Post-receivership, the GSEs have become a government sanctioned back door bailout of regular banks. Any mortgage that cannot be refiâ??d or modified ends up on their books. This includes mortgages on the verge of default and foreclosure.
How much is the worst case scenario for the ongoing bailout of the banking sector, plus Fannieâ??s and Freddieâ??s own screw ups?
If everything goes precisely wrong, taxpayers are potentially on the hook for another $1 trillion bailout:
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.
Its not a coincidence that many of these banks are finding the capital to pay back their bailout loans. The Obama administration is continuing one of the more horrific policies of the Bush administration: Using the GSEs as a back door bailout for the rest of the banking sector: These banks are selling their garbage to the GSEs â?? and according to some anecdotal evidence, are getting pretty close to full boat (100 cents on the dollar) for these bad loans.
Hence, Fannie and Freddie have become a dumping ground for all manner of bad bank loans.
The GSEs have had their own problems over the years â?? accounting fraud, recklessly chasing market share, lowering loan quality, etc. â?? but they have now become are now the last stop for every crappy mortgage ever written:
Fannie and Freddie may suffer additional losses as a result of the Treasury's effort to prevent foreclosures. Under the program, banks with mortgages owned or guaranteed by the companies must rewrite loan terms to make them easier for borrowers to pay.
The Treasury program is budgeted to cost Fannie and Freddie $20 billion. The companies have already modified about 600,000 delinquent loans and refinanced almost 300,000 more, in some cases for an amount greater than the houses are worth.
The government is using Fannie and Freddie "for a public- policy purpose that may well increase the ultimate cost of the taxpayer rescue,"? said Petrou of Federal Financial Analytics. "Treasury is rolling the dice."?
A recent Federal Reserve report pegged the total exposure of Fannie and Freddie at 53% percent of the nation's $10.7 trillion in residential mortgages. Thatâ??s about $5.5 trillion dollars.
How do we get to trillion in losses?
About $1.98 trillion of the loans were made in states with the nation's highest foreclosure rates â?? California, Florida, Nevada and Arizona â?? and $1.13 trillion were issued in 2006 and 2007, when real estate values peaked. Mortgages on which borrowers owe more than 90 percent of a property's value total $402 billion.
That trillion dollar number has a number of challenging assumptions in it. It assumes a large downleg in housing prices, a continuing foreclosure surge, and ongoing unemployment.
My estimates are for about half of that â?? between $450-500 billion dollars. But with just the right â?? or wrong â?? economic policies, bailouts and bad decisions, I wouldnâ??t rule out a trillion dollar loss. And if we keep allowing banks to dump all of their bad loans onto the GSEâ??s books, I would raise my odds of a trillion dollars in losses from 25% to 100% . . .
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Source: Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case Lorraine Woellert and John Gittelsohn Bloomberg, June 14 2010 http://www.bloomberg.com/apps/news?pid=20601109&sid=an_hcY9YaJas&
This is why Turbo Timmyâ??s public private partnership wasnâ??t necessary. Ben gives the Big Banks free money to daytrade, never a losing day since 2009 and Treasury buys up their bad mortgages, the nation exists to ensure not just the survival of the Immortal 19 but to guarantee their profitability. Thier best investments are made in Congress not on Wall street.
â??Their best investments are made in Congress not on Wall street.â?
Truâ?? dat.
The worst part of all of this is that the banks and bankers will ultimately end up owning all of the foreclosed RE, as they will be the only ones who will be able afford to buy "â? even at hugely discounted prices "â? when the value of the RE is eventually marked to reality. 100% reimbursement on their losses and a dead credit system all but guarantee it.
Game over.
@rktbrkr: That was merely the back up plan in case this one didnâ??t fly. Either way, we the Sheeple were going to get fleeced.
Hey, THATâ??S the Canadian banking model!!!! Micheal Shedlock had a post two weeks ago where he divulged most real estate loans made by Canadian banks are passed onto the Canadian Central Bank, otherwise known as â??The Gulf of Mexicoâ? of the north. Such a model, and the absence of a â??no masâ? administrator have allowed the Canadian housing bubble, and Vancouver specifically, to inflate ever higher eventhough the market in the United States has long since entered correction.
