Commentary

Fannie Mae Drains Another $8.5 Billion from Taxpayers

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.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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