This brings us to the final but no less controversial issue of Government Sponsored Enterprises (GSEs) and FHA/Ginnie Mae.
The first controversy surrounds Fannie Mae and Freddie Mac which certainly serve a public purpose and where the government now owns 80% of both companies. These two entities should now be considered as government backed, there is no question about it. This does not mean however that the government share of the 6.3 trillion of liabilities of these companies must simply be added to the government debt position as suggested by some. A balance sheet is made of liabilities but also assets, in this case homes. The loans the enterprises own or guarantee represent more than half of the US single family mortgages outstanding. We could do a dirty extrapolation to try to estimate the losses both entities may occur over the next 10 years, 75 or even to infinity. The chances to hit anywhere close to the actual losses that will be incurred are close to nil. A conservative and more accurate approach would be to simply take the extent of the amount invested by the government to this date and consider that amount irrecoverable. This would give a relatively good representation of the current possible cost for the government without undue extrapolation based on numerous assumptions. The maximum amount either enterprise may draw from the Treasury is the greater of $200 billion or $200 billion plus the cumulative amount of deficiency amounts covered by Treasury preferred purchases as of December 31, 2012, less any surplus at December 31, 2012. Deficiencies are negative net worth measured in any quarter; these require the enterprise to sell preferred stock to the Treasury to maintain net worth at zero. Basically what this means is that the treasury has no clue whatsoever on the costs and there is no limit on the amounts it may provide. Last month when assessing the household balance sheet I took a 20% hair cut to the household real estate asset position. To be consistent and without even considering the current loss reserves, I shall do the same as I believe this hair cut fairly simulates a good worst case at this time.
As for FHA/Ginnie Mae securities, they carry the full faith and credit guaranty of the United States government, so the off-balance sheet liability risk cannot even be questioned here. Ginnie Mae guarantees 826 billion in MBS at FY2009. So to be consistent, lets attribute the same 20% credit loss as for Fannie and Freddie:
Debt Held by the Public: $7’811’009’000
Intra-Governmental Holdings: $4’500’341’000
Off-balance sheet estimated losses: $1’165’000’000
Total Federal Debt: $13’476’350’000
Full article of "In Debt We Trust" :
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