Try your hand at the â??Crack Shack or Mansion?â? game:
http://globaleconomicanalysis.blogspot.com/2010/04/crack-shack-or-mansion-game.html
Its amazing how the Indirect bailout of the Financial Sector through the GSEs has not seen any widespread protests.
@Abhishek: Iâ??d venture to guess that if you polled most Americans that only a small percentage of them would even have any basic understanding of the mechanics of these bailouts. Too complicated, which is what the elites want. It makes their theft that much easier.
Greshamâ??s Law is the best bet. It is the secret of the great fortune â??never a losing dayâ? casino. Stop the Insanity now. The GS enablers throughout politics and government have rigged the game to get paid first before the bleep hits the sheep and the sooner the voters realize the house is burning down the people rather that representing the fraudsters the better.
> Its not a coincidence that many of these banks are finding the capital to pay back their bailout loans. The Obama administration is continuing one of the more horrific policies of the Bush administration: Using the GSEs as a back door bailout for the rest of the banking sector: These banks are selling their garbage to the GSEs "â? and according to some anecdotal evidence, are getting pretty close to full boat (100 cents on the dollar) for these bad loans.
I suspected this was happening, but didnâ??t realize it was â??official policy.â? Can you further elaborate on how the banks dump off their mortgages to the GSEâ??s?
Isnâ??t this similar to the â??bad bankâ?? model put forth at the beginning of the banking crisis w/ the GSEâ??s playing the part of the bad bank-
the bad loans go to the GSEâ??s w/ unlimited backing from the USG- the banks cleanse their loan portfolio of bad loans-
accounting standard are reset to mark to market-
banks are 100%-
QE.QE,QE,QE- to absorb the losses to the GSEâ??s-
game, set, match
The thing about the GSEâ??s is that it looks like weâ??re lending money to ourselves. While in some respects we are, a goodly portion of the GSE bonds are sold overseas, which makes a government guarantee of all the bonds all but unavoidable, if we are to continue to borrow money from abroad. The housing market ,through the GSEâ??s, is how we funded our trade deficits. China sold us widgets and then invested the proceeds in our real estate, if indirectly, through the GSEâ??s. Itâ??s no accident that the GSEâ??s and the trade deficit ballooned to enormous proportions at about the same rate and time. If the price to bail the GSEâ??s out reaches a trillion, or even more, we have no choice but to pay it (if we can). That doing so happens to bail out a few bankers, so much the better, Iâ??m sure Tiny Tim and Ben figure.
The public balance sheet has become one giant dumping ground for bad debt. If/when the GSE and treasury markets finally reflect the existence of this bad debt I suspect it will be the end of the US economy as we know it.
At this rate, the government at some level will most likely own a good deal of any real estate with a mortgage written in the past 8 years or so. If it is in a hopeless area like Detroit, they will bulldoze it. In other areas they can rent it out, or stick Section 8 people in them. That will be the resolution of Fannie/Freddie etc. That is why they are so determined to ram Amnesty for illegals into law. A swing block of voters dependent on government largesse who will preclude any real reform for all time. Welcome to third world America!
If the govâ??t ends up owning all the mortgages, canâ??t Barry and Barney and Chris just order the stoppage of all foreclosure proceedings, and the immediate 90% reduction of all mortgage balances? Underwater mortgage problem solved. Foreclosure problem solved. â?¦ NEXT!
jjay,
along the lines of your Post, this, the following, as a Refresher, for the young Grasshoppers that may be about..
â??â?¦Western nations including the United States have gradually implemented virtually all of Marxâ??s 10 key steps toward creating a dictatorship. What are some examples can you find? Americans would be wise to study the â??Ten Planksâ? and demand that the President and Congress abolish all laws, regulations and agencies which govern these (and all other) unconstitutional seizures of power. Communism was never intended to free man, but to enslave him; indeed the Communist Manifesto promised a â??dictatorship of the proletariatâ? and history proved it always ended up slaughtering millions of the proletariat.
Karl Marxâ??s â??10 Planksâ? to seize power and destroy freedom:
1. Abolition of Property in Land and Application of all Rents of Land to Public Purpose.
2. A Heavy Progressive or Graduated Income Tax.
3. Abolition of All Rights of Inheritance.
4. Confiscation of the Property of All Emigrants and Rebels.
5. Centralization of Credit in the Hands of the State, by Means of a National Bank with State Capital and an Exclusive Monopoly.
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