Sense on Cents

Uncle Sam may think he can keep losses of tens of billions of dollars somewhat secretive, but when those losses cross into the hundreds of billions the dirt is much harder to keep under the rug.

What is the nature and size of this dirt? The losses assocated with those dastardly large twins, Fannie and Freddie. I lifted the rug on this dirt on June 18th in writing, Uncle Sam’s Dirty Little Secret.

Fannie and Freddie hold 50% of the mortgages in our country. These entities are most likely sitting on hundreds of billions in embedded losses currently with limited prospects to generate real revenue. They have no viable business model at this point in time.

CNN reports today, Fannie and Freddie: The Most Expensive Bailout

When Congress was debating the bailout of Fannie and Freddie last July, the official estimate from the Congressional Budget Office was that a bailout would most likely cost taxpayers $25 billion, with only a 5% chance of the price tag reaching $100 billion between them.

In addition, both Fannie and Freddie are likely to need billions of dollars more after they report second quarter results in the coming weeks. Experts believe the cost will only continue to rise in the next year.

“We’re assuming they each will cross the $100 billion mark fairly soon. They could be hitting the $200 billion barrier by the end of next year,” said Bose George, mortgage analyst at Keefe, Bruyette & Woods, an investment bank specializing in financial services firms.

The fact remains that these two wards of the state are no longer for profit entities but rather vehicles for promoting Obama’s housing plans and redistribution of wealth.

The losses within Fannie and Freddie will accrue as long as housing delinquencies and defaults increase. No credible analyst can truly predict when those statistics may peak. They can guess but given the runup in home prices along with the growth in housing, that is all they can do.

In fact, the argument can be made that the very policies being utilized to forestall delinquencies and defaults will ultimately exacerbate and extend the pressure on the housing market, and in turn, Fannie’s and Freddie’s losses.

Will the American taxpayer ever see a return on the funds being pumped into Fannie and Freddie? Don’t hold your breath. 

CNN continues,

Neither firm has given an estimate as to how high losses will reach. But the original limit of $100 billion in losses set in place when the government put Fannie and Freddie into conservatorship, essentially a form of bankruptcy, last September was quickly raised early this year to $200 billion each because of concerns about looming losses.

In return for pumping taxpayer dollars into the two firms, Treasury received preferred stock, which is designed to give the government a healthy 10% to 12% dividend. But few expect that Fannie or Freddie will be able to pay that dividend, let alone return the money handed to the firms to cover their losses..

Even James Lockhart, director of the Federal Housing Finance Agency, the government body that has overseen the two firms since they were placed into conservatorship, said it will be a challenge for Fannie and Freddie to make their scheduled payments.

Let’s be honest, Fannie and Freddie have become financial intermediaries used to promote a form of socialized housing.

With Uncle Sam’s dirty little secret now revealed, break out the industrial strength vacuums!

LD

Related Commentary

Freddie Mac, Fannie Mae Deja Vu? ; May 28, 2009
If you think Fannie and Freddie are alone amidst this dirt, they have sizable company in the form of the Federal Home Loan Bank system.