Price Tag for Fannie and Freddie Bailout Could Double: FHFA

Taxpayers' bill for keeping the nation's two largest mortgage firms afloat could more than double between now and 2013 should market conditions deteriorate further, according to the companies' regulator.
[IMAGE] The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) released projections Thursday of how much money ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com might need over the next three years from the federal government to continue financing mortgages. Projections are based on three separate economic scenarios.

To date, Fannie and Freddie have drawn $148 billion in taxpayer dollars from the Treasury Department since they were placed under government control in September 2008. FHFA says the two GSEs' could need another $73 billion to $215 billion to maintain positive net worth through 2013.

Under the most favorable economic conditions, that means the overall tab for keeping Fannie and Freddie in business will reach $221 billion. Under the worst-case scenario, which has the country reverting into a second recession, the bill would run up to $363 billion.

“These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” said FHFA Acting Director Edward J. DeMarco. “These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the Enterprises.”

The money would be used to cover the GSEs' losses on home loans, as well as dividend payments on the preferred stock relinquished to the Treasury in exchange for financial support.

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FHFA says payments on Treasury preferred stock are beginning to make up a larger share of the draw needed by Fannie and Freddie. If these dividend payments were excluded, the cumulative amount of capital infusions required by the GSE’s through 2013 would decline to a range of $142 billion to $259 billion.

According to ""FHFA’s report"":http://www.fhfa.gov/webfiles/19409/Projections%20102110.pdf, the companies have been steadily increasing loan loss reserves from 2007 through the second quarter of 2010 to cover bad mortgages. Charge-offs are expected to increase over the next three years as these non-performing loans are ultimately resolved. The agency says the primary driver behind GSE losses is their pre-conservatorship mortgage business.

Demands from Fannie and Freddie for lenders who originated souring mortgages during the boom years to buy back loans that weren’t underwritten by the book have become amplified in recent months.

In July, FHFA ""issued subpoenas to 64"":http://dsnews.comarticles/fhfa-issues-64-subpoenas-in-private-label-mbs-investigation-2010-07-12 mortgage-backed securities (MBS) issuers and lenders demanding loan files and transaction documents related to mortgages the GSEs have purchased. The _Wall Street Journal’s_ ""Nick Timiraos reports"":http://online.wsj.com/article/SB10001424052702304011604575564631414300418.html FHFA has hired an outside litigation firm to coordinate its investigation and help recoup some of the losses from banks and Wall Street firms.

Timiraos cites a study from the analysts at RBS Securities Inc., which says originating lenders repurchased $6 billion in faulty mortgages from Fannie and Freddie during the first half of 2010. The research firm estimates banks could be asked to buy back $22 billion more through 2012.

The projected capital needs for Fannie Mae over the next three years is twice that of the projected draw for Freddie Mac. FHFA says that’s in part because Fannie Mae’s mortgage book of business is 45 percent larger than Freddie Mac’s.

FHFA noted that the results here are not expected outcomes; they are modeled projections in response to “what if” scenarios based on assumptions about the GSEs’ operations, financial market conditions, and the path of home prices. The volatility of home price trends, in particular, has been the main culprit behind losses for Fannie and Freddie, according to FHFA.