U.S. taxpayers were reminded on Friday (and again this morning) that our long national Fannie Mae and Freddie Mac nightmare is far from over.
On Friday, Fannie Mae requested another $5.1 billion in aid from the U.S. Treasury to keep its capital at acceptable levels, which would bring the total Treasury bailout of Fannie Mae to $104 billion, with only $14.7 billion being returned in the form of dividends. Then, this morning Standard and Poor’s downgraded Fannie and Freddie from AAA to AA+ following its downgrade of the entire federal government to AA+ on Friday.
No one should be surprised by these moves. The downgrade of Fannie and Freddie debt was expected since the government controls their business activities and guarantees their debt. Yet there remain signs that the housing crisis is not over. In the second quarter Fannie Mae lost around $5.18 billion or 90 cents per share, which was 45 cents per share or $2 billion more than last year.
When paired with its counterpart Freddie Mac, taxpayer backed “donations” total $169 billion, with their net-capital draw approaching $143 billion. This is more than twice as much as the bailout for the automakers (which totaled some $60 billion) and is by far the largest outstanding bailout debt still owed to taxpayers. Together, the two mortgage giants owe more to taxpayers from their bailout than all other industries combined, and the bill is still growing.
This is a problem that can’t be ignored. As Heritage Senior Research Fellow David John concluded, Fannie and Freddie “must be shut down.” But how is it to be done? Despite their troubles, Fannie and Freddie continue to dominate household mortgage holdings in the U.S., with over 90 percent of all U.S. mortgages owned or guaranteed by them. Together they control nearly 31 millions home loans with a total value in excess of $5 trillion. The U.S. is riding a tiger. How can we get off without being eaten?
The answer, according to John, is a gradual phase-out of the two mortgage giants, allowing housing finance to be freed of government interference and distortion, without inflicting an immediate shock on the economy. Any such plan however, should start with the clear understanding that Fannie and Freddie are to be liquidated and that taxpayers—and homeowners—will never be put in such a position again.
Bryan Kloster is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit:http://www.heritage.org/about/departments/ylp.cfm