Fannie Mae / Freddie Mac Bailout Costs Estimated
The government announced on Thursday the total tab taxpayers will end up picking up to bailout the mortgage giants Fannie Mae and Freddie Mac, could be as much as $259 billion. The figure is just about twice what the two companies, now under a government conservatorship, have received so far.
By comparison, bailouts of financial firms and auto manufacturers have only cost taxpayers a combined $50 billion, according to the latest projections from the Treasury Department. And the bailouts of some of the largest Wall Street banks, which caused significant public outcry, have so far earned taxpayers a return of $16 billion.
When the housing bubble burst, Fannie and Freddie were inundated with losses on bad loans they backed as foreclosures mounted. The two companies essentially purchase mortgages from various lenders, package them together into bonds with a guarantee against default, and sell the bonds to investors.
The figures released on Thursday are a general estimate of the cost of bailing out the two mortgage firms, as their actual losses could vary widely depending on what home prices do over the next several years. If prices continue to drop, as predicted by some analysts, it will limit the amount of money the two companies can salvage in foreclosures, and they would require more aid.
So far the government has pumped about $135 billion into the bailouts of Fannie and Freddie, but the Federal Housing Finance Agency (FHFA) projects the bailouts could end up costing between $142 billion and $259 billion by the end of 2013. Those numbers reflect dividends the two companies are expected to have to repay.
The terms of the federal bailout require Fannie and Freddie to pay an annual dividend of ten percent to Treasury, and they have paid a total of $13 billion combined in dividends already. That amount is expected to rise sharply over the next few years, with regulators projecting the two companies to make additional dividend payments of between $67 and $91 billion combined over the next three years.
Fannie Mae and Freddie Mac have been operating under the government’s control for more than two years now. When the government first stepped in, back in September 2008, their combined rescue was expected to cost taxpayers $200 billion.
Thursday was the first time the FHFA offered taxpayers a public estimate of the total tab. The two companies’ combined bailout is on pace to be easily the largest federal expense stemming from the financial crisis. The numbers dwarf the previous record-high single bailout effort, the rescue of American International Group (AIG). That bailout is currently expected to end up costing about $5 billion, and that bailout could eventually end up turning a profit for taxpayers, according to Treasury, if their plans to unload AIG stock succeed.
The Obama administration’s bailout of the auto industry, meanwhile, is expected to cost a total of $17 billion, according to Treasury. Fannie and Freddie own or guarantee close to 31 million home loans with a combined value of more than $5 trillion, or in excess of 50 percent of all US home mortgages.
Over the next year, legislators plan to review the mortgage-lending system and consider possible replacements for Fannie and Freddie. The recently-passed financial-reform package did not address the Fannie/Freddie problem.