Government

The Bailout Of Fannie And Freddie Has Cost $145 Billion So Far. What's Next?

Fannie Mae and Freddie Mac will be delisted from the New York Stock Exchange next month, the government said today.

Shareholders were largely wiped out when the government took over the companies two years ago. Since then, the stocks have been trading at about $1 per share — the minimum threshold to stay on the exchange.

The delisting "does not constitute any reflection on either [company's] current performance or future direction," according to the Federal Housing Finance Agency, which oversees the companies.

So what is the "future direction" of the two companies, which so far have cost taxpayers $145 billion, and could cost hundreds of billions more?

Nobody knows.

Fannie and Freddie were created decades ago, at the behest of the federal government. They buy mortgages from banks, re-sell them to investors, and guarantee to pay the loans off if borrowers default.

There was always a weird ambiguity about their status — private companies, but created by an act of Congress.

They went bust when the housing market fell apart, and the government took them over. Both Fannie and Freddie continue to lose money, and taxpayers continue to pay the price.

Everybody seems to agree the current situation is temporary, and needs to be clarified. But nobody seems to know what comes next. Ultimately, it's up to Congress to decide.

As a GAO report pointed out last fall, the possibilities fall along a continuum, from public to private:

1. Create a government agency to buy mortgages and re-sell them to investors. This would eliminate the profit motive that, some critics say, drove Fannie and Freddie to take the risks that led to their demise. It would also continue to subsidize the mortgage market, making it easier for Americans to buy homes. On the other hand, the government would still be putting lots of taxpayer money at risk to subsidize the housing market.

2. Reconstitute Fannie and Freddie as government-sponsored enterprises, similar to the way they were before. This might be accompanied by new rules limiting the risks the companies can take. Still, this would bring back the problematic ambiguities of having private, government-sponsored companies.

3. Dramatically reduce the government's role in the mortgage business. In this model, there would essentially be no replacement for Fannie and Freddie. But the government might still take some role, such as selling insurance to cover mortgage default. This would reduce (but not eliminate) the risk to taxpayers, but it might also make it more difficult for people to get mortgages.

The chief economist of the Federal Housing Finance Agency recently argued in favor of option 3.

"A good case can be made that we massively over-invest in housing," he said, according to the WSJ. "We can do with a lot less government involvement and still get what we want, just by making some fundamental changes."

But those changes might mean giving up a mainstay of American borrowing: The 30-year, fixed-rate mortgage, with no penalty for pre-payment.

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