The Unnecessarily Disastrous Relationship of Fannie & Freddie Mac.
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In last week’s letter, I focused on recent economic reports which have been modestly more positive, overall, than most forecasters had been expecting. However, I also pointed out that things on the housing front are still flashing warning signs – specifically the continued record spike in home foreclosures. My conclusion was (and is) that until we see a bottom in the housing sector, we should not expect consumer spending to rebound strongly.
When Does the Bleeding Stop?
This week, we will continue on that theme with the latest distressing news on Fannie Mae and Freddie Mac, which are continuing to hemorrhage with multi-billon-dollar losses every quarter. Both of these giant mortgage entities – that were taken over by the government in September 2008 – are once again begging for more huge government bailouts, as their enormous mortgage portfolios continue to plunge in value.
Here again, this suggests slow growth in the economy for the rest of this year as consumers continue to wrestle with falling home prices, a glut of foreclosed properties on the market and high unemployment. Unfortunately, it very much looks like we are at least several months away from a possible bottom in the housing sector, if not longer.
As a part of this discussion, I will also give you the background information regarding who really got us into this housing crisis in the first place. Some of you may be well aware of this information, but I expect that many readers are not. So this may be another of my E-Letters that you will find useful for sharing with friends and/or family members. Let’s get started.
Fannie & Freddie Request More Billions From Uncle Sam
Most of you will recall that Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) – both previously privately-held corporations – were taken over by the US government on September 7, 2008 at the height of the subprime credit crisis. The Bush administration put these giant corporations into federal “conservatorship” and simultaneously fired both of their CEO’s and their boards of directors.
For many decades, Fannie and Freddie have been the largest holders of US mortgage debt, and at the time of the government takeover in September 2008, the two entities owned or guaranteed over $5 trillion in consumer mortgages, amounting to over half of all US home mortgages in existence at the time. Since the takeover of Fannie and Freddie over 20 months ago, data has been sketchy as to just how much money the government has poured into these huge agencies to keep them afloat.
Yet in the first two weeks of May, both agencies formally requested billions more in federal bailout money, just to pay the interest on their enormous debts and stay afloat. On May 5, Freddie Mac requested an additional $10.6 billion in federal money due to losses of over $8 billion in the 1Q alone. On the following Monday, May 10, Fannie Mae formally requested an additional $8.4 billion bailout and reported that it had lost $13.1 billion in the 1Q alone.
I guess that the Obama administration decided it could no longer keep these massive bailouts under wraps and quietly let it be known that the government had already pumped over $145 billion into Fannie and Freddie since the takeover in September 2008 – not counting the latest combined requests for another $19 billion. Obviously, these two giant agencies continue to lose enormous amounts of money despite the recovery in the economy.
A Brief History on Fannie & Freddie
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