Wednesday, February 3, 2010

The Treasury's $5.5 Trillion Lump of Coal for the Taxpayers

On December 24, the same day that the Senate passed its obscenity of a "health care" reform bill, the elves at the U.S. Department of the Treasury quietly made the taxpayers liable for an estimated 5.5. trillion in home loans, or about one-half of all home mortgages.

The Treasury worked this bit of magic by simply adjusting the formula it uses to determine how much financial support the Treasury is allowed to provide. This required no action by Congress, although Congress could intervene if it wanted to. Support for Fannie Mae and Freddie Mac had previously been capped at $200 billion each, but the new "flexible formula" effectively removed those caps until 2012.

The one "bright" spot in all of this is that these loans are backed by real assets (31 million mortgaged homes), unlike the trillions of dollars of liabilities in promised entitlement payments (e.g., Social Security, Medicare, and Medicaid), which are backed by the faith and credit of the U.S. government (i.e., the taxpayers). Experts don't expect the companies to use even the $400 billion allowed under the caps, but continued high unemployment and a slowly growing economy could easily lead to more defaults and foreclosures than expected, and taxpayers would end up paying an even larger bill.

The ongoing debacles of Fannie Mae and Freddie Mac demonstrate one of the frequent flaws of public-private partnerships. They remain "private" as long as they are running a profit, but when begin to run in the red, they become "public," and the taxpayers are left holding the bill.

In the case of Fannie Mae and Freddie Mac, the wisest course would seem to be to break up both companies and sell off their assets at market rates, which would eliminate the taxpayer liability. Then, except for maintaining basic regulations, Congress and the rest of the federal government should stay out of the housing market, which they clearly do not understand.

Update: There's even more bad news. Apparently, Fannie and Freddie have trillions of dollars in nonperforming loans that are off the books. Fannie's estimated maximum exposure is $2.4 trillion; Freddie's is $1.5 trillion, according to today's report from The Street.

"Treasury removes cap for Fannie and Freddie aidSeattle Times, December 24, 2009
U.S. Treasury Department, "Treasury Issues Update on Status of Support for Housing Programs," December 24, 2009

Hat tip: Thomas A. Saunders III at all-staff meeting at the Heritage Foundation

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