Deal with Fannie and Freddie Now or We’ll Pay Later

David C. John / May 17, 2010

What’s the main selling point for the financial regulation bill Congress is debating? That it would end taxpayer bailouts. The Senate even added an amendment directly noting that the bill is intended to “prohibit taxpayers from ever having to bail out the financial sector.”

But don’t breathe a sigh of relief too quickly. Because the bill’s many problems include this frequently overlooked fact: It does nothing to fix the problems with Freddie Mac and Fannie Mae, both of which A) played a major role in the meltdown of 2008 and B) are asking for more money.

Ignoring Fannie and Freddie would be a huge mistake. More than a year after going into receivership, they still dominate the housing finance market by buying mortgages from lenders, packaging them into bond issues, and then reselling them to investors worldwide. Last year, the two financed or backed about 70% of single-family mortgage loans. They hold about $5 trillion in their investment portfolios.

Most importantly: Both are losing money fast, with those losses being covered by the U.S. taxpayer. About a week ago, Freddie announced it had lost $8 billion in the first quarter of 2010 and would be asking for another $10.6 billion in taxpayer help. Not to be outdone, Fannie announced an $11.5 billion loss and asked for another $8.4 billion from taxpayers. (more…)