Taxpayers Already Bailing Out Housing Market

It's the silly season again, and that means that politicians will say one thing while doing another and then pretend they are being consistent. For instance, President Bush made a big deal of opposing the Democratic-sponsored bill for using the F.H.A. to bailout distressed homeowners. John McCain also opposes a bailout for homeowners.

And yet, just a couple weeks ago, the Bush Administration proposed using the F.H.A. to bailout homeowners.

While the two plans are different, they both involve using the same agency to do the same thing.
What really makes this silly is that the agency they want to use, the F.H.A. is already insolvent from bailing out homeowners.

Housing officials say the agency will face a deficit for the first time in its 74-year history, starting in the fiscal year that begins in October.

“These types of loans have pushed F.H.A. to the brink of insolvency.”
- Housing Secretary Alphonso R. Jackson

H.U.D. has asked Congress for taxpayer subsidies for the first time in three decades, primarily because of losses at their F.H.A. subsidiary.

If the program continues without any changes, Congressional officials say, the F.H.A. would face a 1,400,000,000 dollar shortfall in fiscal 2009. This would mean that Congress — and American taxpayers — would have to subsidize the F.H.A. for the first time.

In other words, even you are part of the +33% of Americans that rent because you can't afford the over-inflated housing prices, you are already subsidizing the housing market. And this is before either the Republican or Democratic bailout plans are passed, which will put the taxpayer on the hook for hundreds of billion of dollars more.

The looming financial difficulties have not prevented the Bush administration from expanding the F.H.A.’s role to help ease the nation’s foreclosure crisis. Since September, more than 150,000 homeowners have refinanced through F.H.A. and officials hope that the number will increase to 400,000 by the end of the year.

“It’s a toxic brew. All the ingredients are there for the problem to escalate.”
- Howard Glaser, former HUD general counsel

The financial problems at the F.H.A. have gotten so bad that the Federal Home Loan Bank of Chicago will stop buying home loans from its members.

And now for the Main Event

The bailout doesn't stop there by any means.
A little over a month ago the Bush Administration changed the rules on how the two governments-sponsored mortgage giants, Fannie Mae and Freddie Mac, could handle their loss reserves.

By reducing the extra cushion of capital the two companies have been required to hold since 2004, the regulator, the Office of Federal Housing Enterprise Oversight, is enabling the companies to invest $200 billion more in home loans. In essence, the companies are being allowed to take billions of dollars that had been used as a reserve against possible further losses and invest that money now in the housing market.
[...]
At the end of 2007, Fannie Mae had $45 billion in capital and Freddie Mac had $37 billion, for a total of $82 billion between them. But that cushion supports more than $1.4 trillion of combined debt and debt guarantees.

So the question is: how important are those reserves?
Judging by recent history, it is very important. Freddie Mac lost $2.5 Billion in the last quarter of 2007, and another $2 Billion in the quarter before that. Fannie Mae lost $3.55 Billion in the last quarter of 2007, and $1.4 Billion in the quarter before that.

The finances at Fannie Mae has gotten so bad that Barron's openly suggested a government bailout was coming.

Barron's said the company, which lost $2.6 billion last year, has a balance sheet that appears loaded with "iffy" assets and understated liabilities that could leave the company ill-equipped to weather a serious financial crisis.

So what would a government bailout of Fannie and Freddie look like? Well, it wouldn't be pretty. CNN called it the 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.

In fact, a government bailout of Fannie and Freddie would be so large that it would cost America its AAA debt rating. Losing the AAA rating would mean foreigners would fly from our Treasuries, thus bringing to an end the dollar's status as world's reserve currency.

Is a bailout of Fannie and Freddie in the future? At this point it is still just speculation and no one is predicting it.
However, the unprecedented housing bust, the changing of Fannie and Freddie's reserve rules, and now what will probably be a prolonged recession, means that the chances have already risen further than Wall Street would have dreamed of just a 6 months ago.

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Comments

Good diary, a few points

1. In addition to the 30% of Americans who are "bitter renters", there is another 30% who are homeowners who have paid off their mortgages. These people must also wonder why they bothered to do the responsible thing. There are ~7% of Americans who are in trouble on their mortgages now. leaving about 33% of Americans with mortgages. Now, we don't know how many have refinanced or got "fog-the-mirror" loans, but let's just guess that half of this 33% have never taken out HELOCs or are current with their suitable mortgages. Bottom line: something like 75%-80% of Americans who have been prudent one way or the other are being told to bail out greedy or irresponsible misbehavior.

2. I know it's unintentional, but your essay makes it appear that the Bush malAdministration is the primary tout of tapping federal agencies for the bailout. Unfortunately, this one is bipartisan. Even Barney Frank, many of whose proposals are good ones, has also proposed this loot of the Federal agencies.

3. Don't forget the Federal Home Loan Banks. Remember the one it Atlanta turned out to be buying something like $52 Billion (!!!) of Countrywide's toxic stuff a few months ago as it was spiraling into bankruptcy.

4. As usual, the bailout is being given without the reforms to prevent the next catastrophe from being put in place. That's always for "later", and the lobbyists and campaign contributors always make sure that "later" never comes.

bailout

Yuck. Thanks for posting on this, I'm still confused about it all, but a 1 trillion dollar time bomb, I noticed the statement that if evaluations (prices) dropped, people will just stop paying on their loans. Yet, to me, housing prices have to drop because they are out of the stratosphere in terms of what most people can afford.

I've got a figure that 23% of all home mortgages are predatory, or subprime loans.

So here I can see refinancing these to fair rates and so on,
but I don't see why the FHA should be backing loans of $750k. Seems to me that just keeps the overpriced, super inflated prices going on, such as Silicon valley.

What do you think of Hillary's plan to

Clinton has also talked about a new housing stimulus package to provide $30 billion directly to states and local governments to buy foreclosed or distressed properties. The cities and states could then resell the properties to low-income families or convert them into affordable rental housing

?