The Corner

Fannie, Freddie, and the Housing Bill

This week, Fannie Mae and Freddie Mac both lost about half of their value as their stock prices plummeted over investor concerns that the mortgage giants are “technically insolvent.” So how does the U.S. Senate react? By passing a housing-market bailout funded by a special tax on Fannie and Freddie. I wish I was making this up:

Washington, D.C. –

The housing bill expected to be passed by the Senate Friday evening [it passed] is designed to provide better regulatory oversight for embattled mortgage buyers Fannie Mae and Freddie Mac. But it also leans on them heavily to help fund the mortgage bailout, precisely at a time when they’re experiencing financial turmoil.

With share prices of Fannie and Freddie plummeting daily, are the government-sponsored entities really in a position to help rescue people whose homes are headed for foreclosure? […]

The Senate’s bill would establish a new regulator for Fannie and Freddie, which are now regulated by the Office of Federal Housing Enterprise Oversight. The new authority would presumably be stronger than the current structure; it would establish capital standards for the government-sponsored companies and would embolden their management standards.

But there’s a catch. The centerpiece of the bill allows the Federal Housing Administration to insure up to $300 billion in new loans for troubled mortgages, with much of the funding coming from Fannie’s and Freddie’s profits. According to the Congressional Budget Office’s most recent analysis of the bill–in June–the legislation would cost Fannie and Freddie $710 million in 2009 and about $9 billion from 2009 to 2018. Although those figures have likely changed as the bill has been modified, the message is the same: The government-sponsored mortgage buyers would be on the hook for a hefty sum of money.

Admittedly, Fannie and Freddie have much bigger problems right now than a few hundred million dollars in new taxes. But that’s kind of the point. If, as many suspect, the government [i.e. the taxpayer] eventually has to bail out Fannie and Freddie, how are Fannie and Freddie supposed to bail out the rest of the housing market?

I love Chris Dodd’s answer to this question:

“They’ll be fine,” Senate Banking Committee Chairman Chris Dodd, D-Conn., told reporters Friday. Dodd, who helped shepherd the bill through the Senate, says the companies are “fundamentally sound and strong,” noting that they hold excess capital and that their portfolios are primarily made up of healthy, 30-year fixed-rate loans.

“There’s no reason for the kind of reaction we’re getting,” Dodd added, referring to what he described as “panic” on Wall Street. Fannie and Freddie shares have experienced multiple sell-offs after an analyst report Monday indicated that they needed to raise a combined $75 billion.

Tis but a scratch,” says Dodd. I honestly hope he’s right.

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