Bloomberg.com / Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case
From Bloomberg comes an article about the estimated costs of saving Fannie Mae and Freddie Mac.Fannie and Freddie currently own or guarantee 53% of the U.S.’s $10.7 trillion of residential mortgages and during 2009 bought or guaranteed around three-quarters of all U.S. home loans. Since the government decided to put the two agencies into conservatorship in early 2008 the two government sponsored entities are now 80% owned by the U.S. taxpayers, have drawn $145 billion from the Federal government and have an unlimited line of government credit. While the $1 trillion worst case scenario price tag mentioned in this article seems a bit dubious, the non-partisan Congressional Budget Office has estimated that the two companies may need as much as $389 billion in federal subsidies through 2019 and the White House Office of Management and Budget estimates that even if the economy continued to grow the subsidies would total $160 billion.
Without the subsidies from the American people it is possible that the two companies would default on some of their debt. Should this occur the defaults could cause a ripple effect around the world as many banks and sovereign nations own Fannie and Freddie debt.
It will take robust economic growth to encourage private companies to return to the mortgage-securitization market. In the meantime Fannie and Freddie continue to act as the buyer or guarantor of the majority of U.S. housing debt.This could mean that additional subsidies beyond the $145 billion already extended may be needed.