Fannie, Freddie rescue binds taxpayers to housing market
The final tab may exceed that of the savings and loan bailout, depending on the depth of the housing slump.
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The tab will depend on how Washington runs these mortgage giants and how the housing market and economy perform.
A wide range of outcomes is possible, because the size of Fannie and Freddie is so large. With a $5 trillion book of home loans that they own, or have guaranteed, fractional changes in foreclosure rates can translate into tens of billions very quickly.
In a worst case, the cost could run well above the roughly $125 billion that taxpayers spent in the early 1990s to insure depositors in failed savings-and-loan institutions, some mortgage-market experts say.
In other scenarios the short-term infusion of cash might ultimately be recouped with little or no net cost to taxpayers.
What's clear is that every US taxpayer is now tethered directly to the troubled housing market. And the stakes are much higher than the $30 billion federal intervention to stave off bankruptcy at Bear Stearns earlier this year.
"This is Bear Stearns times 100 or Bear Stearns times 1,000," says Brian Battle, a vice president at Performance Trust Capital Partners, an investment firm in Chicago. How much taxpayers lose is "100 percent correlated" with the depth of the housing slump, he adds.
The more home prices fall, the higher foreclosure rates will become and the more losses will pile up at Fannie and Freddie. The less home prices fall, the less that any lender will lose when a loan defaults and the property is resold.
Fannie Mae and Freddie Mac are known as government-sponsored enterprises (GSEs), because they were chartered by Congress to create a more stable mortgage market. Over the past year, they have been fulfilling that mission, guaranteeing home loans or buying them outright. Amid a sharp decline in real estate sales and prices, investors have been willing to fund the so-called "conforming" home loans that carry a Fannie or Freddie imprimatur. That has helped keep mortgages relatively available and affordable.
But even though the GSEs were not conduits for the worst "subprime" lending, they are being hit by loan defaults, with Fannie and Freddie posting a combined second-quarter loss of $3 billion.
Their capital, the reserves available to cover future losses and continue funding new loans, fell to the point where the US Treasury Department intervened.
That followed a string of other federal actions in recent months. The Federal Reserve has loaned money to investment banks in addition to the $30 billion in credit it extended to facilitate the buyout of Bear Stearns by JPMorgan Chase.