Fannie and Freddie Limbo

This week Fannie Mae, one of the two mortgage giants bailed out in September 2008 at the height of the financial turmoil that year, released its 2011 financial results. Management revealed losses of over $2 billion in the last quarter of 2011, nearly $17 billion for all of 2011 and asked for almost $5 billion from Treasury to continue operating. The 2011 loss was actually worse than the 2010 loss of $14 billion.

The casual taxpayer responsible for covering these losses might have a simple question: When is this going to end? The answer is not any time soon:

  • There is no agreed on plan to wind down the GSEs.
  • There has been no progress in downsizing Fannie Mae and its cohort Freddie Mac by shrinking them down to prepare for unwinding
  • Fannie and Freddie’s supervisor and conservator, the Federal Housing Finance Agency (FHFA) says that the cumulative payments by Treasury through 2014 will ultimately be in the range of $220 billion to $311 billion.

The FHFA takes no responsibility for this ‘in limbo’ status of the pair. In a strategy document issued last month, they point the finger at Congress: “A new structure for housing finance requires congressional action, but no clear legislative consensus has emerged from the Administration or Congress.”

Although not a bald-faced lie, this characterization is certainly misleading, as if to say the pair remains in limbo until Congress acts. FHFA has the power to take them out of conservatorship and place them in receivership which would allow FHFA to “place [Fannie Mae and Freddie Mac] in liquidation and proceed to realize upon the assets of [Fannie Mae and Freddie Mac] in such manner as the Agency deems appropriate.” No excuses.

Vernon P. McKinley is a Research Fellow at the Independent Institute and author of the Independent book Financing Failure.
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