Post-receivership, the GSEs have become a government sanctioned back door bailout of regular banks. Any mortgage that cannot be refi’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 Fannie’s and Freddie’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 — 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 — accounting fraud, recklessly chasing market share, lowering loan quality, etc. — 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. That’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 — California, Florida, Nevada and Arizona — 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 — between $450-500 billion dollars. But with just the right — or wrong — economic policies, bailouts and bad decisions, I wouldn’t rule out a trillion dollar loss. And if we keep allowing banks to dump all of their bad loans onto the GSE’s books, I would raise my odds of a trillion dollars in losses from 25% to 100% . . .

>

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&

Category: Bailouts, Credit, Legal, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “GSEs: $1 Trillion Dumping Ground for Bad Bank Loans”

  1. rktbrkr says:

    This is why Turbo Timmy’s public private partnership wasn’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.

  2. The Curmudgeon says:

    “Their best investments are made in Congress not on Wall street.”

    Tru’ dat.

  3. Marcus Aurelius says:

    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 — even at hugely discounted prices — 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.

  4. Mannwich says:

    @rktbrkr: That was merely the back up plan in case this one didn’t fly. Either way, we the Sheeple were going to get fleeced.

  5. Chief Tomahawk says:

    Hey, THAT’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 “The Gulf of Mexico” of the north. Such a model, and the absence of a “no mas” 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 “Crack Shack or Mansion?” game:

    http://globaleconomicanalysis.blogspot.com/2010/04/crack-shack-or-mansion-game.html

  6. Abhishek says:

    Its amazing how the Indirect bailout of the Financial Sector through the GSEs has not seen any widespread protests.

  7. Mannwich says:

    @Abhishek: I’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.

  8. ToNYC says:

    Gresham’s Law is the best bet. It is the secret of the great fortune “never a losing day” 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.

  9. jimh009 says:

    > 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 — 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 didn’t realize it was “official policy.” Can you further elaborate on how the banks dump off their mortgages to the GSE’s?

  10. call me ahab says:

    Isn’t this similar to the “bad bank’ model put forth at the beginning of the banking crisis w/ the GSE’s playing the part of the bad bank-

    the bad loans go to the GSE’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 GSE’s-

    game, set, match

  11. The Curmudgeon says:

    The thing about the GSE’s is that it looks like we’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 GSE’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 GSE’s. It’s no accident that the GSE’s and the trade deficit ballooned to enormous proportions at about the same rate and time. If the price to bail the GSE’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, I’m sure Tiny Tim and Ben figure.

  12. Super-Anon says:

    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.

  13. jjay says:

    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!

  14. beatstreet says:

    If the gov’t ends up owning all the mortgages, can’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. … NEXT!

  15. jjay,

    along the lines of your Post, this, the following, as a Refresher, for the young Grasshoppers that may be about..

    “…Western nations including the United States have gradually implemented virtually all of Marx’s 10 key steps toward creating a dictatorship. What are some examples can you find? Americans would be wise to study the “Ten Planks” 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 “dictatorship of the proletariat” and history proved it always ended up slaughtering millions of the proletariat.

    Karl Marx’s “10 Planks” 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.

    6. Centralization of the Means of Communication and Transport in the Hands of the State.

    7. Extension of Factories and Instruments of Production Owned by the State, the Bringing Into Cultivation of Waste Lands, and the Improvement of the Soil Generally in Accordance with a Common Plan.

    8. Equal Liability of All to Labor. Establishment of Industrial Armies, Especially for Agriculture.

    9. Combination of Agriculture with Manufacturing Industries; Gradual Abolition of the Distinction Between Town and Country by a More Equable Distribution of the Population over the Country.

    10. Free Education for All Children in Public Schools. Abolition of Children’s Factory Labor in it’s Present Form. Combination of Education with Industrial Production.

    http://www.conservativeusa.org/10planksofcommunism.htm
    ~~
    http://www.libertyzone.com/Communist-Manifesto-Planks.html
    ~~

    w/this: “Hence, Fannie and Freddie have become a dumping ground for all manner of bad bank loans…”

    maybe we can get the EPA to declares the GSEs a “Superfund”-site ?
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=EPA+Toxic+Waste+Superfund+sites

  16. b_thunder says:

    “well, duh, if banks don’t offload bad loans, they may go belly up and cause great depression” – that’s the biggest fear of the Banking Industry Employee of the year and Times Magazine Man of the year Ben S. Bernanke, nad future chairman of Goldman Sachs Timothy Geithner.

    first, they rob people by paying 0% interest on deposits
    second, they rob future earnings by loaning$ to the banks at 0%, which they use to buy bonds, interest on which will have to be paid by the taxpayers
    third, they offload worthless loans at par to the GSEs, that will have to be bailed out by taxpayers

    did i miss anything?

