The Fannie-Freddie Housing Subsidy

In this Yahoo Tech Ticker clip, Barry Ritholtz and Dean Baker discuss a concept I've advanced: that, effectively, Fannie (FNM) and Freddie (FRE) (or as we call them around here, FanFredron) are being run at a loss to create a false housing economy via subsidization. They do put forth an additional point that I have not harped on as much, that one added benefit of this "policy" is that our financial oligarchs win... again.

If we ever get back to a world where the private sector is truly a part of the financing of the housing market it is going to be mighty interesting to see where the true rates will be set, now that "strategic default" is part of the American lexicon. But with government now supporting some 95% of all home financing this is an issue that won't face us for many years. Until then, we will get even more below-market rates offered by the two institutions that can gladly lose money forever... ponzi style.

(Amazing fact I heard the other day, Fannie Mae has lost more money in the past two years than it made the previous 30 years. Chew on that for a moment before you move onto the next paragraph. Thankfully there is no such thing as a clawback in corporate America.)

The Senate on Tuesday rejected a Republican sponsored measure that would effectively cut off support to Fannie Mae and Freddie Mac in two years. The government-sponsored enterprises, now in conservatorship, have already cost the government about $145 billion.

And there's no limit to how much more they can ask for in the next two years!

Fannie Mae lost $11.5 billion in the first quarter while Freddie Mac lost more than $6.7 billion. After posting those massive losses, they asked for a combined additional sum of nearly $20 billion in government assistance.

"Are they losing money as a matter of policy or are they losing it as bad judgment?" asks Dean Baker, co-director of the Center for Economic and Policy Research, who calls Fannie and Freddie the elephant in the bailout room.

Via The New York Times:

Baker and Fusion IQ's Barry Ritholtz are convinced the government is effectively sponsoring a backdoor bailout of the banks via the GSEs. "This is a conscious, willful decision," says Ritholtz, author of The Big Picture blog and Bailout Nation. "Fannie And Freddie act as a conduit for taking all this junk off the banks' balance sheets."

And Congress is along for the ride, says Baker. "To some extent the wool's been pulled over their eyes but I'd just say it's willingly. They just don't want to deal with it right now," he notes. The fear is cutting off aid to Fannie and Freddie could kill the housing industry. In the first quarter, the government backed more than 96% of all residential mortgages.

Whatever the reason, taxpayers will continue to pay the price. Ritholtz estimates Freddie and Fannie could easily cost us $400 billion combined; judging by the continued carnage "maybe that's way on the low side?" he concedes.

[Sep 7, 2008: Bailout Nation Continues - Fannie/Freddie Now Owned by You]
[Feb 1, 2010: 2 Graphs Showing Part of the Reason for the Christmas Eve Taxpayer Massacre] [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer]
[Feb 9, 2010: WSJ - No Exit in Sight for US as Fannie, Freddie Flail]