The loss of $11.5 billion for the first quarter of 2010 is a sign that troubles in the US housing markets continue – and a reminder that Congress still needs to sort out the future of the troubled "government sponsored enterprises" like Fannie Mae.
Fannie and its sibling organization, Freddie Mac, own or guarantee a large share of US mortgage loans. The question for the future is whether – or how – they can do that without putting US taxpayers at risk during market downturns.
"The housing finance system clearly cannot continue to operate as it has in the past," he told the House Financial Services Committee in March. But "designing and implementing practical solutions ... will not be simple."
Many housing-policy experts say it's useful to have some system that ensures the flow of financing in mortgage markets, to a reduce the risk of downward spirals in a market that's central to the net worth of American families. Fannie and Freddie currently serve that function, but in doing so they take big risks that came home to roost in 2008.
Both corporations essentially failed and were taken into a government conservatorship. Taxpayers are paying a price, as the Treasury pumps in money to make sure that losses don't push Fannie and Freddie into a position of negative net worth.
Along with announcing its quarterly loss, Fannie Mae said Monday that it was calling for $8.4 billion in support from the Treasury, because of its first-quarter performance resulted in a net-worth deficit. The news organization ProPublica, in its running tally of federal bailouts, currently puts total government aid for Fannie and Freddie at $144.9 billion since the conservatorship.
Fannie's first-quarter loss this year was smaller than in the same period of 2009, when the firm lost $15.2 billion. And Monday's report comes amid some positive signs for the housing market. The credit agency Transunion reported a small decline in mortgage delinquencies during the first quarter.
The stronger the economy gets, with an improving job market, the fewer people are likely to default on their mortgages. Still, many hard-hit metro areas still have a large number of current or expected foreclosures.
What can be done to improve the health of the housing markets – and of the finance system that now relies so heavily on Fannie and Freddie?
Three leading options are:
- Reconstitute the firms. Make them essentially as they were before 2008 (a hybrid of shareholder ownership with a congressionally mandated mission to support the home-loan market), but with tighter oversight and perhaps backstopping from private mortgage firms that benefit from the services provided by Fannie and Freddie. The problem: We've just seen that a hybrid public-private identity can work badly.
- Nationalize them. Turn them into government-owned corporations, with tighter oversight of their risks and capital cushions. The problem: This would mean putting trillions of dollars in debt they carry officially on the federal balance sheet. If problems keep cropping up, taxpayers are on the hook.
- Shrink or eliminate them. This option, favored by many conservatives, would seek to create a housing market much less reliant on loans that are bought or backed by Fannie or Freddie. One idea is to break them into smaller pieces, and have them gradually withdraw to a smaller role. The problem: In times of financial crisis, mortgage lending can dry up without government financing or guarantees (as occurred in 2008).
"There is significant reason to question the capacity of private banks to support mortgage markets in times of financial distress without government support," Congress's government accountability office said in a 2009 report.
But adding loads of new debt onto the federal balance sheet could take America a step closer to a possible Greece-style debt crisis.
"The federal debt stands at $8 trillion. But the Fannie Mae, Freddie Mac, and Federal Home Loan Bank debt stands at $8 trillion as well," Anthony Sanders, a real estate expert from George Mason University, told the recent House hearing. Together, those debts are greater than a year's gross domestic product, which he called a “Grecian Formula” of debt issuance to fund housing goals.
A solution to the thorny problem of housing-market finance is notably absent from the financial reform bill now working its way through Congress.