It appears the public has bailout fatigue, as the quarterly bailout Freddie Mac and Fannie Mae receive now barely registers as a blip of a news item. Six billion dollars used to be a lot of money, but in a world where the Fed injects hundreds of billions into the marketplace, and Europe is creating special entities over a trillion, I guess it is just a rounding error.
You might wonder why the numbers are still so big this many years after the heart of the crisis -- most of the truly horrible loans have long gone bust, after all. Well, each time we speak of new government plans for refinancing or "rescuing" homeowners, there is both a cost and a benefit. Usually the press (and administration) only talks about the benefits -- but someone has to lose. And when there is a lower coupon payment via a refinance on a government loan, Fannie or Freddie lose. And since Fannie and Freddie are fully supported by the taxpayer, it's a direct subsidization by the taxpayer to the homeowner. If that is the right or wrong thing for society to do is another subject, but it should be clear for what purposes these 2 agencies are being run.
Going back to the earlier comment about paying attention to this, it's a win for the political class because the new programs to help homeowners get all the attention, while the quarterly bailouts now seem to get little attention. In fact, this is the first time I can remember Fannie or Freddie reporting their need for a bailout during the week - usually the requests come late on a Friday night when no one is paying attention. Which was the same tactic Mr. Geithner took when rather than sticking to the original script of a limited amount of dollars and years that the federal government would continue to bail out the GSEs, he subjected the U.S. taxpayer to unlimited losses for an additional three years: announced on Christmas Eve, 2009. From The Associated Press:
Government-controlled mortgage giant Freddie Mac has requested $6 billion in additional aid after posting a wider loss in the third quarter. Freddie Mac said Thursday that it lost $6 billion, or $1.86 per share, in the July-September quarter. That compares with a loss of $4.1 billion, or $1.25 a share, in the same quarter of 2010.
This quarter's $6 billion request from taxpayers is the largest since April 2010. Freddie's losses are increasing mainly for two reasons: Many homeowners are paying less interest because they are able to refinance at lower mortgage rates. And failing and bankrupt mortgage insurers are not paying out as much money when homeowners default.
The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them. Since then, a federal regulator has controlled their financial decisions.
Taxpayers have spent about $169 billion to rescue Fannie and Freddie, the most expensive bailout of the 2008 financial crisis. The government estimates it could cost up to $51 billion more to support the companies through 2014 after subtracting dividend payments.
With the new refinancing program announced last week, it looks like the losses for Fannie and Freddie should begin to accelerate relatively dramatically. We can see from the CEOs comments, Freddie is no longer run for the taxpayer's benefit -- in fact, he is touting the interest payment savings. Sounds like he is running a charity, in fact. Damn the company's finances -- they're someone else's responsibility.
Charles E. Haldeman Jr., Freddie's chief executive, said many homeowners are refinancing at lower mortgage rates or are shortening the terms of their mortgage. While that saves homeowners money, it is pushing Freddie deeper into the red.
"In fact, borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year," he said. ...
Still, many homeowners are still defaulting on their mortgages. The percentage of those who are late by 90 days or more on their monthly mortgage payments was virtually unchanged at 3.51 percent in the July-September quarter.
Another reason Freddie needs more aid is because it has received less money from mortgage insurers. Many riskier mortgage loans require insurance, which is meant to protect lenders and investors from losses if a homeowner defaults and the lender doesn't recoup costs through foreclosure. The borrower pays a monthly premium for the insurance, typically a set percentage of the total mortgage loan. But when those mortgage insurers fail, they pay out less in claims.
For example, the main subsidiary of private mortgage insurer PMI Group was seized by Arizona insurance regulators last month. That followed heavy losses the group incurred after the housing market collapsed. PMI is now paying claims at just 50 percent.
As a result, the amount that Freddie has set aside for losses increased from $2 billion in the January-March quarter to $3.6 billion in the July-September quarter.
Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default, and then sell them to investors around the world. When property values drop, homeowners default -- either because they are unable to afford the payments or because they owe more than the property is worth. Because of the guarantees, Fannie and Freddie must pay for the losses.