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January 11, 2010

Fannie and Freddie to Grow Under Government Management


In a previous blog, I wrote that the Fannie and Freddie losses being absorbed by the federal government and the taxpayer would continue to grow (See my May 24, 2009 entry). On December 28th, the federal government increased the loss ceiling from $100 billion each to $200 billion for the struggling lenders. Just two days later, the Wall Street Journal reported that it had been suspended, clearly the way for a bottomless pit of taxpayer money to go flying into these huge mortgage holes.

In fact, according to the Wall Street Journal, Fannie and Freddie’s mortgage portfolio had actually INCREASED, yes INCREASED in size during the year 2009. And, because of the clearance of the loss ceiling, analysts are saying that Fannie and Freddie are free to buy more mortgages in the market in order to keep mortgage interest rates low. What about this is different from what caused the financial crisis?

The Wall Street Journal also reported that Fannie and Freddie will be buying the actual mortgages behind the securities that they have held and that have failed, all under the guidance and funding of the federal government. Essentially, the federal government is using Fannie and Freddie to attempt to keep mortgage rates down.

Does this bother anyone?

In addition to this, executives from each of the companies both received about $5 to $6 million in compensation bonuses each. Apparently, Ken Fienburg (the pay czar)’s $500,000 compensation cap is exempt at the companies that may end up destroying more taxpayers dollars than twice that of AIG (

Does this bother anyone?

How does making a company bigger solve the problem of “Too Big to Fail?”

Putting the issue in terms of dollars, the Associated Press stated:

“Now they will be able to hold a combined $1.62 trillion in mortgage investments by the end of next year, compared with $1.36 trillion under the old rules. The result: Fannie and Freddie will have an additional $260 billion to invest next year, Credit Suisse calculates.”

What happens when the interest rate environment becomes unfavorable and rates go up in 2010? Will Fannie/Freddie and the housing market still have the expansionary forces to grow into prosperity? Does having no loss ceiling on the companies’ mortgage portfolios increase or decrease accountability? Are the incentives to succeed greater? Are the disincentives of failure still present? If so, what are they and how are they affecting the company’s management to make better decisions?

I believe that the eliminating of the loss ceiling is opening the door for Fannie and Freddie to buy more bad mortgages. By buying the bad mortgages that securitization is tied to, Fannie and Freddie can take losses on the mortgages, the securities, and the depreciation/costs of repossessing and selling foreclosed homes.

As a taxpayer, are you comfortable about the steps the federal government and Fannie/Freddie are making in investing in the housing market in 2010?

If you are, maybe you should continue to vote for the party of change in November.

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