U.S. mortgage giants may getter bigger still

December 24, 2009

As with many giants, it’s hard to cut Fannie Mae and Freddie Mac down to size. The government, which controls the mortgage behemoths, planned to shrink them by 10 percent in 2010.  Don’t count on it.

Failure is unthinkable, even though both companies still rely on a $400 billion equity life-line from taxpayers. These are institutions with a combined $1.5 trillion portfolio of mortgage-related investments. Without their supply of financing for home borrowers with good credit, house prices would be lower – and more banks would be in trouble.

Yet in theory, Fannie and Freddie could still be allowed to wither away. When they were put into conservatorship in 2008, a special sort of bankruptcy, the plan was to cut back on their hedge-fund like investment portfolios beginning next year.

In March, one other big support of the housing market will disappear. The Federal Reserve is supposed to sell down, or at least not add to, its $1.25 trillion portfolio of mortgage-related securities built up since January. Private investors are expected to take the Fed’s place. Mortgage-backed bonds still sport triple-A ratings and offer a higher yield than government debt.

But it’s a big hole to fill. And the last thing any politicians want in an election year is for mortgage rates to rise, as they will if private demand falls short. So the government is not going to be in a hurry to let Fannie and Freddie add to the pressure on the weak housing market. They won’t start winding down their portfolios until house prices are much firmer. On the contrary, they will stand ready to act as purchaser of last resort.

Of course, in the long term it’s hard to see why government should be in the business of using tax receipts to prop up housing prices and make good on losses from mortgage defaults. That distorts everything about the housing business and adds to the state’s fiscal burden. But barring a government financing crisis, the long term wind-down for Fannie and Freddie isn’t going to start in 2010.


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Our government has failed to understand the fundamentals of housing prices just as private investors did before the present crisis. Housing prices must be supported by salaries. If house prices exceed what can be supported by salaries (as is the case in all the regions with low affordability indexes) then either house prices must fall or imprudent loans must be made to those who can’t afford them. Having tried the former with private money, which has now completely left the mortgage market, our government is trying to prevent the correction in housing from completing its return to fundamentals, which is to say salaries. Loans are being made with 3.5% down, whereas after the Depression as much as 75% was required to offset the magnitude of the risk which this crisis had made apparent. Housing will fall again hard, but only when the government stops funding mortgage welfare through Fanny Freddie.

Posted by reconstructions | Report as abusive

“U.S. mortgage giants may getter bigger still”

Really? Getter?! Even the most basic proof-read would have caught that mistake!

Posted by Zok | Report as abusive

Zok: ‘A getter is a method that gets the value of a specific property. A setter is a method that sets the value of a specific property.’ Maybe Agnus is a go getter and trend setter making things better.

Anyway, this just shows how petty we can gether (sic), no wonder Copenhagen was such a stuff-up. This is most probably more appropriate as a comment under Neil Unmack’s article above, so a bit out of context, but there are no related articles coming up, it is all about money, but we DO need an environment to actually use our homes, albeit paid off or on credit to further feed the mortgage giants. Here is a solution:

y = 3/6(cubic kilometers air emissions) + 2/6(cubic kilometers water emissions) +1/6 (cubic kilometers ground emissions).

If positive, you sit with a carbon debit, as an asset, and with a credit to a non-distributable reserve.

If negative, you sit with a carbon credit, as a liability, and with a debit to a non-distributable reserve.

The hob knobs must just ask all 190 countries to come up with a fuzzy ‘y’ and stick it into a terraflop (sic) computer for simultaneous solving. The result WILL be a net debit as an asset, as everybody will cheat, so then we redo it with optimized solving until we sort it out and start carrying it on governments’ balance sheets as assets or liabilities. Only then can we start trading carbon debits and credits.

Casper the Angry Ghost

Ps: Moderator, how do I change my ‘screen name’, I was in a bad mood on that day.

Posted by Ghandiolfini | Report as abusive

This is worse than a Charles Manson parole hearing.

Let’s refine this:

W = ½(x cubed kilometers) + 1/3(y cubed kilometers) + 1/6(z cubed kilometers),

Where W = Waste

or cubed = cubits for the Revelators.

Posted by Ghandiolfini | Report as abusive