paid back, the total cost would be $154 billion.
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 Asset Relief Program, originally valued at $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, then late last year made a pledge of unlimited 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 declining 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 ultimately will be made by the administration in concert with Congress.
"In the most likely economic scenario, nearly 90 percent of the losses at Fannie Mae and Freddie Mac are already behind us, and that almost all of those losses are attributable to mortgages that were already on those businesses' books prior to" the government seizing them, said Jeffrey Goldstein, Treasury undersecretary for domestic finance, in a statement. "But that news should not distract us from the pressing need for reform so that taxpayers aren't put on the hook in the future. From the beginning, the Obama Administration has made clear that the current structure of the government's role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long-term."
An administration official said the dividend - 10 percent - is a fair price for the companies to pay in exchange for taxpayer support and would be reexamined only in the context of an overall revamp of housing finance policy next year.
The Federal Housing Finance Agency made the projections based on stress tests similar to those that were applied to the largest banks last year. In the best case, housing prices would start to recover immediately and there would be minimal additional costs to taxpayers.
"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."