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WSJ: CBO: Fannie, Freddie Guarantees to Cost Government $42 Billion

Washington, Jun 3 -

Mortgage guarantees made by Fannie Mae and Freddie Mac in the coming decade are expected to cost the government another $42 billion, the Congressional Budget Office said Thursday.

The mortgage giants were seized by regulators and placed into a federal conservatorship in September 2008 as housing prices tumbled nationwide and foreclosures climbed.

Through the end of March, the government provided about $154 billion in capital to Fannie and Freddie, while the two government-sponsored enterprises paid out more than $24 billion in dividends to the government — resulting in a net cost of about $130 billion so far, according to Deborah Lucas, CBO’s assistant director for financial analysis. Ms. Lucas’ comments came in remarks prepared for a House Budget Committee hearing.

“CBO expects additional net cash payments from the government over the next several years,” she said.

If the two continue to do business on current trends, the CBO “estimates that the new guarantees the [enterprises] will make over the 2012-2021 period will cost the government $42 billion,” Ms. Lucas said. The agency bases its subsidy estimate on the capital and guarantees Fannie Mae and Freddie Mac provide to the mortgage market at prices below what private financial institutions offer.

Fannie and Freddie still account for the bulk of the mortgage market; in 2010, they financed 63% of new mortgages originated.

U.S. House lawmakers last month unveiled seven bills to speed up the eventual closure of Fannie and Freddie, part of a Republican push to dramatically reduce the U.S. government’s role in the mortgage market.

Republicans, especially in the House, want to unwind the government’s longstanding backing of the $10.5 trillion U.S. mortgage market, arguing that the high levels of support that have traditionally been part of American housing policy pose too much of a risk for future bailouts.

Fannie and Freddie purchase home loans from originators and package those loans into mortgage-backed securities. The securities are then held as investments, or sold to investors along with a guarantee against losses from defaults on the underlying mortgages.