Mortgage News

If Fannie and Freddie fail the price tag is somewhere between $400 billion and a shade over a trillion of taxpayer money to bail them out. How do you like them apples? A trillion bucks? Big enough to sink the government’s AAA rating. Big enough to make LTCM look like child’s play. This is some scary stuff folks.

Some comparisons shall we?

Clinton’s proposed universal health-care coverage
10-15 years of Obama’s plan @ $50-65 billion per year
Cost of the Iraq war

From CNN’s trillion-dollar mortgage time-bomb:

Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.

This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980’s and early 1990’s. That cost taxpayers about $250 billion in today’s dollars.

S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government’s AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive.

But other experts expect that declining home values will force more borrowers who have a Fannie- or Freddie-backed loan to stop making payments in the coming months, rather than continuing to make payments on a home now worth less than their loan balance.

Rising job losses may also make it difficult for other borrowers who formerly had good credit to stay current on their mortgage payments.

“The real fundamental problem is real estate prices have been falling and they might fall substantially more,” said Robert Shiller, a Yale University economist who argued for years that a bubble was forming in real estate prices. “OFHEO and Fannie and Freddie never considered the possibility of a massive real estate correction.”

Some economists suggest that if investors start to see problems in the performance of loans backed by Fannie and Freddie, they’ll dumping them. And that would force the federal government to step in.

“I would say there’s at least a 50-50 chance of some sort of bailout. I’m not saying it will necessarily cost $1 trillion, but they’ll need some kind of help, and it very well could happen this year,” said Dean Baker, co-director of the Center for Economic and Policy Research

Investors are signaling growing concern as well. The yield premium for securities backed by Freddie and Fannie compared to the yield on Treasury bills has grown to about 2.25 percentage points from 1.7 percentage points at the beginning of the year. That’s a sign that the investors see a greater risk of Fannie and Freddie running into bigger problems.

I’m guessing there’s a school, a child, a homeless person, a neighborhood, a teacher, a firefighter, a veteran that could all use more help - I hope we don’t end up costing them that help by recklessly throwing Fannie and Freddie in front of this train.

And Fannie and Freddie’s role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets.

The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts.