Fannie, Freddie Fix May Cost $685 Billion, S&P Says
Fannie, Freddie Fix May Cost $685 Billion, S&P Says
Andrew Harrer/Bloomberg
A replacement for Fannie Mae and Freddie Mac would be capitalized at 7 percent of total assets, or $400 billion, supplied by the government, a report said.
A replacement for Fannie Mae and Freddie Mac would be capitalized at 7 percent of total assets, or $400 billion, supplied by the government, a report said. Photographer: Andrew Harrer/Bloomberg
Fannie Mae and Freddie Mac, the mortgage firms operating under federal conservatorship, may cost taxpayers as much as $685 billion as the U.S. covers losses and overhauls the housing-finance system, Standard & Poor’s said.
Costs for resolving the two government-sponsored entities could reach $280 billion, including $148 billion already delivered under a U.S. Treasury Department promise of unlimited support, New York-based S&P said today in a research report. The government may spend another $405 billion to capitalize a replacement for the two companies, which own or insure more than half the U.S. mortgage market.
“It appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement,” S&P said, citing the GSEs’ growing portfolio of unsold homes, a sluggish economy, high unemployment, the prospect of rising foreclosures and billions in legacy losses.
Treasury Secretary Timothy F. Geithner, who has said there is a strong case to be made for continued U.S. involvement, has promised to deliver the Obama administration’s plan to overhaul the housing-finance system by the end of January. Republican lawmakers who will take control of the House of Representatives in January have called for the government to end its support for Washington-based Fannie Mae and Freddie Mac of McLean, Virginia.
“Although federal authorities have taken no concrete public steps toward sponsoring a GSE alternative, Standard & Poor’s believes that it’s a useful exercise to consider how much such a recapitalization might cost taxpayers,” the report said.
Replacement
A replacement for Fannie Mae and Freddie Mac would be capitalized at 7 percent of total assets, or $400 billion, supplied by the government, the report said.
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, said last month that the two companies could need as much as $363 billion in taxpayer aid -- including funds already delivered -- through 2013 if the housing market falls to levels it reached during the credit crisis. The actual cost to the U.S. would be $259 billion, because almost 30 percent of the funds would come back to Treasury as dividend payments on its holdings of senior preferred stock.
The total cost could be as little as $221 billion, or $142 billion after dividends, if there is moderate growth in home prices, FHFA said in its report. If prices decline slightly, the companies would need $238 billion, or $154 billion after dividends, FHFA said.
The estimates in S&P’s report included projected outlays from Treasury to Fannie Mae and Freddie Mac, but didn’t factor in the dividend payments.
The Congressional Budget Office calculated last year that Fannie Mae and Freddie Mac would need $389 billion in subsidies through 2019. The White House Office of Management and Budget said in February that aid could total as little as $160 billion.
Treasury Department officials said last week 90 percent of the companies’ losses are behind them, with most attributable to loans made before the government took control.
To contact the reporter on this story: Clea Benson in Washington at Cbenson20@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
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