Fixing Fannie+Freddie Mac to cost 1 trillion?!?!?

[n2doc]

Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case

By Lorraine Woellert and John Gittelsohn


June 14 (Bloomberg) -- The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them.

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http://www.bloomberg.com/apps/news?pid=20601109&sid=an_hcY9YaJas&pos=10

[ProgressiveVictory]

1. wow, just wow.

We need to do something about these companies I guess. This is getting out of control.

[Gaedel]

2. uhhh, the loans are already made

and have already gone bad.

[ProgressiveVictory]

5. you are right, but we need to stop using them so the future damages we have to pay

Is minimal.

[Statistical]

3. Fannie & Freddy needs to be slowly unwound.

No new "exotic loans" If banks want to issue a mortgage they should be required to keep it on their own books.
Fannie & Freddy have essentially been a dumping pound for mortgages. Banks get all the profits, F&F get all the risk.

So nothing drastic, existing loans should be held until maturity (and or default :( ) however F&F should wind down the loans they have on books and reduce the loans they will accept over next couple years.

Eventually F&F should only handle FHA loans with strict underwriting guidelines and only 2 options: 30 year fixed or 15 year fixed. Period.

No option loans, no jumbo loans, no interest only loans, no option-ARM, no x year ARM, no balloon loans, no reverse amortization loans.

15 year fixed or 30 year fixed
strict underwriting requirements
strict limits on loan to value
strict guidelines on home appraisals
5% down-payment
FHA only

Within a generation F&F will be 1/10th their current size.

[ProgressiveVictory]

4. great post!

[SlipperySlope]

6. Pisses me off to no end.

Fannie and Freddie debt, **by definition** was not backed by the United States government. Investors who bought Fannie and Freddie debt were explicitly accepting the risk of default *and* were being paid an interest premium for that risk.

But as soon as the fat cats face a loss, BOOM, the government decides to bail them out and put all that loss onto the taxpayer instead.

Fannie and Freddie are time bombs waiting to go off. It could end up costing the taxpayer over $1 trillion - cost that was supposed to be born by the BONDHOLDERS who bought these things, accepted the risk, and were paid a premium for that risk.