From the Boston Globe:
Fannie and Freddie were once the most powerful forces in the US housing industry. They pumped liquidity into the sector by buying up mortgages written by banks and mortgage companies. That kept the cost of capital low and increased the volume of mortgages. Government backing allowed the two to borrow money at lower rates than anyone else in the housing financing market.
While Fannie and Freddie operated under some form of congressional oversight, they ultimately answered to their stockholders. Their business was making money. They joined Wall Street firms in making record profits — and hauling in record bonuses — by buying, securitizing, and reselling subprime mortgages that never should have been written in the first place.
The housing market’s collapse sowed destruction and put the nation’s biggest banks on a government lifeline. No lifeline has been bigger than the rope the feds threw Fannie and Freddie, though. In September 2008, the two firms received a bottomless line of credit. So far, their tab stands around $148 billion — more than AIG, the company that insured all of Wall Street’s worst housing bets, is in hock for.
In January, the Congressional Budget Office said the total cost to taxpayers could reach $373 billion.
Government aid to Fannie and Freddie has been handed out piecemeal so far. It’s easier to stick another $3.3 billion on the tab, as the two did last week after posting massive quarterly losses, than it is to grab the whole $300 billion pie all at once. But there’s a growing recognition in Washington that Fannie and Freddie can’t keep stringing along like this.
There is no easy way to clean up Fannie and Freddie. Lawmakers can’t just kill them, as has been suggested. The pair have actually been operating under a recent government mandate to increase their mortgage purchases, as a way of propping up the fragile housing market; if they disappeared suddenly, the economic aftershocks would be catastrophic.
Nor do they have a clear near-term path to privatization. The gap between the companies’ estimated bailout tab and what they’ve received so far reflects sizable losses they should incur, but don’t have reserves to absorb. Fannie alone has lost more than $150 billion over the past three years. Both companies were recently taken off the New York Stock Exchange.
That leaves nationalization. It’s notable that the White House has until after midterm elections to file formal reorganization plans for Fannie and Freddie. If Washington can’t kill or privatize the mortgage firms, it will have to assume responsibility for their massive liabilities.
Read the whole thing here.
Fannie and Freddie were once the most powerful forces in the US housing industry. They pumped liquidity into the sector by buying up mortgages written by banks and mortgage companies. That kept the cost of capital low and increased the volume of mortgages. Government backing allowed the two to borrow money at lower rates than anyone else in the housing financing market.
While Fannie and Freddie operated under some form of congressional oversight, they ultimately answered to their stockholders. Their business was making money. They joined Wall Street firms in making record profits — and hauling in record bonuses — by buying, securitizing, and reselling subprime mortgages that never should have been written in the first place.
The housing market’s collapse sowed destruction and put the nation’s biggest banks on a government lifeline. No lifeline has been bigger than the rope the feds threw Fannie and Freddie, though. In September 2008, the two firms received a bottomless line of credit. So far, their tab stands around $148 billion — more than AIG, the company that insured all of Wall Street’s worst housing bets, is in hock for.
In January, the Congressional Budget Office said the total cost to taxpayers could reach $373 billion.
Government aid to Fannie and Freddie has been handed out piecemeal so far. It’s easier to stick another $3.3 billion on the tab, as the two did last week after posting massive quarterly losses, than it is to grab the whole $300 billion pie all at once. But there’s a growing recognition in Washington that Fannie and Freddie can’t keep stringing along like this.
There is no easy way to clean up Fannie and Freddie. Lawmakers can’t just kill them, as has been suggested. The pair have actually been operating under a recent government mandate to increase their mortgage purchases, as a way of propping up the fragile housing market; if they disappeared suddenly, the economic aftershocks would be catastrophic.
Nor do they have a clear near-term path to privatization. The gap between the companies’ estimated bailout tab and what they’ve received so far reflects sizable losses they should incur, but don’t have reserves to absorb. Fannie alone has lost more than $150 billion over the past three years. Both companies were recently taken off the New York Stock Exchange.
That leaves nationalization. It’s notable that the White House has until after midterm elections to file formal reorganization plans for Fannie and Freddie. If Washington can’t kill or privatize the mortgage firms, it will have to assume responsibility for their massive liabilities.
Read the whole thing here.
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