About a week ago Barron's ran an article on the future of Fannie Mae and Freddie Mac - you know the formerly quasi government companies that are no longer quasi because they lost so much money trying to subsidize home purchases for people who shouldn't have been buying those homes in the first place? They would be the culprits conveniently left out of the recent financial reform bill even though they needed as much reform as the rest of the culprits.
I don't know if you can read this article without a subscription so here are a few of the highlights:
- Fannie Mae and Freddie Mac own or insure $5.7 Trillion of the $11 Trillion mortgage market
- In the last year they provided 75% of the mortgage funds
- Through the second quarter of this year taxpayers have spent $148 Billion trying to rescue them and will have to spend at least another $100 Billion. Based upon a Congressional Budget Office estimate the additional cost could easily reach $300 Billion.
- Despite the failure of using these institutions to promote the government's housing
policy they are still being called upon to do so. Case in point: they
are being pushed to modify mortgages under HAMP (Home Affordable
Modification Program), which is already proving to be another government
fiasco with huge default rates.
- Fannie and Freddie will likely be addressed in a housing finance reform bill to be worked on next year. In all likelihood they will have a much smaller role in the housing market with less government support.
With roots going back to 1938, Fannie and Freddie looked like they could actually succeed in manipulating the housing market for more than 60 years. However, as with all government manipulations they ultimately failed and now we have to figure out how to disentangle them from the housing market without causing another disaster. That's going to be tough because mortgage rates are sure to rise at a time when the housing market is still reeling.