Feds to Pull Out Check Book in 2010 to Help Fannie Mae and Freddie Mac
December 31, 2009 - In 2008 the federal government took over Fannie Mae and Freddie Mac; the two government backed companies that guarantee most of the mortgages in the United States. The reason for the takeover was that both organizations were in trouble because of the number of bad mortgages that they had agreed to provide financial backing for. The result of the takeover was that taxpayers became the backers of roughly $5 Trillion in mortgage debt, but because of the way the takeovers occurred, this debt was not made a part of the national debt. You could call this an accounting trick. Initially, the government agreed to pump up to $200 Billion into the companies. That figure was eventually capped at $400 Billion. Now, they are removing any caps altogether.
Fannie Mae and Freddie Mac are actually supposed to provide liquidity to mortgage markets. They were actively involved in the schemes that led to the housing market meltdown which began in 2007 and which started the country's economic decline of the past two years.
Although you would never know it from the rhetoric that comes out of Washington, DC, Congress was the organization that dropped the ball on Fannie and Freddie. As early as 2001, the Bush administration was sounding an alarm and calling for greater regulation of these two organizations. Those calls only increased in intensity over the years, but Congress still failed to act. Both Rep. Barney Frank and Sen. Charles Schumer led the efforts to block further regulation. Both continue to hold office.
The reason that Frank and Schumer were against more regulation was supposedly because they wanted Fannie and Freddie to help finance more affordable and low cost housing. The result was that many of the loans backed by the organizations were given to people who could never afford them. On September 25th, 2003, Frank actually said, "I do think I do not want the same kind of focus on safety and soundness that we have in OCC (Office of the Comptroller of the Currency) and OTS (Office of Thrift Supervision). I want to roll the dice a little bit more in this situation towards subsidized housing..." That roll of the dice has been responsible for millions or lost jobs, homes and dreams. It is one of the worst economic policy disasters in American history and yet nobody - not even the voting public - has held these people responsible for their actions.
Had Congress passed regulatory legislation, there is a good chance that the economic events of the past two years never would have occurred. This means that if you have been laid off or lost your home, and your congressman or senator has been in office for more than one term, you should be asking them some tough questions about how they voted on Fannie and Freddie regulatory proposals. And if they voted against these, then you may want to vote against them.
Unfortunately, much of this is water under the bridge. What we need to be concerned about is how much these two organizations will cost us in the future. Removal of the cap on the amount of support that will be offered to Fannie and Freddie means that taxpayer losses are now expected to top $400 Billion. How far they will go over that threshold is unknown but you can bet it will be very expensive. That is probably why the Treasury Department made its announcement on Christmas Eve. They were hoping that nobody would notice. Well, we did notice.
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