Giant Mortgage Lenders to Get $363-Billion in Bailouts

By Mike Colpitts

As much as $363-billion in mortgage-backed security purchases may be required to bailout troubled Freddie Mac and Fannie Mae, the government sponsored mortgage giants from growing debt due to the foreclosure crisis, according to a government report made public today.

The projection was made by the Federal Housing Finance Agency, the government agency started by the Obama administration to regulate and reform the nation’s giant mortgage lenders in the wake of the financial crisis. The bailouts would be made in the form of the Treasury Department buying stock in the lenders in the form of mortgage-backed securities.

However, the level of uncertainty related to government involvement ranges from $221-billion all the way up to $363-billion, according to the government study through just 2013 and depends on the number of mortgages that fail. In reality, the cost of the bailout could be much higher and take as long as ten years to achieve, according to analysts.

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Three scenarios were used to study the outcome and size of the historic default rate, which determined various levels of housing deflation. “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.”

Treasury Department Secretary Tim Geithner is expected to make recommendations to Congress in January on how the Obama administration would like to see Fannie and Freddie repaired and reformed. However, it is expected to take members of the Senate and the House a number of years to resolve the problems weighing on Fannie Mae and Freddie Mac, taken over by the government as insolvent nearly two years ago.

“Under the three scenarios used in the projections, cumulative Enterprise (Fannie and Freddie) draws range from $221 billion to $363 billion through 2013,” a statement released by FHFA said. “FHFA worked with the Enterprises to develop consistent, forward-looking projections across three possible house price paths. The approach taken in developing these projections is based roughly on the approach taken by the federal banking agencies last year in the Supervisory Capital Assessment Program, which produced potential, not expected outcomes.”

Fannie and Freddie have already received $148 billion from Treasury to stay in business. Both lenders are still being treated as public entities by the stock market. Fannie and Freddie’s stock now trades on the Over the Counter Exchange (OTC) after they failed to maintain a necessary minimum price of $1 per share on the New York Stock Exchange for trading.

An additional $73 to $215 billion would be required to keep the mortgage giants in business under current projections. Amounts ranging from $67 billion to $91 billion represent dividend payments to Treasury on its holdings of preferred stock presently held in the lenders.

Deregulation of Collateralized Debt Obligations (CDOs) by President Bill Clinton and a move by President George W. Bush to loosen lending guidelines as part of the administration’s efforts to expand home mortgage lending to all levels of society led to the highest amount of mortgage lending in U.S. history, producing the real estate bubble. The lending explosion provided the dollars to back the securities that provided the cash to fuel the real estate buying mania with little oversight by federal regulators.

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