  17. louis says:

    “If the gov’t ends up owning all the mortgages, can’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. … NEXT!”

    Amen brother! Why won’t they move on the underwater problem and put it behind us? What is the payoff for these guy’s to have the problem continue? All of this high-powered brain knowledge and we can’t figure out how to erase the tranches on this toxic crap and get people to buy stuff again. If you were underwater and they wiped out half of your monthly debt what would the masses do with that extra cash?

  18. Marcus Aurelius says:

    MEH:

    Read this info at your link, last night.

    I don’t think much of it is applicable to our present condition (we’re paying lower taxes now than we have historically, for instance). The Central banking/credit (#5) is relevant. Our current situation is one where many of the other tenets fit, but the form of government isn’t $ocialist or kommunist, it’s corporatist.

  19. Marcus Aurelius says:

    MEH:

    Read this info at your link, last night.

    I don’t think much of it is applicable to our present condition (we’re paying lower taxes now than we have historically, for instance). The Central banking/credit (#5) is relevant. Our current situation is one where many of the other tenets fit, but the form of government isn’t Marxist or communist, it’s corporatist.

  20. Mannwich says:

    @louis: Buy more “cheap” homes?

  21. Lucretius says:

    BR,

    This “backdoor bailout” thesis has been making the rounds on the basis of “anecdotal evidence,” but no one pushing it has offered any hard data that supports it. The extent to which the GSE’s purchases of non-performing loans assets from banks post-crisis is affecting their losses is much smaller than this thesis suggest. The real problem is the default and delinquency rates on assets the GSE purchases and/or gauranteed back during the zenith of the housing boom.

    As the following link notes:

    “Amazing as it may seem, the losses generated by Fannie and Freddie come from the asset-backed securities (ABS) and loans acquired during the “boom” of 2005-2007. Over 93% of losses are accounted for by securities and loans the GSEs already owned or guaranteed as of December 31, 2007. The remaining 6% of losses come from loans originated in 2008 and 2009 to fund new mortgages (or refis), not stinker loans acquired from banks.”

    http://www.economics21.org/commentary/closer-look-gse-credit-losses

    So the backdoor bailout thesis is, I think, more conspiracy theory than reality.

  22. MA,

    it’s why I posted http://www.libertyzone.com/Communist-Manifesto-Planks.html , too..

    that page goes further to delineate the types of ‘Actions’ that that Author feels are fitting the motif.

    past that, I’m not invested in the Idea that “C@mmunism”, per se, is at sway..and, given the Current Events, it’s easy to say “Corporatism” is the name of the Game..

    but, for sure, our, once, Representative Republic, no matter how flawed it may have been, is, surely, no longer with us..

  23. KidDynamite says:

    as noted, THIS is where the profits for the banks’ perfect trading quarters comes from – not from the talking point diversion of high frequency trading.

  24. [...] The cost of fixing Fannie and Freddie keeps going higher.  (Bloomberg, Big Picture) [...]

  25. Mannwich says:

    Great point, KD.

  26. KidDynamite says:

    i wrote a whole post about that mannwich. May 13th on my blog (“Big Bank Perfect Trading Quarters: The Real Story”). i don’t want to post links here, out of respect for BR.

  27. Rescission says:

    When are we allowed to have an honest assessment of this current administration’s policies without referring to Bush?

  28. ToNYC says:

    The principles of Gresham’s law can sometimes be applied to different fields of study. Gresham’s law may be generally applied to any circumstance in which the “true” value of something is markedly different from the value people are required to accept, due to factors such as lack of information or governmental decree.

    In the market for used cars, lemon automobiles (analogous to bad currency) will drive out the good cars.[11] The problem is one of asymmetry of information.

    When the “never a losing day” casino that GS has championed with myrmidons throughout government and politics have run out of road; we will be left trying to make a living selling that lemonade . However, if by now you have realized via the Madoff Social Contract of “join the club, no further thinking or standing up necessary, free lunch is served to the members ’cause I know somebody” and that Financial Engineering is a fundamental fraud trying to make 2+2=6, you may be safely on your way finding one of the many real needs and working to fill it for more than your own good.

