The New Price Tag for Fannie and Freddie

The Treasury Department, as reported by the WSJ, announced that it was removing the $400 billion cap from what it believed would be necessary to keep Fannie Mae and Freddie Mac solvent. The reason for the cap removal is that the Treasury has come to the conclusion that $400 billion is far "too" small. That is, think in terms of trillions of dollars, not hundreds of billions.

Let's look at some history of Fannie and Freddie. By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages with a total principal balance of $1.6 trillion. These loans are now defaulting at unprecedented rates. Since 2008 (and we know what happen then), these two governmental agencies have continued to buy these lousy mortgages in order to stabilize housing prices. (Insanity. That is to continue to do the same thing and expected a different result. Another example of the ineptness and stupidity of our government at work.)

By the way, there is more to this Fannie and Freddie story. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A. [Sidebar: In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime. An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default.] However, Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008. [Outright fraud! What has the government done about this fraud? Absolutely nothing!]

So, once again, the American taxpayer is going to be at risk for over a trillion dollars because of failed governmental policies on housing. I hope it is just a trillion, not a quadtrillion.