Fannie Mae and Freddie Mac, the mortgage-finance companies operating under U.S. conservatorship, could draw a total of $363 billion in Treasury Department aid through 2013 if the housing market worsens, the Federal Housing Finance Agency said.
The FHFA, which oversees the government-sponsored entities, offered the estimate today as the worst-case in an analysis modeled on the stress tests conducted on the nation’s biggest banks last year. The actual total cost to taxpayers under the regulator’s most dire scenario 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.
Under the best-case scenario, which assumes a strong near-term recovery in the housing market, the total cost to taxpayers would be $221 billion, or $142 billion after dividends. A middle-ground scenario would require total aid of $238 billion, or $154 billion after dividends. So far the companies have drawn $148 billion and returned $13 billion in dividends to Treasury.
“These projections are intended to give policy makers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” FHFA Acting Director Edward J. DeMarco said in a statement released with the report. “The results reflect the potential effects of a limited set of hypothetical changes in house prices.”
Brink of Collapse
Regulators took control of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, in September 2008 after losses stemming from the subprime mortgage crisis pushed them to the brink of collapse. Since then, the two companies have used U.S. aid to buy and guarantee home loans while Washington policy makers weigh an overhaul of the mortgage-finance system.
“The Obama administration has made clear that the current structure of the government’s role in housing finance, while necessary in the short-term to provide critical support to a still-fragile housing market, is simply not acceptable for the long-term,” Jeffrey Goldstein, Treasury’s undersecretary for domestic finance, said in a statement.
Nearly 90 percent of the companies’ losses are behind them, with most attributable to loans made before the government took control, Goldstein said.
Fannie Mae and Freddie Mac funded more than 62 percent of new mortgages in the first half of this year, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland.
The FHFA analysis, which relies heavily on housing-price projections, presents an incomplete picture of the risks facing Fannie Mae and Freddie Mac, said Karen Shaw Petrou, managing director at Federal Financial Analytics, a Washington-based research firm.
“The report provides a sense of the GSEs’ likely cost to taxpayers, but nowhere near a definitive picture of it,” Petrou said in an analysis of the report.
The range of the FHFA’s projections “suggests the agency doesn’t have a very good grasp on the GSEs’ losses going forward,” said Guy Cecala, chief executive officer of Inside Mortgage Finance.
The Congressional Budget Office calculated last year that Fannie Mae and Freddie Mac would need $389 billion in federal subsidies through 2019. The White House Office of Management and Budget said in February that aid could total as little as $160 billion if the economy strengthens.
Other estimates are higher. Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said a 20 percent loss on the companies’ loans and guarantees could lead to a $1 trillion taxpayer bailout.