  29. Rescission says:

    Is all this redistributive? Stop the foreclosures, or at least delay them through mandatory “mediation” which is the new tactic. Bail out the mortgagors and stick it to the taxpayer. Who pays all the taxes? By the way, Fannie and Freddie are currently “loosening” their lending guidelines if you can imagine that. But the real crazy aunt in the cellar is the FHA, the sub-prime lender post 2007. It all has the same theme. The voiceless taxpayer gets screwed in a big way. Who pays all the taxes? Did I already ask that?

  30. Mannwich says:

    @Rescission: I can tell you that the FHA is probably the next boondoggle to blow because the first question a mortgage broker asked me when pitching a re-fi to me is if I was on an FHA. Everyone wants to do an FHA now because they’re the new bagholder. Who’s the bagholder after them? Oops…..

  31. DeDude says:

    Lucretius; Thanks for the link to reality. The link in that link to a reform proposal (http://www.economics21.org/commentary/whither-fannie-and-freddie-proposal-reforming-housing-gses) is also worth a read.

  32. Andy T says:

    But, as Barry has pointed out so often…the GSEs are just like the other “crappy” banks, right? Errr….maybe not.

    Remember, the Government is good and there is nothing wrong with massive Government sponsored entities. The don’t have any affect on the housing market and never have. Private firms are the bad and evil actors. The government subsidized firms are just normal players doing nothing wrong.

    Repeat after me: The GSEs were not at all responsible for the decades long boom and bust. It was all those unscrupulous sub-prime lenders that were responsible for everything. The TRILLION dollar implied backstop behing FNM/FRE had nothing to do with the boom.

  33. rktbrkr says:

    Rescission,
    “When are we allowed to have an honest assessment of this current administration’s policies without referring to Bush?”

    As soon as there is a significant difference. Bernanke was reappointed (anointed?) and Turbo Timmy is the Sorcerer’s apprentice, Paulson Lite. Surprisingly Team O’B has even embraced “drill, baby, drill” and displayed the same blind eyed regulation as Bush the Lesser.

  34. So the short version is the working people better be prepared to work their buns off to continue to pay for all this.

  35. Bomber Girl says:

    Lucretius, DeDude and Andy T: you must be partisan. Of course.

  36. honestann says:

    At some point, hopefully in the not-too-distant future, the gangsters who own and run the FederalReserve, Treasury and the too-big-to-end-up-with-less-than-99%-of-the-assets-of-the-USSA must be hung in the village square. Their behavior is so utterly and obscenely corrupt that any honest jury would find them guilty of billions of counts of treason and crimes against humanity.

  37. dchouser says:

    Lucretius has it correct. The GSEs are not buying other banks’ bad paper. In fact, if anything, the stream is running the other way as Fannie and Freddie press billions in buyback requests to originating lenders that passed along loans that are now failing that it turns out were underwritten outside of the guidelines they’d agreed to. The GSEs credit losses are coming from 1) their own mistakes in following the herd into the Alt-A market in an attempt to recoup market share in the last years of the boom (10-15 percent of their credit book, nearly 1/2 their losses), 2) being a monoline company in a sector that has experienced an unprecedented overall drop in asset value, and 3) having trillions invested in soundly underwritten mortgages that newly unemployed and underemployed borrowers can’t repay.

    They are operating the Administration’s loan mod program but they are not taking on those failing assets from banks.

  38. DeDude says:

    The real dumping happened in 2005-7, when the master of the housing Ponzi scheme realized that they had to get F&F into it, to keep it going long enough to allow themselves to get out. So they had their lawmakers and white house sock-puppets allow, entice and push F&F into the subprime business. This may have been completely against the neocons ideal of letting the (real) private sector do everything; but as soon as someone whispered in their ear that this was actually to give the GSE’s greater market share in some toxic waste that would blow them up, then the Bush White House were all for it. Not that it took much to convince the Bush White House. Their whole economic policy (another Ponzi scheme) was resting on the need for a housing bubble to provide consumers with money to spend. And in the liberal lawmakers ears they whispered: “this is to give poor people big houses” (then those suckers were on board). So our financial masters (now with personhood) got to harvest their profits at the peak and leave the losses to everybody else.