On Friday, Fannie Mae announced its quarterly earnings—or lack thereof. The GSE reported it would be asking the Treasury Department for $8.5 billion to cover losses in the first quarter of 2011, putting the total bailout of Fannie Mae at over $98 billion and the combined bailout with Freddie Mac at $162.4 billion.
Here is a breakdown of the bailout payment requests from Fannie Mae since 2008:
- Date — Bailout Request
- 1Q 2011 — $8.5B
- 4Q 2010 — $2.6B
- 3Q 2010 — $2.5B
- 2Q 2010 — $1.5B
- 1Q 2010 — $8.4B
- 4Q 2009 — $15.3B
- 3Q 2009 — $15B
- 2Q 2009 — $10.7B
- 1Q 2009 — $19B
- 4Q 2008 — $15.2B
- 3Q 2008 — $0B
- Total — $98.7B
In contrast, Freddie Mac has requested a total of $63.7 billion over the past three years but did not need any financial help from the Treasury Department for this past quarter.
The losses Fannie is suffering largely stem from its activities during the housing bubble, guaranteeing mortgage-backed securities full of toxic debt and buying up poor quality loans—poor quality because of its own decrepit standards. The Treasury Department has promised to guarantee 100% of losses through then end of this year, but then will have a limit of $400 billion in bailout payments for the two GSEs combined.
Some analysts had suggested GSE losses were finally slowing down, citing the lower loss numbers in the past three quarters. But future losses are highly dependent on how housing prices interact with delinquencies. If home prices decline the GSEs will also find it hard to recover losses when selling homes they have foreclosed on. (The WSJ reported last week that the GSEs own 218,000 homes combined as of the first quarter of 2011, a number that has grown 33% in the past year.)
However, housing prices are likely still too high relative to the historical trend and need to come down further to clear away the faux-gains of the housing bubble. This creates a policy dilemma for Washington that should let prices fall naturally to hit their true bottom, but also want to protect taxpayers from higher bailout costs.
The easiest way to handles this would be to end the bailout, put Fannie and Freddie in receivership, and wind down the firms. As the GSE bailout continues to grow Congress should also be reminded of the importance of addressing this issue sooner than later to prevent a similar problem from happening in the future.