The Housing Chronicles Blog: Can Fannie and Freddie ever exit life support?

Friday, September 4, 2009

Can Fannie and Freddie ever exit life support?

A year after the government takeover of Fannie Mae and Freddie Mac, it seems that both mortgage entities would likely fail without the implied guarantee of U.S. taxpayers. First from an AP story via MSNBC Money:

A year after the near-collapse of Fannie Mae and Freddie Mac, the U.S. mortgage giants remain dependent on the government for survival and there is no end in sight.

The companies, created by the government to ensure the availability of home loans, have tapped about US$96 billion in government aid since they were seized a year ago this weekend. Without that money, the firms could have gone broke, leaving millions of people unable to get a mortgage.

Many questions remain about Fannie and Freddie's future, but several things are clear: The companies are unlikely to return to their former power and influence, the bailout is sure to cost taxpayers even more money and the government will have a big role in the U.S. mortgage market for years to come...

A year later, the government controls nearly 80 per cent of each company, and their problems are growing as defaults and foreclosures continue to skyrocket.

The percentage of homeowners who have missed at least three months of payments is normally under one per cent for both companies. Now it's nearly four per cent for Fannie and three per cent for Freddie...

It could be another year before the final taxpayer tab for Fannie and Freddie is known, and that outcome will depend on when delinquencies and foreclosures finally crest.

Barclays Capital predicts the companies will need anywhere from $160 billion to $200 billion out of a potential $400 billion lifeline, which the Obama administration expanded from the original $200 billion set last fall. Most analysts don't expect the money to be returned any time soon, if at all...

For its part, the Mortgage Bankers Association is hoping for an overhaul of both GSEs into smaller, more manageable pieces. Can anyone say "turf war?" From a Reuters story via MSNBC:

The U.S. Mortgage Bankers Association said on Wednesday it will ask Congress to transform mortgage lenders Fannie Mae and Freddie Mac into several smaller, privately held companies that would issue mortgage securities with a government guarantee.

The proposed framework from the industry group would give successor entities to Fannie Mae and Freddie Mac the authority to create securities backed by certain types of mortgage...

"The government has an important, limited role to play to ensure a stable flow of funds for mortgages," said Michael Berman, MBA's vice chairman and chairman of the Council on Ensuring Mortgage Liquidity.

The MBA plan calls for government agencies, rather than the new companies, to assume the "mission" of promoting affordable housing that Congress has long assigned to Fannie and Freddie.

The number of new companies would be initially limited to two or three, the MBA said.

Fannie Mae and Freddie Mac were not immediately available for comment.

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