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  • Deal with Fannie and Freddie Now or We'll Pay Later

    What’s the main selling point for the financial regulation bill Congress is debating? That it would end taxpayer bailouts. The Senate even added an amendment directly noting that the bill is intended to “prohibit taxpayers from ever having to bail out the financial sector.”

    But don’t breathe a sigh of relief too quickly. Because the bill’s many problems include this frequently overlooked fact: It does nothing to fix the problems with Freddie Mac and Fannie Mae, both of which A) played a major role in the meltdown of 2008 and B) are asking for more money.

    Ignoring Fannie and Freddie would be a huge mistake. More than a year after going into receivership, they still dominate the housing finance market by buying mortgages from lenders, packaging them into bond issues, and then reselling them to investors worldwide. Last year, the two financed or backed about 70% of single-family mortgage loans. They hold about $5 trillion in their investment portfolios.

    Most importantly: Both are losing money fast, with those losses being covered by the U.S. taxpayer. About a week ago, Freddie announced it had lost $8 billion in the first quarter of 2010 and would be asking for another $10.6 billion in taxpayer help. Not to be outdone, Fannie announced an $11.5 billion loss and asked for another $8.4 billion from taxpayers.

    That’s atop the nearly $145 billion of your dollars that Fannie and Freddie have already received. And the total is sure to go higher: Last December, the Obama administration lifted caps on how much total bailout money the two can receive. The old limits were $200 billion each (though those estimates were widely understood as fiction). The new limits {hellip} well, there are no new limits. Moreover, requirements that the two shrink their portfolios were watered down.

    There seems to be no end in sight — the two firms’ own management admits that there is no prospect for ending the red ink in the foreseeable future.

    The crisis should have come as no surprise. Experts have warned for decades that both entities lacked sufficient capital — made up of both investors’ money and retained earnings — to protect against losses. Back when they were privately owned, Fannie and Freddie had only $1 for every $20 in assets, while most banks had $1 in capital for every $12 in assets. Congress considered higher standards in the 1990s, but many of the same congressional leaders who head their oversight committees today bowed to a high-powered lobbying campaign that derailed reform.

    Enough is enough. Fannie and Freddie should be partly wound down, the rest broken up and sold off — not replaced, reformed, or rejuvenated. Such a process of course cannot be done overnight. Realistically, this will take several years. But that only makes it more important that the process begin now.

    Yet, reforming these two government-sponsored enterprises isn’t a priority for many policymakers. According to Sen. Mark Warner (D-VA), a plan to tame Fannie and Freddie will have to wait until at least next year. An effort by Sen. John McCain (R-AZ), to amend the pending financial regulation bill to address the problem was defeated last week, replaced by a call for a “study” of the issue.

    The issue has also been slow-tracked by the Obama administration, which only recently opened a formal proceeding to examine options for the two firms. In fact, rather than resolving the pair, the administration is making them a key part of its economic arsenal, using them to prop up the housing markets. As support from TARP and by the Fed shrinks, Freddie and Fannie seem — at least in part — to be taking their place.

    Fannie and Freddie haven’t been coy about their new role. In a financial statement released last year, Fannie Mae was unusually blunt about what the administration was asking, and what the financial effects were: “Our financial results are likely to suffer, at least in the short term, as we expand our efforts to assist the mortgage market, thereby increasing the amount of funds that Treasury is required to provide to us and further limiting our ability to return to long-term profitability.”

    This must stop. Fannie Mae and Freddie Mac have distorted housing markets enough. Fannie Mae and Freddie Mac should be put on a path to resolution. And Congress should ensure that no successor institution be provided with the implicit guarantees that allowed these two to play havoc with financial markets.

    Otherwise, we can look forward to many more bailouts in the future.

    Co-authored by James Gattuso.

    Cross-posted at USA Today.

    Posted in Economics [slideshow_deploy]

    11 Responses to Deal with Fannie and Freddie Now or We'll Pay Later

    1. Lloyd Scallan - New says:

      If Congress would "fix" Freddie and Fannie, that would confirm that certain Democrat (like Barney Frank) lied or distorted to true facts about the financial condition of the two companies, which led to our present problems. Do you

      think that will happen? Does anyone think the Dems will accept blame?

    2. Tim AZ says:

      As I've said before. The Fannie and Freddie entities hand cannot be removed from the citizenry's pocket. Until most of the liberal parasites that have set themselves up to benefit from this entity are removed from D.C. by the American citizenry through the election process. Once the enabler's are sent packing Fannie and Freddie can be put to rest.

