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Don't Exacerbate Freddie's Failures

Posted By Conn Carroll On May 16, 2008 @ 12:06 pm In Economics | Comments Disabled

The Washington Post reports today [1] that “Senate negotiators broke off talks last night without striking a deal to rescue hundreds of thousands of homeowners at risk of foreclosure, but they said they were close to an agreement.” Let’s hope they don’t get any closer.

A key part of the housing bailout plan includes upping the size of the loans Freddie Mac can buy and resell from $417,000 to $730,000. Without Freddie’s ability to buy these jumbo loans, the rest of the housing package won’t work because the securities industry will not be able to turn them into mortgage-backed securities [2]. And how is Freddie doing with those shaky mortgages they are already involved with? The Washington Post reported yesterday [3]:

The giant mortgage funding company, a bellwether of market conditions, reported that it lost $151 million (66 cents per share) in the three-month period ended March 31, compared with a loss of $133 million (35 cents) in the first quarter of 2007.

If the company were forced to liquidate its holdings at current prices, it would have been left with a loss, based on a snapshot Freddie Mac provided of its assets and liabilities. The estimated asset value swung to negative $5.2 billion on March 31 from positive $12.6 billion on Dec. 31.

The hole could have been deeper: If not for changes in valuation methods, the March estimate would have sunk by $4.6 billion more.

And how are Freddie Mac, and its sister government sponsored entity Fannie Mae, responding to the fact that their riskiest loans are defaulting at rates much higher than traditional loans? They are lowering their lending standards to take on even more risky loans. [4] Taxpayers should not be forced to further subsidize this irresponsible lending.


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URL to article: http://blog.heritage.org/2008/05/16/dont-excacerbate-freddies-failures/

URLs in this post:

[1] reports today: http://www.washingtonpost.com/wp-dyn/content/article/2008/05/15/AR2008051504008.html

[2] securities industry will not be able to turn them into mortgage-backed securities: http://www.foundry.org/2008/04/30/government-already-back-to-encouraging-risky-lending/

[3] reported yesterday: http://www.washingtonpost.com/wp-dyn/content/article/2008/05/14/AR2008051401141.html

[4] They are lowering their lending standards to take on even more risky loans.: http://www.washingtonpost.com/wp-dyn/content/article/2008/05/16/AR2008051600905.html

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