Fannie, Freddie and the Government’s House of Cards

The nascent housing price recovery is restoring health to Fannie Mae and Freddie Mac, as both had sufficient earnings in 2012 that they won’t need money from the U.S. Treasury to cover operating losses. Though it is true that with Fannie and Freddie now able to pay the Treasury rather than draw money out, their immediate burden on the taxpayer is reduced, it also has made it more likely that their time as effectively nationalized banks is likely to be extended. When Fannie and Freddie were losing money, Congress was strongly motivated to liquidate or privatize them, but now that they look positions to be cash cows that could help relieve the government’s budgetary woes, talk in Washington about “resolving” them has become more subdued. This is particularly concern as the entire home mortgage industry has become effective nationalized, and, with the exception of the private banks and mortgage companies in the mix, the government now owns the majority of the risks in the industry. Over the past four years, the government has become the insurer for a large portion of the nation’s nearly $16 trillion economy, despite being effectively bankrupt and running budget deficits greater than $1 trillion over that time. It would seem clear that government backing leads to sloppy banking and ultimately to defaults, which result in taxpayers having to become responsible for the losses. As recently as a year ago, it seemed possible that taxpayers would be able to unload at least a portion of the Fannie and Freddie mortgage guarantees, but now that hope is fading. | Read More