    3. Drew Page, IL says:

      Chris Dodd's bill is intended to end taxpayer bailouts of financial institutions?

      Will there ever be legislation that will end taxpayer bailouts of the government's endless bungling, earmarks, graft and corruption? Never mind, it was a rhetorical question.

    4. stirling, Pennsylvan says:

      Welcome to the progressives "slush" fund with unlimited taxpayers money (read Glenn Beck's analysis of this.) It's astounding what Fanie and Fredie are being turned into with the backing of this administration. Since it's not private or public FIOA can't be used here. Therefore Fanie/Freddie being a money pit is only going to continue until the socialism agenda is stoped once and for all.

    5. JSchau, San Diego says:

      The best fix would be to fire Chris Dodd, Barney Frank and Charlie Rangel. We have to stop the bleeding by eliminating the great enablers of people who can't afford to buy homes.

    6. KRIS, TUCSON says:

      As citizens and taxpayers we need to stop this. If the bailout were to help the mortgage holders, then why didn't it help the mortgage that the citizens have. If they had taken the money and paid every home owner mortgage down to 1/2 and refinanced at the lower rate and stipulated that they could not sell for ten years, or until the mortgage was paid off, then we would have been in better shape, had more income to spend in the economy. I would have more money to spend on needed items, not wanted items. My loan would not have been sold to Bank of America and their crooked ways and it would have helped save the loan companies until they could see what happened and changed their way of doing business.

    7. Jeanne Stotler, wood says:

      I heard yesterday that a lot of thosewho got the special refinancing deals to prevent foreclosure are now in the rears again. I knew this would not help, yet there goes more of OUR money down the tubes and these people will still lose their houses but they owe more now than if they had gone into foreclosure instead of this refinancing deal the Gov't. insisted on,

    8. Pingback: Deal with Fannie and Freddie Now or We’ll Pay Later - Whitley County Patriots

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    10. Joyce Cauthen, Houst says:

      Up until 1998, Fannie and Freddie were the best of the best and as such, millions of homeowners, together with the VA and FHA, these homeowners were able to secure homes they could afford to purchase and maintain. We all know after that what happened. Deregulation and a distortion of what was a great program (the CRA) which dismantled the ethics, integrity and honesty, of Fannie and Freddie to protect the consumer. All of this at the direction of a certain few who had their own agendas and ended up purchasing the cooperation of those near the top at Fannie and Freddie. 1994 was a start, but by 1998, the agenda was clear. Utilize Fannie and Freddie in a way not imaginable before. But let's not forget the "second chance" financing that came into play in 1994 by such companies as Ford Consumer, Household Finance, who really planted the seeds for the sub prime lending that would take this economy to such devastation. From 1982 through 1994, there were good strong honest managers running Fannie and Freddie. These two GSO's cannot succeed until we replace the management teams that understand what it means to protect the consumer and the economy as a whole and who simply must not be controlled as a government operation. Government oversight of themselves will never work, however in order to move the Obama agenda, this must be carried out. Chris Dodd and Barney Frank have greatly contributed to the demise of this country's and the global economy, but McCain and Shelby when they attempted to stop Fannie and Freddie management in 2005 forward, failed miserably when they took it to the floor for vote and lost and simply bowled out without any further action to stop those that would harm this Country's economy. They, McCain and Shelby, were far too weak to get the job done and their fight was not strong enough to overcome. With the current administration, we can never return what were extremely fine institutions back to their original form. The whole situation has become so distrorted with the blame game that I don't believe the Republicans realize that under the proper circumstances, they can be instrumental in bringing them once again to a successful resolution as a private entitity and millions of Americans can once again have the faith that they will be able to purchase a home they can afford to keep. I have worked with hundreds of homeowners losing their homes to foreclosure, but now with the arrogance of Fannie and Freddie and the big banks, it is all down the drain. The modification programs were not workable as one must measure the actual modification which the homeowner received to see that it changed a payment very little, but simply brought him current temporarily. All of this nothing more than a ploy by the government to make it look like they were doing something for the homeowner when in reality, that would never happen and that along has cost the American Taxpayer billions that have been relagated to various other entities that had no right to the money.

      All we had to do was take 60 billion back in the latter part of 2007 and we could have set up a fund to save no less that 6 million homes from foreclosure. A plan that had merit, but no listeners. Thank you.

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