Fannie Mae And Freddie Mac Costs Could Be $700 Billion

The cost of bailing out Fannie Mae and Freddie Mac is soaring.

New S&P research estimates that it will take $700 billion to bring the firms back to financial health, slightly less than the size of the entire government stimulus package. The government has already spent $280 billion to keep the firms solvent.

“With a growing portfolio of unsold homes, a sluggish economy, stubbornly high unemployment, the prospect of  rising foreclosures, and billions in legacy losses, it appears unlikely in our  view that housing and mortgage markets will be able to operate normally  without continuing and substantial government involvement
That will likely mean further taxpayer support for Freddie Mac and Fannie Mae,  the government-sponsored enterprises (GSEs) that, along with the Federal  Housing Administration, now buy more than 90% of all home loans compared to  less than half before the crisis.
That support has so far come at a price, which we believe is likely to rise  substantially. Standard & Poor’s estimates that the ultimate taxpayer cost to resolve Fannie Mae and Freddie Mac could reach $280 billion, including the  $148 billion already invested–money largely spent to make good on loans gone  bad. (Both GSEs are already in conservatorship.)
That $280 billion, however, could swell to $685 billion, by our estimate, with  the establishment of a new entity to replace Fannie and Freddie that the government would initially capitalize.

The research highlights the failure by the federal government to build support under home prices. It is nearly inconceivable that the homebuyer tax credit was allowed to expire in April. It was one of the few successful incentives that helped bring buyers into the market. The HAMP program to modify mortgages has been a remarkable failure, although the plan was to be funded with as much as $75 billion in taxpayer money.

The conflict over funding Fannie Mae and Freddie Mac is a simple to articulate. The $700 billion cost will be yet another strain on the ability of the government to balance its books. An ongoing rescue balloons the deficit and adds to the national debt. On the other hand, the two institutions are vital to the smooth operation of the US housing market.

Unemployment continues to be at the heart of the moribund residential real estate industry. The government does not seem to have a solution to bring down the jobless rate either.

So, the possible solutions are simple, but risky no matter what the path. Does the federal government go further into debt though funding  Fannie Mae and Freddie Mac to hold together an already shaky  housing market, of does it spend more money on incentives to encourage job growth. Unfortunately, the answer is probably both. The two problems are inextricably linked

Douglas A. McIntyre