NCPA - National Center for Policy Analysis

FANNIE-FREDDIE BAILOUT COULD COST TAXPAYERS $1 TRILLION

July 2, 2010

American taxpayers are now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans.  Unfortunately, that amount could be just the tip of the iceberg, says CNBC. 

According to the Congressional Budget Office: 

  • The losses could balloon to $400 billion.
  • And if housing prices fall further, the cost to taxpayers could hit as much as $1 trillion. 

Two things are clear, says CNBC: 

  • Taxpayers don't want to foot the bill.
  • Fannie and Freddie, taken over by the government in 2008 to stanch the financial bloodletting, need a major overhaul.  

At the crux of the financial crisis, the government took over Fannie and Freddie to avert possible massive losses for banks, money-market funds and, perhaps, most importantly, foreign institutions that purchased billions of Fannie and Freddie debt because of its implied government guarantee.  The Chinese, for example, had invested heavily, and the United States decided it didn't want them to take a loss on their investment. 

One possible scenario for the entities is to turn them into utilities, says Sean Dobson, CEO and chair of Amherst Securities, whose company trades as much as $50 billion in mortgages annually.   "Freddie and Fannie could be used to standardize the mortgage product," says Dobson, "to completely describe what the risks are and then act as a conduit for the capital markets to take the risk." 

Source: Michelle Lodge, "Fannie-Freddie Bailout Could Cost Taxpayers $1 Trillion" CNBC, June 29, 2010. 

 

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