The Freddie/Fannie conservatorship, which seemed like an epic event at the time, was succeeded by so many crises, Lehman, the September/October meltdowns, AIG, the European bank rescues, that it seems like a distant memory. But the Treasury made a commitment to maintain positive net worth for both the mortgage lenders/guarantors and was remarkably non-specific as to what the damage over time might be (a $100 billion authorization for each from July looked to be more than adequate, or so we ere told). CBO estimates were not helpful, since the Treasury commitment was formally through the end of 2009 (meaning that time frame was all the CBO could opine on) when the backup would clearly be renewed.
, and of course, the liability simply through the end of 2009 is much bigger than the officialdom pretended:
Fannie Mae and Freddie Mac, the mortgage-finance companies seized by regulators, may need more than the $200 billion in funding pledged by the U.S. government if the housing market continues to deteriorate, Federal Housing Finance Agency Director James Lockhart said….
“When we sized the amount in September, we obviously looked at stress tests and what was happening in the marketplace,” Lockhart said. “There’s been some significant events since then that weren’t in our forecast.”
Yves here. Ahem, by September, many forecasters were looking for housing prices to revert to historical norms in terms of their relationship to income and rents. That suggested a 30-35% fall from peak to trough. That’s before you get into overshoot due to rising unemployment and typical bank tightening of lending standards in downturns. Back to the article:
The government seized control of Fannie Mae and Freddie Mac after their losses threatened to further disrupt the housing market, and pledged to invest as much as $100 billion into each company as needed if the value of their assets drops below the amount they owe on obligations.
Fannie Mae said in a November regulatory filing that “this commitment may not be sufficient to keep us in solvent condition or from being placed into receivership.” Freddie Mac is taking a “hard look” at whether it will need more than $100 billion, [Chairman John] Koskinen said last week….
Federal officials are now leaning on the government- sponsored enterprises to help stabilize the housing market. House Financial Services Committee Chairman Barney Frank said last week that the companies will be used “very aggressively” to help reduce record foreclosures.
Lockhart said Fannie Mae and Freddie Mac aren’t expected to take a loss “under any program” that requires their involvement. “We would expect them to be writing business that’s profitable at this point, not a large profit,” he said yesterday. “But we would not expect them to be writing business at a loss under any program.”.
And that has been the recent problem. The GSEs have been and remain under pressure to keep the housing market afloat, when they are already badly impaired and require regular cash transfusions.