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Home > Blogs > Anthony Harrington > Freddie Mac and Fannie Mae: the mother of all bailouts still to come?

Freddie Mac and Fannie Mae: the mother of all bailouts still to come?

US bailouts | Freddie Mac and Fannie Mae: the mother of all bailouts still to come? Anthony Harrington

During a recent interview with Fox News Business Editor Neil Cavuto, the Chairman of the Philadelphia Federal Reserve, Charles Plosser made it clear that in his view the two state sponsored entities, Fannie Mae and Freddie Mac, who between them own or guarantee around 53% of the US $10.6 trillion mortgage market, should be phased out.

The interview, which is worth watching in its entirety, was noteworthy because Plosser did not shirk the fact that the cost of ending the two housing market giants would be colossal. However, in the view of the Chairman of the Philly Fed., the two government sponsored entities are now apparently in a hopeless mess and something has to be done. Plosser puts it thus:

Plosser: [We have to see an end to them.] Economists have been warning us for almost two decades now that these entities were destined for trouble. We didn't do anything about it and now all the chickens have come home to roost. Now we have to do something because they are not viable as they exist.

Cavuto: [So we would pay $150 billion just to bail them out?]

Plosser: Absolutely, if you talk about bailouts, this is going to be the number that is going to swamp all other numbers. I predict that it is going to cost the taxpayer more money than all the other bailouts combined.

To anyone watching the ramping up of the US deficit with any degree of anxiety, even allowing for some exaggeration – and Federal Reserve Chairmen are not really supposed to exaggerate for effect – the idea of another taxpayer funded bailout to the tune of several hundred billion dollars is not a happy thought. Clearly if Plosser thinks that ending Freddie and Fannie is going to cost more than all the other bailouts combined he is thinking of a much larger figure than the Fox interviewer’s suggested $150 billion.

Even worse, the US government is clearly relying to a fairly large extent on Freddie and Fannie to stabilize the troubled US housing market. It is, of course, not clear how you stabilise a market by underpinning it with wobbly entities… Fannie Mae reported a loss of $13.1 billion for its last quarter, with Freddie Mac reporting a loss of $6.7 billion, this after the US government has already spent $143 billion bailing the two entities out when it took them into conservatorship in September 2008.

According to an article by Surojit Chatterjee in the June 16 edition of the International Business Times, the Obama Administration has already said that it will guarantee the losses of the two entities through to 2012. Moreover it will do so even if this means going beyond the $400 billion cap which it originally put on its commitment to Freddie and Fannie.

Chatterjee points out that it is actually exceedingly difficult for anyone to calculate how deep a hole the two entities are actually in, since that depends on a cluster of interacting variables, such as how high and persistent unemployment is, and what happens to the US housing market. Analysts at Barclays Capital, he points out, estimate a funding shortfall of some $500 billion, which could worsen if housing prices weaken still further. 

For its part, the Administration takes a more optimistic view. According to Chatterjee, the White House’s Office of Management and Budget produced estimates in February 2010 arguing that the required aid from Government could be as little as $160 billion if the US economy strengthens.

However, Chatterjee also cites a Pennsylvanian ratings agency comment that if the housing market weakness continues some 20% of Fannie and Freddie’s loans and guarantees could have to be written off, amounting to around $1 trillion. Which raises an interesting question – just how much debt can the US safely assume?

Further reading on the subprime housing fiasco and US bailouts:

Tags: bailout , Fannie Mae , Freddie Mac , sovereign debt , sub prime fiasco , US debt , US housing market
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  1. hemlock says:
    Fri Dec 06 05:50:31 GMT 2013

    The federally-run home loan buyer, Fannie Mae, said that it had profits of $5.1 billion in the year's second quarter. That also marked its second net increase since the government took control after the bubble burst on the market five years ago. This gives sure evidence that there is upward motion in the housing market.

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