Fannie And Freddie Meltdown Could Cost Up To $1.1 Trillion
Here’s something to think about. According to CNN Money yesterday, credit rating agency Standard & Poor’s recently estimated that a financial meltdown at mortgage financing giants Fannie Mae and Freddie Mac could require a taxpayer bailout costing $420 billion to $1.1 trillion. CNN Money senior writer Chris Isidore noted that this staggering amount dwarfs the cost ($250 billion in today’s dollars) of the savings and loan crisis bailout. S&P added that saving Fannie and Freddie might cost so much that the AAA credit rating of the U.S. government might even be jeopardized. Should this happen, all federal government borrowing would become more expensive.
Victoria Wagner, a S&P credit analyst who worked on the report, told CNN Money’s Isidore that she and other analysts are concerned about more problems in the mortgage market because both Fannie Mae and Freddie Mac “have become increasingly important to the health of the industry.” Wagner pointed out that at the end of January, 82% of all mortgages in the United States were backed by one of these firms, up from only 46% in the second quarter of 2007. And the roles of both in the mortgage and real estate markets are likely to grow, as Congress recently allowed them to back larger mortgages (up to $729,750), up from the previous limit of $417,000. The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets. Isidore wrote:
The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts. The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines. And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business.
Fannie Mae posted a $2.1 billion loss in 2007, while Freddie Mac lost $3.1 billion last year.
Source:
“The trillion-dollar mortgage time bomb”
Chris Isidore
CNN Money, April 21, 2008
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