Fannie and Freddie's Federal Shakedown: A $19-Billion Bargain?

Is $19 billion a lot of money -- or a small price to pay for keeping mortgages available to you at a reasonable price during the ongoing financial crisis and into the future? Ask yourself that as you take in the heated reaction to this news: The government overseer of Fannie Mae and Freddie Mac wants the U.S. Treasury to use that pile of treasure to keep them from collapse.

The latest take comes from Gretchen Morgenson at The New York Times, who asks a provocative question: Why aren't Fannie Mae and Freddie Mac part of the financial reform package going through Congress right now? That's the same question Senate Republicans have been asking. Last week, Sens. Richard Shelby, John McCain and Judd Gregg introduced an amendment to the reform bill that would eliminate Fannie and Freddie over the next few years.

Morgenson brings to her case the liberal economist Dean Baker, who suggests that Freddie Mac is somehow overvaluing new mortgages in order to prop up the mortgage markets. It would seem that we have a consensus across the political spectrum: Fannie Mae and Freddie Mac are a menace to the American taxpayer, vampirically sucking our hard-earned wealth.

Pretty awful, right? Not if you compare it to the garbage loans that Fannie and Freddie's virtually unregulated private competitors were dealing in.

Morgenson brings out some ugly numbers from Freddie Mac's latest financial report: a delinquency rate of 4.13 percent on its mortgages overall. (Fannie and Freddie define delinquent payments as more than 90 days late.) Fannie's numbers, which just came out today, are even worse, at 5.47 percent delinquent. When it has to sell foreclosures, Freddie Mac takes an average 39 percent loss. All those borrowers failing to pay their mortgages led to net losses in the quarter of $6.7 billion for Freddie and $11.5 billion for Fannie. And much scarier stuff is to come: Fannie and Freddie combined have more than $338 billion in "nonperforming assets" that will lead to future losses.

Now let's look at unregulated mortgages in the private sector: According to the latest numbers from First American LoanPerformance, as analyzed by Amherst Securities, 12 percent of the total balances of 2006 prime, fixed-rate mortgages securitized by Wall Street are currently 60 days or more past due. That's the good news. Subprime adjustable-rate mortgages? A terrifying 61 percent of dollars lent to borrowers are late, and 49 percent for Option ARMs. When investment banks' servicers resell their foreclosures on the real estate market, they'd love to get Fannie and Freddie's prices. Instead, on a house tied to a 2006 subprime loan, they're looking at average losses of 74 percent.

These are the scary, ugly losses that forced the feds to step in with the Troubled Asset Relief Program to prevent the whole banking system from falling apart. Now, TARP is making sure that banks are paying back the billions they borrowed from taxpayers to stay solvent -- Treasury even reports that it's making a profit.

That does seem to be a better financial situation than the vortex Fannie and Freddie have created, voraciously devouring funds to stem their losses.

But think for a minute about what the two sets of numbers represent. Fannie and Freddie may be suffering big losses. But despite the current pressures of unemployment and the bubble's bursting, most of the borrowers whose loans met Fannie and Freddie's relatively strict standards are doing OK. They're living in homes that they own, and hopefully will continue to do so.

And those sub-prime borrowers financed by Wall Street? Anyone who is still holding onto their home, perhaps with the help of the Home Affordable Mortgage Program, is likely drowning in debt.

Yes, it's completely nuts to keep pouring billions down the volcano hole of the home-ownership gods. Fannie and Freddie need to be torn down and rebuilt as much leaner and more flexible machines, designed to maximize access to credit for consumers and minimize risk to taxpayers or investors. (Plus someone has to help finance the development of rentals, since that's where more people are going to be living.)

But we're kidding ourselves if we think we can just get rid of the agencies and live happily ever after as a nation of homeowners. If McCain, Shelby and Co. get their way, agencies with a mission of looking out for borrowers -- getting them longterm mortgages at low rates -- will be a thing of the past. And every homeowner and home buyer will pay a high price for that.

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