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Fannie and Freddie: The Legacy of Washington’s Financial Illiterates

Posted by Larry Doyle on June 14, 2010 8:54 AM |

When the day of reckoning comes, the record will show that those misguided, incompetent and reckless legislators who supported and were supported by the house of cards known as Fannie Mae and Freddie Mac will have cost our nation untold hundreds of billions of dollars. In fact, the losses attributed to these organizations may ultimately cross the trillion dollar threshold. Think about that for a second.

While Franklin Raines, Leland Brendsel, Daniel Mudd, and other Fannie and Freddie execs walked out the door with tens of millions of dollars, our nation is left with a financial sinkhole that will serve as a drag on our economy for years if not generations. How and why did this happen?

Shallow, weak, and financially illiterate legislators from both sides of the aisle were bought off by their crony counterparts at Fannie and Freddie. The costs of those ‘payoffs’ are currently unknown, but will be felt for a long time.

Bloomberg addresses the reality of what will likely be the escalating costs embedded in Fannie and Freddie by writing, Fannie-Freddie Fix at $160 Billion with $1 Trillion Worst Case:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

While the losses at Fannie and Freddie continue to mount, do not forget that these losses are not reflected on Uncle Sam’s balance sheet (Fannie and Freddie are in receivership). The fact is Washington at large and the Obama administration specifically do not now have, nor have they ever had, the political will and courage to face the reality of the financial charades created within these organizations. What is the key to measuring the depth of theses sinkholes? Expected losses resulting from future delinquencies, defaults, and foreclosures on mortgages held by Fannie and Freddie. What are the prospects on this front?

The composition of the $5.5 trillion of loans guaranteed by Fannie and Freddie suggests that the surge in delinquencies may continue. About $1.98 trillion of the loans were made in states with the nation’s highest foreclosure rates — California, Florida, Nevada and Arizona — and $1.13 trillion were issued in 2006 and 2007, when real estate values peaked. Mortgages on which borrowers owe more than 90 percent of a property’s value total $402 billion.

Fannie and Freddie may suffer additional losses as a result of the Treasury’s effort to prevent foreclosures. Under the program, banks with mortgages owned or guaranteed by the companies must rewrite loan terms to make them easier for borrowers to pay.

How long might this entire mess take to unwind and what are the impacts on our nation’s housing market? The Obama administration’s programs  to modify mortgages are ultimately a stalling tactic to stem the foreclosure process. What does that mean for the future of our housing market? Let’s visit housing and mortgage expert Mark Hanson who recently wrote that at the current pace of foreclosures, it will take 101 months (that’s right, over 8 years!!) to clear the number of loans in the distressed pipeline.

Add it all up, and we are talking potentially a trillion dollar loss and almost a decade for our nation to reconcile the housing mess driven by Fannie and Freddie, facilitated by their Washington cronies.

Nice legacy.


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