Tuesday, November 10, 2009

Fannie Mae needs another bailout; Freddie Mac will need one

Fannie Mae is in more financial trouble:
Fannie Mae, the federally controlled mortgage finance giant, said Thursday it lost $19 billion in the third quarter and had submitted a request to the Treasury Department for $15 billion in more aid to stay afloat.

District-based Fannie Mae and its McLean sibling, Freddie Mac, were seized in early September 2008 by the federal government. Since then, Fannie Mae has lost $111 billion. The $15 billion in aid it has requested comes on top of $45 billion it already received. Freddie Mac has received $51 billion in aid.

In total, the seizure of Fannie Mae and Freddie Mac has cost taxpayers $121 billion, among the costliest of the government's interventions to stabilize the financial markets.

Fannie Mae said its losses and its need for additional government aid are both likely to continue. And it said activities it was undertaking at the behest of the Treasury Department, such as modifying mortgages to help homeowners avoid foreclosure, were magnifying its losses. ...

In its earnings statement, Fannie Mae said its assistance to struggling homeowners "could adversely affect our economic returns, possibly significantly."
Meanwhile, Freddie Mac doesn't need another bailout yet but it will:
Freddie Mac said it didn't need any additional federal aid for the second straight quarter as it reported a loss of $6.3 billion for the third quarter on Friday.

But the company said it expected to ask for more handouts from the U.S. Treasury in the future as rising unemployment and falling home prices continue to drive higher credit-related losses for both Freddie and its larger rival, Fannie Mae.
The government really didn't have much choice but to take control of Fannie and Freddie when they were teetering on collapse. However, government didn't have to keep these failed companies operational. The loses they will endure for continuing to lend during a declining housing bubble can be justly blamed on the politicians. The government should simply shut down Fannie Mae, Freddie Mac, and AIG. There's no good reason to keep these failed companies in business.

To put the costs in perspective, $121 billion in losses divided by 105 million American households means that these two companies have cost your household roughly $1,150.

6 comments:

  1. To put the costs in perspective, $121 billion in losses divided by 105 million American households means that these two companies have cost your household roughly $1,150.

    Puts the $30B or so in homebuyers tax credits into perspective. How much worse will the $121B get without it?

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  2. Puts the $30B or so in homebuyers tax credits into perspective. How much worse will the $121B get without it?

    That's a false dichotomy. The choice isn't simply between a tax credit and no tax credit. There is also (among many other things) a continual choice of continuing to bail these failed institutions out. James is absolutely right - we should shut them down. That seems like a much surer way to stem additional losses than questionable handouts to the real estate lobby.

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  3. I love your comment:
    "The government really didn't have much choice but to take control of Fannie and Freddie when they were teetering on collapse. However, government didn't have to keep these failed companies operational. The loses they will endure for continuing to lend during a declining housing bubble can be justly blamed on the politicians. The government should simply shut down Fannie Mae, Freddie Mac, and AIG. There's no good reason to keep these failed companies in business."

    I can't wait to move into McLean or Great falls after the Government lays off these useless employees at Freddie & Fannie.

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  4. The analysis seems to miss the point by focusing on the symptoms of a much larger problem. It was the unregulated and entirely opaque over-the-counter derivative (CDO, CDS, etc.) market which drove the insane flow of investor dollars begging for more mortgages to invest in.

    There were other factors, such as low interest rates, the Japanese Yen carry trade, social engineering to promote affordable home ownership.

    But, if the mortgage market were entirely privatized, the results highlighted in the article would have been largely the same, and society would still have been required to step in and rescue the results of "free markets" gone awry.

    The vast majority of subprime mortgages were made outside regulated lending institutions.

    There may be reasons to privatize mortgage lending. But, the article doesn't seem to get beyond "pitchforking" to the angry mob.

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  5. Mark F,

    Those who argue for more regulation ignore the fact that where regulation existed, regulation failed. Countrywide Financial, IndyMac, Golden West Financial, Fannie Mae, Freddie Mac, and Citigroup were all regulated. In addition the Federal Reserve, which is a regulator, actively argued that there was no national housing bubble, and thus turned a blind eye to potential trouble.

    Also, America's politicians in both political parties actively encouraged an "ownership society". The social engineering to promote affordable home ownership evolved into social engineering to promote home buying, regardless of affordability.

    For the record, I support regulation, but believe that regulation that depends on the whims of human beings is destined to fail. When everybody seems to be getting rich, nobody wants to step in and take away the punchbowl. Human beings tend to react AFTER things go bad. Instead, mathematical rules (such as requiring 20% down payments for home purchases) should be preferred over human judgment.

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  6. James,

    I agree that regulators failed.

    See this recent Frontline piece detailing how the CFTC chairperson wanted to regulate completely opaque over-the-counter derivatives market, and warned that they would bring down the economy. She was squashed by Greenspan, Rubin and Summers. She was forced out of office after the LTCM crisis (largely a result of derivative speculation).

    However, that doesn't change the fact that the vast majority of subprime mortgages were made by unregulated institutions, reacting to the huge demand for mortgage-backed investments by private investors. Investments that masked risk through the use of derivatives.

    If Fannie/Freddie/Ginnie didn't exist, the result would have been largely the same. Society would still have had to rescue private, unregulated financial institutions (perhaps to a much larger tune if they held assets that F/F/G do today.).

    There may be reasons not to socialize mortgage lending. But, the recent meltdown had much more to do with the lack of socialization of the financial market. It was a byproduct of that, not socialization of mortgage lending.

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