Obama Budget Ignores $187 Billion Cost to Taxpayers of Fannie and Freddie, But Not Future Profits!

Confounded Interest ^ | 04/11/2013 | Anthony B. Sanders

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Jon Prior at Politico reports that according to budget projections released Wednesday, taxpayers could see “a $51 billion profit on the $187 billion in federal funds that have been pumped into” Fannie Mae and Freddie Mac “since they were taken over by the government in 2008.”

The catch? Fannie and Freddie would have to remain under government control for another 10 years.

Wait a minute. If taxpayers spent $187 to bailout Fannie and Freddie, a $51 billion profit over ten years still leaves taxpayers in the hole for $136 billion. Politico is making it sound like a tremendous return on taxpayer return on investment ($51b Profit / $187b “Investment).” It isn’t — it would still cost taxpayers $136 billion over ten years AND the government would still control them.

Even worse, going forward in the President’s budget, improved profits at Fannie and Freddie are a cash cow for Treasury (the losses are in the past). So, will government allow their new cash cows to be returned to the private sector?

The Fannie/Freddie model of privatized gains and socialized costs (e.g., the $187 billion bailout) was an abysmal failure. It is an example of how the public-private model is a dangerous concept since political agendas can subvert and destroy the model. So the allure of a public-private model “making profits for taxpayers” conveniently forgets the $187 billion in losses that they accumulated.

Having said that, Fannie Mae and Freddie Mac are very good at what they do. It is a question of decoupling them from the public-private partnership model.

The Federal Housing Finance Agency today directed Fannie Mae and Freddie Mac to extend the Home Affordable Refinance Program (HARP) by two years to December 31, 2015. The program was set to expire December 31, 2013.

FHFA will soon launch a nationwide campaign to inform homeowners about HARP. This campaign will educate consumers about HARP and its eligibility requirements and motivate them to explore their options and utilize HARP before the program ends. HARP is uniquely designed to allow borrowers who owe more than their home is worth the opportunity to refinance their mortgage. Extending the program will continue to provide borrowers opportunities to refinance, give clear guidance to lenders and reduce risk for Fannie Mae, Freddie Mac and taxpayers.

To be eligible for a HARP refinance homeowners must meet the following criteria:  The loan must be owned or guaranteed by Fannie Mae or Freddie Mac.  The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.  The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.  The current loan-to-value (LTV) ratio must be greater than 80 percent.  The borrower must be current on their mortgage payments with no late payments in the last six months and no more than one late payment in the last 12 months.

This is the problem with the Fannie/Freddie model. A regulator like FHFA can intervened in the business decisions of two corporations, even if it helps more households to get out of negative equity.

To be sure, The Federal Reserve can always backstop Fannie Mae, Freddie Mac and member banks. And Congress/Administration can always bailout troubled corporations. But linking a private corporations to political agendas is a recipe for disaster.

The good news? Serious delinquencies (90+ days) are declining.

And the housing market is improving.

Hence, Fannie and Freddie will see improvement in profits (especially if employment improves). But they would be better off without the ball and chain of government housing policies and influence.

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Obama ignores the COST to taxpayers, but wants to keep Fannie and Freddie around as a cash cow.